Force majeure and contract termination for a cause explained the reason

31.03.2022

From the first weeks of the defensive war on our territory, it became clear that the business activities by Ukrainians play a very important role in saving lives and protecting the country. This dimension of martial law in Ukraine should be measured from the point of view of managers and business owners – both given current planning and for the time after the cessation of hostilities. Below are the answers to the question of what is the impact of martial law on the implementation of treaties and how they can be changed or redistributed the risks of the parties.

 

State of War and Martial Law

One of peremptory norms of international law is to avoid the use of force in international relations:

According to Clause 4, Article 2 of the UN Charter "All Members shall refrain in their international relations from the threat or use of force against the territorial integrity or political independence of any state, or in any other manner inconsistent with the Purposes of the United Nations."

An aggressive war is a crime against peace to be prosecuted. The UN Charter allows the lawful use of force only in 2 cases: based on the UN Security Council's decision (Article 42) or in the exercise of right of self-defence (Article 51) if an armed attack occurs.

Thus, an aggressive war is a crime, and the people and organizations causing such crime must be held accountable..

The Constitution of Ukraine (Clause 9, Part 1, Article 85 of the Constitution of Ukraine) empowers the Verkhovna Rada of Ukraine to declare the state of war based on the submission of the President of Ukraine. In the past centuries, hostilities could not commence between two or more states without clear warning in the form of a declaration of war stating the reasons therefor or of an ultimatum with a conditional declaration of war. Once such a requirement had been met, a state of war between countries formally existed. However, this condition has been rarely met, especially after national states substituted empires. Therefore, there were no more multilateral arbitrators or even observers who would monitor whether such conditions are met – neither emperor, nor clergy were any longer eligible for that.

In the public knowledge, the Russian Federation refrained from statements that it had directly attacked Ukraine. 2014 saw the annexation of the Autonomous Republic of Crimea with the help of the unmarked army units. The actions performed in the Occupied Districts of Donetsk and Luhansk Oblasts were declared "political and diplomatic support of the Russian-speaking population" (later, 2021 witnessed the recognition of military and technical support of the Occupied Districts of Donetsk and Luhansk Oblasts), and the acts of aggression started on 24 February 2022 were called by the Russian Federation a "special operation". It means that military attacks to Ukraine were started without

declaring the war. Simillarly, Republic of Belarus joined the aggressive war against Ukraine on 24 February 2022 without any declaration or ultimatum.

In practice, thus, for the state of war between the countries, it would suffice for one of parties to make its intentions clear by actually commencing hostilities or trying to launch military actions. Should this be the case, international humanitarian law may also apply - assistance to victims of war (non-combatants, wounded and dead) by the third states and international organizations.

Considering practical aspects of aggression by other states, Article 4 of the Law "On Defence of Ukraine", empowers the President of Ukraine to announce mobilization, declare the martial law in Ukraine or in some of its areas, use army units etc in case of armed hostilities against Ukraine. Moreover, the President of Ukraine is entitled to submit the declaration of the state of war to the Verkhovna Rada of Ukraine. Thus, the law distinguishes between the right of Ukrainian state to defend itself (in compliance with international law) and the right to declare the state of war. In case of self-defence, the the imposition of the martial law is the last-ditch measure. Unlike the latter, declaring the state of war helps in public international law: to impose sanctions on the enemy, restrict rights of citizens (subjects) of an aggressor state, suspend and terminate business relations with the aggressor's territories, sever diplomatic and consular relations related to the protection of Ukrainian citizens living abroad.

At the very least, in the martial law companies may be released from liability for non-performance. At the most, contracts might be terminated for the good cause - material change in circumstances

 

Materiality

As you might be aware from Article 652 of the Civil Code of Ukraine, ‘I could not see this even in my worst nightmare’ sentiment is a ground for termination of the contract by mutual agreement of its parties, or its termination by the judicial order at the request of one of the parties – as a consequence of additional obligations during a special period, or direct result of such period. Cases where the plaintiff prevailed on termination of the contract due to a material change in circumstances are rather rare. To this date, we have yet to see consistent legislation to postpone liability for the breach of the contract; for example, when Ukrzaliznytsia as the successor of the State Enterprise ‘Donetsk Railway’ (partially located in the occupied territories of the Donetska oblast) was exempt from most of DR liabilities, the courts failed to apply the law in its entirety.

Under the case law, the change of substantial circumstances may prompt the court to vary the contract if four prongs are met: 1) when concluding the contract, the parties assumed that such change in circumstances would not occur; 2) the change in circumstances is caused by reasons that could not have been eliminated by the interested party with all care and caution that the situation demanded; 3) the fulfillment of the contract obligations would disturb the correlation of the tangible interests of the parties and would deprive the interested party of what it hoped for entering the contract; 4) the contract essence or business customs does not provide that the risk of change in circumstances must be borne by the party concerned.

Accordingly, the burden of proving a change in material circumstances rests with the party that refers to it, and, accordingly, it is difficult to provide for the position of the courts to the debtor's reference in the contractual obligation to such changes in economic activity.

 

Force Majeure

 

It is an established rule of business customs and statutory law that a person is released from liability for breach of contract if he/she proves that a breach was caused due to accident or force majeure. Article 14-1 of Law of Ukraine ‘On Chambers of Commerce and Industry of Ukraine’ (dubbed by Regulation on certification of force majeure by the Chambers of Commerce and Industry of Ukraine) provide for the list of such circumstances: war or threat of war, armed conflict or serious threat of such conflict, hostile attacks, blockades (including the closure of ducts), a ban on exports or imports, military embargoes, mobilization, armed forces actions (in our opinion, these a military/warfare were could have been meant - INTEGRITES), riots (including elements of hybrid aggression), acts of terrorism, sabotage, piracy, invasion, curfew, requisition (seizure), fire, explosion, flood, illegal actions of third parties (illegal seizure of an enterprise), quarantine, etc.

 

The list of statutory force majeure grounds coincides in many respects with the situations invoked by martial law or during other special periods (see the table).

Lack of funds, short supply of services or commodities, exchange rate volatility is generally not considered force majeure. Therefore, the behavior of the markets should greatly impress the judges before they allow any exception to this rule. In our opinion, theoretically, this may be an objective impossibility to make a payment as a result, (1) if the bank does not work, in particular, due to the lack of electricity supply in the region, destruction of equipment, unauthorized interference with the operation of the bank's computer networks or the bank is closed in connection with the risk of physical seizure or destruction of branches - in case of blocking the relevant settlement by the enemy; (2) legislative restriction of payments, in particular cross-border currency transfers - as currently introduced by the National Bank; (3) bankruptcy of a systemically important bank or large clearing house member of an organized commodity market, such as electricity, fuel; (4) The physical inability of a director or accountant to make a payment if they are under occupation or shelling without access to a client-bank system and unable to move to a safe place where there is an operating bank.

 

Certification of force majeure

Тhe Chambers of Commerce and Industry of Ukraine (the CCI) and its regional divisions are authorized to issue a certificate of force majeure, which is sufficient evidence under the Ukrainian law. A breaching party must apply to the CCI for a certificate and, establish, to the contemplation of the CCI expert, the causal link between the force majeure and non-performance of the contract.

With the extreme situation caused by the initiation of the war, the CCI has published on its website a general official letter certifying force majeure of Russia’s aggression against Ukraine – from 24 February 2022 until the end. Thus, the procedure for the martial law period had been simplified: a business no longer needs to apply to the CCI with a bundle

of documents to certify force majeure on each contract. The only thing you must do is to establish the respective causal link with the non-performance of the agreement.

 

Moreover, the contract may contain a provision, if force majeure lasts more than a certain period (for example, 90, or 180 days), the contract may be terminated at the initiative of one of the parties.

What can be done in the future?

Entering a contract after the outbreak of war (or any armed conflict for that matter) makes it difficult to recognize the war or related circumstance as unpredictable, and the impact of war on the contract as unavoidable, even if actions took place in another part of Ukraine – as was the case with agreements between NJSC ‘Naftogaz of Ukraine’ and RAO ‘Gazprom’ in 2019, or, for example, the contract concluded in Kyiv in 2021 (i.e., given ongoing aggression by Russian in Donetsk and Luhansk oblasts and Crimea). A refutable assumption, therefore, would be that the impact of war or armed conflict on the contract was foreseeable and constituted a business customary risk, which can be refuted by the court or arbitration tribunal.

Restrictions on martial law: use of capacity, labor resources, funds of enterprises for defense, conscription for able-bodied persons, seizure of property, removal of managers are expressly provided by the statute. Thus, the businesses should care to expand the list of force majeure events as well as rehaul the sections for termination of existing or future contracts to provide the customary grounds of termination relevant to their industry.

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Partner, Head of International Arbitration