Military aggression of the Russian Federation against Ukraine is recognised as force majeure: what does it mean for contractual obligations?

Legal Alerts
30.03.2022 164

On 28 February 2022, the Chamber of Commerce and Industry of Ukraine ("Chamber") issued a letter № 2024 / 02.0-7.1 (the "Letter") in order to simplify the regular procedure for certifying force majeure. The Chamber confirmed to "anyone concerned" that the military aggression of the Russian Federation against Ukraine is a force majeure starting from 24 February 2022 and until the official end of martial law in Ukraine.


This client briefing contains an overview of several legal issues important to those engaged in any kind of contractual relations in view of the recognition of Russian military aggression as force majeure.

 

1. General Observations Regarding Force Majeure


What is the effect of force majeure?

Force majeure exempts the party from responsibility for failure to fulfil its obligation. However, force majeure is not a release from obligation itself. The party will not be liable if force majeure directly impacts such party's ability to comply with its obligations.

Example: Ukrainian buyer and foreign supplier entered into a supply agreement. Ukrainian buyer is located within the temporarily occupied territory and/or territory of active hostilities. The foreign supplier is unable to deliver goods in time due to occupation, active hostilities or other related factors. In this case, the supplier is highly likely to be exempt from liability for failure to deliver goods in time.


Does the Letter provide for an automatic release from liability?

The courts or other dispute resolution bodies set out by the parties in the agreement decide on release from liability due to force majeure on a case-by-case basis. 

The Chamber's force majeure certificate is usually treated as one of the pieces of evidence. At the same time, the Letter is not a force majeure certificate in its ordinary meaning. The certificate concerns specific contractual party and relates to such party's specific obligations, while the Letter is issued to "anyone concerned" and in relation to undefined obligations. Therefore, it is unclear, what is the legal force of the Letter and whether it will be considered valid evidence in a particular case.

 

2. Force Majeure and Contractual Obligations
 
Force majeure may have an impact on contractual obligations under agreements governed by (i) Ukrainian law or (ii) foreign law. Such agreements may either govern force majeure or be silent in this respect.
 
Ukrainian law agreement silent in relation to force majeure
 
If a Ukrainian law agreement does not contain any provisions governing force majeure, a party may rely on legislative provisions.  
 
Pursuant to Part 2 of Article 218 of the Commercial Code of Ukraine ("Commercial Code") and Part 1 of Article 617 of the Civil Code of Ukraine ("Civil Code"), the breaching party shall not be liable for breach if it proves that the breach occurred due to force majeure.
 
Foreign law agreement silent in relation to force majeure
 
If an agreement governed by a foreign law does not contain provisions regarding force majeure, the parties will need to consult with lawyers in the relevant jurisdiction.
 
Example: If an English law agreement is silent with regard to force majeure, it is impossible to apply force majeure in relation to such an agreement. English law does not have any legislation on force majeure and recognises force majeure only when the agreement contains relevant provisions. However, legal counsel in relevant jurisdiction may propose other ways (if any) to achieve the expected result (e.g., relying on the frustration of contract, etc.).
 
Ukrainian law or foreign law agreement governing force majeure
 
Force majeure clauses need careful analysis in order to successfully invoke force majeure. The following provisions are usually included in Ukrainian law and/or foreign law agreements and should be of particular interest to the parties and their lawyers in case of force majeure:
 
(a) Force Majeure Notice
 
An agreement may contain a particular procedure and requirements that the breaching party has to adhere to when notifying the other party of force majeure (e.g., deadline, form of a notice, terms of delivery and receipt, consequences of non-compliance). Failure to comply with such requirements may deprive the breaching party of the right to be released from liability for breach.
 
(b) Evidence of Force Majeure
 
An agreement may provide for an obligation of a breaching party to provide evidence of force majeure. Usually, the required evidence is a force majeure certificate issued by the Chamber. Again, the provisions of a particular agreement have to be analysed to determine whether the Chamber's Letter suffices as a valid piece of evidence of force majeure.
 
(c) Effect of Force Majeure
 
An agreement may provide, inter alia, for the following effects of force majeure:
 
  • the breaching party is released from liability for non-compliance with its obligations for the duration of force majeure; or
  • the breaching party has the right not to suspend the performance of its obligations for the duration of force majeure; or
  • the non-breaching party has the right to terminate the agreement if the duration of force majeure exceeds a certain period (e.g. 60 days).

 

3. Force Majeure and Monetary Obligations
 
Does force majeure justify failure to pay?
 
Non-compliance with monetary obligations is almost impossible to justify with force majeure because, under the general rule, lack of funds does not release the debtor from liability for failure to pay (Part 2 of Article 218 of Commercial Code; paragraph 2 of Part 1 of Article 617 of Civil Code).
 
As an exception, failure to fulfil foreign currency monetary obligations to foreign legal entities may be justified by force majeure if a breach of such obligations occurs due to the moratorium on payments in foreign currency abroad.
 
Example: Ukrainian buyer and foreign supplier entered into a supply agreement. The purchase price has to be paid in EUR. Ukrainian buyer is unable to pay the purchase price in EUR due to the moratorium on foreign currency payments imposed according to the Resolution of the National Bank of Ukraine № 18 dated 24 February 2022.
 
 
What are the martial law legislative incentives concerning monetary obligations?
 
Under Article 625 of the Civil Code, if the party delays the performance of its monetary obligations, such party has, unless otherwise provided by agreement or law, to:
  • repay the debt taking into account the inflation index for the entire period of delay; and 
  • pay default interest in the amount of three per cent per annum of the overdue amount.
 
The Law of Ukraine "On Amendments to the Tax Code of Ukraine and Other Legislative Acts of Ukraine Concerning the Validity of Norms for the Period of Martial Law" № 2120-IX dated 15 March 2022 releases a borrower for the period of martial law from:
 
  • liability under Article 625 of the Civil Code;
  • obligation to pay a penalty (fine, default interest) for delay under the credit (loan) agreement (penalties and other payments accrued from 24 February 2022 for late performance shall be written off). 
 
NB! The debtor is still obliged to repay the principal of the loan and pay interest for the use of funds. 
 
 
What are the incentives provided by the lenders?
 
Several Ukrainian banks introduced a so-called "repayment holiday", meaning that a debtor may delay repayment of the loan principal and payment of interest.
 
 
 
4. Force Majeure and Dispute Resolution

If case of force majeure, the parties may start a formal dispute resolution procedure. Agreements may provide for the dispute resolution in Ukrainian or, if applicable, in foreign courts or alternative dispute resolution (e.g., negotiation and/or arbitration).
 
In case of the dispute resolution in Ukrainian courts, does a statute of limitations continues to run during the martial law?

The statute of limitations (specified in Articles 257-259, 362, 559, 681, 728, 786, 1293 of the Civil Code) is extended for the entire duration of the martial law in Ukraine according to the Law of Ukraine "On Amendments to the Tax Code of Ukraine and Other Legislative Acts of Ukraine Concerning the Validity of Martial Law" № 2120-IX dated 15 March 2022.
 
 
 
Key Takeaways
 
It is a key that commercial parties take the above observations into account when entering into, performing their obligations or expecting performance by a counterparty of their obligations under any kind of agreement during martial law.
 
Below are the key takeaways of this briefing:
 
  • (a) Force majeure releases a party from liability for non-compliance with the obligations and not from obligations themselves.
  • (b) Chamber's Letter does not automatically release the party from liability. The release from liability for non-compliance with obligations due to force majeure has to be awarded by a court or another dispute resolution body provided for in the agreement.
  • (c) If a Ukrainian law agreement is silent in relation to force majeure, the party may still rely on legislative provisions.
  • (d) If an agreement contains clauses governing force majeure, the party has to pay particular attention to the requirements (e.g., deadline, procedure, form) and consequences such clauses provide for.
  • (e) Lack of funds does not release the debtor from liability for failure to pay under the agreement.
  • (f) For the period of martial law any borrower is released from (1) liability under Article 625 of the Civil Code and (2) obligation to pay a penalty (fine, default interest) for delay under the credit (loan) agreement.
  • (g) The statute of limitations is extended for the entire duration of the martial law in Ukraine.
 
 
NB! Force majeure requires immediate action. It is important to analyse and/or let your lawyers analyse the agreement in view of the potential impact of force majeure, and contact /or let your lawyers contact your counterparty as soon as possible to effectively find a legally and commercially comfortable solution.
 

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Our experts: Yevheniy Deyneko, Andriy Olenyuk, Yuliia Kylchynksa, Olha Horodniuk

Key issues: Ukraine, force majeure, war, martial law, contractual obligations

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