An important consequence of the Cabinet of Ministers of Ukraine imposing restrictions and prohibitions due to coronavirus is the high probability of breach of contractual obligations by economic entities. However, liability for such a breach may not arise if the party who committed the breach informs the other party of the force majeure.
Article 14-1 of the Law of Ukraine “On Chambers of Commerce in Ukraine” establishes that force majeure (circumstances of irresistible force) are extraordinary and inevitable circumstances that objectively make it impossible to fulfil the obligations stipulated by the terms of the agreement (contract, settlement etc.), duties under legislative and other regulations, and provides a list of such circumstances such as: threat of war, revolution, rebellion, uprising, riots and other circumstances.
On March 17, 2020 the Verkhovna Rada of Ukraine adopted the Law of Ukraine “On Amending Certain Legislative Acts of Ukraine aimed at Preventing the Occurrence and Spread of Coronavirus Disease (COVID-19)”, by which was decided to supplement Article 14-1 of the Law “On Chambers of Commerce in Ukraine” list of force majeure circumstances with: “quarantine established by the Cabinet of Ministers of Ukraine”. The law was promulgated and came into force on March 17, 2020.
As it is known, on March 11, 2020, the Cabinet of Ministers of Ukraine adopted Resolution № 211 “On Prevention of Coronavirus COVID-19 Spread on the Territory of Ukraine”, according to which quarantine was established throughout the entire territory of Ukraine from March 12, 2020 to April 3, 2020.
It should be noted that the mere spread of Coronavirus Disease (COVID-19) and establishment of quarantine on the territory of Ukraine are not grounds for refusing to fulfil one’s undertaken obligations.
A party claiming that a quarantine established in Ukraine is a force majeure circumstance for him/her must be prepared to reasonably prove that the quarantine directly prevented one from fulfilling his/her obligation and to prove the relevant cause and effect.
Is the establishment of quarantine force majeure circumstance (circumstance of irresistible force)? The answer to this question depends on each particular situation, including the terms of the agreement, the particularities of the obligations undertaken by the party, the real reasons for the impossibility of fulfilling them.
Obviously, as of today, references to quarantine as a force majeure will become more frequent. It is not excluded that this mechanism will be used not only by enterprises that are really in a difficult situation due to quarantine, but also by unconscientious counterparties who will try to justify their financial failure by force majeure. Therefore, it is extremely important not only to properly apply force majeure, but also to defend oneself against attempts to misuse it.
Additionally, we would like to note that, on the legislative level, the absence of money is not considered a force majeure, so the inability to fulfil monetary obligations under the agreement cannot be attributed to force majeure unless there is confirmation of technical limitations on payment. In particular, with due justification, force majeure can be confirmed in the event that the premises cannot be used due to restrictions or prohibitions imposed by the government on entities in the relevant fields.
One should not forget about the possibility of discharge from liabilities and penalties by amending the agreement amicably. We recommend following the procedure for settling relations of the parties to the agreement by concluding appropriate amendments to the agreement concerning the postponement of fulfilment of obligations.
Please take into account that the winding up of the enterprise due to the refusal of employees to show up for work amid quarantine in case of absence of order for this at the state level, which obliges the enterprise to cease its activities, including through mass lay-offs, cannot be considered a force majeure.
It should be noted that due to establishment of quarantine, no legal act on the territory of Ukraine provides for the possibility of refusing to go to work without obtaining a leave of absence, sick leave, obtaining the consent of the management to work on a remote schedule without harming the work.
If, due to the establishment of quarantine on the territory of Ukraine, there is a risk of default on undertaken obligations and application of penalties, we are ready to provide you with the necessary legal assistance in this matter.