Force Majeure As A Way To Avoid Losses In Liabilities

Force Majeure As A Way To Avoid Losses In Liabilities

Force majeure circumstances

Events of force majeure, or as they are often called force majeure circumstances, as of today is the most talked about topic in the Ukrainian (and not only) business environment, immediately after discussing the spread of a coronavirus pandemic … and not for nothing, as, at first glance, this ordinary and banal article in almost every legal transaction (agreement, contract, etc.) can help prevent significant losses in the activity of individuals and legal entities.

What exactly is a force majeure circumstance and who sets it up?

The proper legislative definition of a force majeure circumstance is contained in the Law of Ukraine “On Chambers of Commerce”, which states that this is an extraordinary and inevitable circumstance that is objectively preventing a person from fulfilling his obligations under the terms of the legal transaction and which entitles such person to defer or even terminate his obligation thereunder.

The above specified Law lists the circumstances that may be subject to “force majeure” (for example: revolution, war, fire, embargo, etc.), and more recently the Law on the Prevention and Spread of Coronavirus Disease (COVID-19), a new “force majeure” circumstance was added, namely, “quarantine established by the Cabinet of Ministers of Ukraine”.

Confirmation (evidence) of a force majeure circumstance occurs through the issuance of a certificate from the Ukrainian Chamber of Commerce and Industry or its authorized regional chambers of commerce and industry, which according to the Law must take place within 7 (seven) days from the date of the respective request.

In order to receive a certificate, a corresponding application must be submitted to the relevant chamber of commerce and industry, a contract for which a force majeure will be established, as well as a written notice to the other party of the legal transaction on the failure to fulfill its obligations in connection with a “force majeure”.

Can any force majeure circumstance automatically be a ground for a failure to fulfill a party’s obligations?

Generally, no. The Ukrainian Chamber of Commerce and Industry also draws attention to it on its official website. In particular, the Chamber of Commerce and Industry states that: “In accordance with international practice, a force majeure, including quarantine, does not automatically release a person from a liability. One need to understand how a particular circumstance, including quarantine, limits certain obligations.”
Thus, a force majeure circumstance is evidenced in each legal transaction separately and in view of the specific obligation of the person who had or must fulfill it under the terms of the legal transaction, but cannot or could not fulfill it due to the existence of force majeure, which fairly prevents the legal transaction.

Can a person’s lack of funds due to a force majeure be a release-from-liability ground?

The article 617 of the Civil Code of Ukraine, as well as the Article 218 of the Economic Code of Ukraine almost duplicate textually that the lack of funds to fulfill a person’s liability is not a proper ground to release him from a such.
In turn, there is no such a reason as the lack of funds for the person to fulfill his obligations within the list of force majeure circumstances prescribed by Article 14-1 of the Law of Ukraine “On Chambers of Commerce”.

That is, for example, the individual or legal entity lack of due funds (income) in connection with the impossibility of carrying out their activities due to restrictions imposed by the state is not currently considered a force majeure (as a general rule), and is not even considered a ground for release from other types of penalties (fines, etc.) for breach of the obligations.

Given the lack of legislation, the parties to any legal transaction should set out in detail a list of circumstances that are subject to force majeure, which will significantly affect the parties’ performance of their obligations and indicate the procedure therefor to suspend and / or terminate the legal transaction.

In case of occurrence / existence of force majeure circumstances that limit the ability of the parties to fulfill their obligations under the agreement – the best option is to conclude a separate agreement between the parties to determine the order and extent of fulfillment thereby of their obligations for the period of force majeure that may free them from lengthy litigation in future.

In order to reduce the possible consequences, we recommend you to take the above actions as soon as possible, since the sooner the parties agree with each other, the less material and moral damages they suffer due to the introduction of force majeure circumstances, which hinder their cooperation.

If you have any questions about your force majeure case, please contact:

Managing Partner Dmytro Syrota and
Lawyer Bohdan Zvarun