Legal Consequences of Force-Majeure

COURT PRACTICE

Some countries, including Kazakhstan, have adopted appropriate instructions for the judges on application and case consideration to avoid inconsistency in the interpretation of the force-majeure circumstances caused by the state of emergency. These instructions are helpful not only to the judges but also to the practicing lawyers and help them apply laws under the new circumstances.

For example, on April 21, 2020, the Presidium of the Supreme Court of the Russian Federation has approved a Judicial Practice Review No.1 on the application of the law and anti-COVID-19 measures on the Russian Federation's territory.

The Supreme Court clarified to the judges of the lower courts the issues related to the trial deferrals, suspension, extension of the terms for consideration due to the anti-COVID-19 measures, as well as issues related to resumption and extension of the procedural terms, exemption from liability for failure to fulfill obligations, modification or termination of contracts, the bankruptcy of enterprises (in connection with the previously imposed moratorium on bankruptcy), and issues related to legal proceedings in criminal and administrative cases.

The Resolution of the Supreme Court of the Republic of Kazakhstan dated May 6, 2020, No.9 approved the Clarifications No.1 on some issues of the court practice related to the state of emergency.

The lower courts were instructed that the state of emergency has all the attributes of force-majeure because it can be characterized as emergency and inevitability. There is no need to appeal to the courts for confirmation of this juridical fact of force-majeure due to the state of emergency. The issues of exemption from liability of the party that failed to fulfill its contractual obligations due to the state of emergency, calculation, extension, and resumption of the judicial terms, the necessity of the pre-trial amicable setting of the dispute as well as the return of the claims against failed suppliers of the state procurement if such failures were caused by non-performance or improper performance of the contractual obligations due to the state of emergency were covered as well. In addition, the courts were given recommendations to take into account the principles of business ethics and encourage an amicable setting of the disputes.

APPLICATION IN COURTS

Considering the instructions mentioned above and the current legislation, we would like to discuss a few situations that might happen due to the force-majeure and the possible legal risks the parties might face.

1. What are the legal consequences for the contract parties, if the state of emergency will be considered as force-majeure (inevitable circumstances)?

According to Clause 2 of Article 359 of the Civil Code, the party that did not perform or failed to properly perform its obligations while conducting business, is liable, if it does not prove that a proper performance became impossible due to force-majeure meaning the emergency and inevitable circumstances such as natural disasters, military operations, etc. The absence of the goods, works, and services to perform should not be considered as such circumstances.

Therefore, a party may be exempted from liability if it is established that the failure to fulfill contractual obligations occurred due to the force-majeure, particularly the measures and restrictions introduced during the state of emergency, and proved the direct cause and effect connection. The liability exemption does not excuse the party from fulfilling the obligation (like rent payment, a supply of the goods, etc.)

Civil law on liability provides for (1) compensation of the losses and (2) payment of the penalty.

1. Does the tenant have a right to forfeit the rent for the period of the state of emergency? Does the landlord have a right to collect the rent for the period of the state of emergency forcibly?

The force-majeure does not relieve per se the parties from their contractual obligations, including payment of the rent if these obligations could still be fulfilled once the state of emergency is over.

More to the point, rent payment does not connect directly to the state of emergency. The tenant might have sources of income other than revenue from sales, such as a commercial or internal loan. In addition, in the current judicial practice, courts do not recognize a shortage of operating money as a force-majeure.

Therefore, the tenants may not forfeit the rent during force-majeure, and the landlord has a right to collect unpaid rent through legal action.

3. Does the party have a right to terminate the contract under its sole discretion due to the inability to perform?

According to Article 401 of the Civil Code, modification and termination of the contract are possible upon the agreement of the parties or under the court orders.

According to Clause 2 Article 404 of the Civil Code, either party has a right to renounce the performance under the contract if such performance of the contractual obligation is no longer possible (Article 374 hereof).

Clause 1 of Article 374 of the Civil Code specifies that obligation can be terminated due to the inability to perform if such failure is caused by the circumstances for which the performer is not liable. This rule does not apply to financial obligations.

Therefore, the parties are not allowed to terminate the contract under sole discretion due to the inability to fulfill financial obligations. The parties are permitted to exercise their rights for early termination only for the non-financial obligations.

4.Does a party have a right for early termination due to the non-performance of its counterpart? Shall this party give a termination notice to its counterpart?

According to Article 361 of the Civil Code, if any of the parties is not able to perform under a two-party contract due to the circumstances for which neither party is liable than neither party has a right to demand the performance under the contract unless otherwise provided by the law or such contract. Each party has a right to demand restitution on everything that has been performed and for what it has not received any counter-performance.

According to Article 401 of the Civil Code, modification and termination of the contract are possible upon the mutual agreement of the parties or under the court orders. The court ordered termination is possible due to (1) the material breach of the contract by the other party, and (2) in other cases provided by the Civil Code, other laws, and the agreement of the parties.

According to Article 404 of the Civil Code, the unilateral renounce of the contract is allowed in cases provided by this Code, other laws, or agreement of the parties. In case of the unilateral refusal from the performance under the contract, the renouncing party shall give at least one-month notice unless otherwise provided by this Code, other laws, and the agreement of the parties.

That is why in case of the failure of one party to perform under the contract, the other party has a right to unilaterally terminate the contract by giving it a one-month notice (or earlier one as provided by the contract).

5. Does a party have a right to request a performance deferral if the state of emergency caused its failure to perform?

In case of the non-performance of the contractual obligation due to the force-majeure, the affected party can request an extension of performance term in accordance with the procedure provided by Chapter 24 of the Civil Code (modification and termination of the contract). If the counterpart does not agree, the dispute shall be resolved in court.

6. Shall the parties of the contract follow the procedures of the pre-trial amicable setting of the dispute caused by the non-performance due to the state of emergency?

According to Clause 4 of Article 404 of the Civil Code, the renouncing party shall give a one-month notice to its counterpart in case of unilateral termination of the contract. The early termination claim to the court can be filed only upon the receipt of the other party’s refusal to modify or terminate the contract, or if such response has not been received before the deadlines specified in such notice, by the laws, or in the contract. If such deadlines are not specified, the waiting time for the response is thirty days (Clause 2 of Article 401 of the Civil Code).

Some laws and business customs provide for obligatory pre-trial amicable setting attempts before referring to the courts.

According to the Clarifications No.1 of the Supreme Court of the RoK, the courts have a right to return the claim citing Subclause 1) Clause 1) of Article 152 of the Civil Procedure Code, giving a reason that requirements for pre-trial or arbitration were not met and the possibility of such setting has not been lost.

Therefore, the parties shall observe this requirement of the pre-trial court setting of the dispute and arbitration.

SUMMARY

In this article, we discussed some most common situations that could occur due to the failure to perform contractual obligations caused by the force-majeure.

The Kazakhstani government is constantly monitoring the economic situation and has introduced a number of measures to prevent the economic crisis and mitigate the negative consequences of the pandemic.

On May 11, 2020, at the final meeting of the State Emergency Commission, the President stressed the attention on recognizing the state of emergency as a force-majeure at the regulatory level. Therefore, in the claims of the individual entrepreneurs and small business, the state of emergency will be recognized as force-majeure. To avoid the pressure from malicious creditors, all bankruptcy claims against the companies and individual entrepreneurs were suspended until October 1 of this year.

We believe that corresponding legislation will be sure to follow. We recommend to closely monitor the changes in the legislation and exercise your right diligently without infringing on the rights and interests of the other entities.