Dmytro NIKOLOV, attorney
With the beginning of the full-scale invasion of the Russian Federation on the territory of Ukraine, the question of applying the provisions of the legislation on force majeure became actual again. “Again”, because the mentioned institute has already been the subject of scientific controversy and has been analyzed by the courts in cases regarding economic activity in the ATO zone, and later – in cases regarding quarantine restrictions caused by COVID-19.
It should be noted that there is a more “categorical” understanding of force majeure and its impact on the performance of contractual obligations in the legal community nowadays, because on February 28, 2022, the Chamber of Commerce and Industry of Ukraine published an official letter regarding the certification of force majeure circumstances (circumstances of force majeure) caused by military aggression of the russian federation against Ukraine, which, in turn, gave reasons for many lawyers to claim that any non-fulfillment of an obligation will be considered as caused by force majeure now.
In our opinion, such a “categorical” approach does not correspond current legislation and has developed judicial practice, which will be described in details below.
First, let us remind once again that force majeure exempts from liability for non-fulfillment of an obligation (in particular, from penalties and compensation for damages), but not from the obligation itself (that is, from the the obligation in kind). Conventionally speaking, if due to force majeure circumstances the developer was not able to complete the construction within the agreed terms, then he is only exempted from paying a penalty and compensation for damages, but not from the obligation to complete the construction, as well as other obligations before the investor.
Currently, it is quite common to ask investors of new buildings whether they can legally not to pay regular payments due to the war. In general, the answer to this question is negative. Yes, a Part 1 of Art. 625 of the Civil Code of Ukraine contains a rule according to which the debtor is not exempted from responsibility for the impossibility of fulfilling a monetary obligation. The meaning of this rule is, among other things, in the fact that the lack of funds does not affect the debtor’s obligation to fulfill his monetary obligation. Moreover, to sum up the current edition of Part 1, 2 of Art. 625 of the Civil Code of Ukraine, even a technical impossibility to fulfill a monetary obligation (for example, in the case of a complete or partial stoppage of the functioning of the banking system, technical problems of the bank itself, the impossibility of buying currency due to currency restrictions) is not a reason for exemption from liability.
Incidentally, we note that exemption from the fulfillment of a monetary obligation can be established by special legislation (a classic example is a part 4 and 6 of Article 762 of the Civil Code of Ukraine regarding exemption from rent payments if the possibility of using the property has significantly decreased or the property could not be used by the employer due to circumstances for which he is not responsible).
Invoking force majeure as a basis for exemption from liability, the interested party must prove exactly how the force majeure manifested itself in a specific obligation. The only abstract reference to the presence of force majeure will definitely not be enough.
In this regard, the decision of the Commercial Court of Cassation of the Supreme Court dated 25.01.2022 in case No. 904/3886/21 states: “… Force majeure circumstances do not have a prejudicial (predetermined) nature. When they occur, the party that refers to force majeure must prove it. The party that refers to specific circumstances must prove that they are force majeure, including for a specific case. Based on the signs of force majeure, it is also necessary to prove its emergency and inevitability. The fact that force majeure circumstances must be proven does not exclude the fact that the existence of force majeure circumstances can be certified by the relevant competent authority…“.
In view of the above, the abstract and general letter of the Chamber of Commerce and Industry of February 28, 2022 does not meet the requirements for specifying the impact of the relevant force majeure circumstance on a specific obligation (and proof of a cause-and-effect link is mandatory in such a case).
In this regard, we also note that, in principle, the presence of force majeure circumstances can be confirmed by any evidence, which, in the opinion of the court, will be sufficient to establish the relevant circumstance. We do not agree with the popular opinion that force majeure is the exclusive “jurisdiction” of the CCI. After all, the existence of force majeure is, among other things, a question of fact, and the legislation does not contain any restrictions on what kind of evidence can be used to confirm such existence.
The same position is followed by the CCC of the Supreme Court, in paragraph 44 of its resolution dated 21.07.2021 in case No. 912/3323/20 it is stated: “…Courts of previous instances considered that the only proof of the existence of force majeure is the certificate of the Chamber of Commerce, however, this position is wrong. The existence of force majeure circumstances regarding the violation/non-fulfillment of obligations that arose as a result of the conclusion of a lease agreement between residents of Ukraine can be proven by any evidence…“.
In our opinion, the question of whether it is possible to regulate the appropriateness and sufficiency of evidence that would confirm force majeure according to the contract is more difficult. For example, the parties established that force majeure can be confirmed only by a specific regional Chamber of Commerce and Industry, and the party, and the party, in its turn, received a certificate from the Chamber of Commerce and Industry of Ukraine. At the same time, the parties could state in the contract that other documents are not accepted at all.
It should be noted that there is no unity of opinion on this issue at judicial practice. On one hand, in the decision of the CCC of the Supreme Court dated 26.05.2020 in case No. 918/289/19, the court refused to recognize as proper evidence the conclusion and the certificate of the Rivne Chamber of Commerce and Industry and a number of other documents, because the parties agreed that force majeure must be confirmed by a certificate of the Chamber of Commerce and Industry of Ukraine.
On the other hand, in the above-mentioned decision of the CCC of the Supreme Court dated 25.01.2022 in case No. 904/3886/21, the court made a more “liberal” approach to the evidence provided by the party (although formally the court referred to the principle of interpretation “contra proferentem” to justify its position because the parties in the contract ambiguously defined the appropriate body of the Chamber of Commerce and Industry, which should issue the certificate).
Our position on this issue is that in this case the parties cannot settle procedural issues in the contract. We are of the opinion that proving the existence of force majeure is, among other things, proving the fact, and the parties cannot limit the means of proof in the contractual manner. Moreover, the parties cannot limit the court in evaluating the evidence, otherwise any clause that contradicts the Civil Procedural Code of Ukraine or the Commercial Procedural Code of Ukraine could be included in the contract, and in the future the parties would refer to the fact that in this way they simply implemented the principle of freedom of contract. At the same time, freedom of contract is impossible where there are direct imperative provisions, which we consider to be the provisions of the procedural codes regarding the procedure prove before the court.
From our point of view, the most difficult issue is the impact of force majeure on the possibility of applying operational economic sanctions.
According to Art. 611 of the Civil Code of Ukraine in case of violation of an obligation, among other things, there are legal consequences established by the contract or the law, namely the termination of the obligation due to a unilateral refusal of the obligation, if it is established by the contract or the law, or termination of the contract.
According to the terminology of the Commercial Code of Ukraine, such unilateral termination (refusal) is an operational-economic sanction. After all, in accordance with Part 1 of Art. 236 of the Commercial Code of Ukraine, in business contracts, the parties may provide for the use of the following types of operative-economic sanctions: unilateral refusal of the managed party to fulfill its obligation, with the exemption of its responsibility for this – in the event of a violation of the obligation by the other party.
To understand the essence of the problem with operational and economic sanctions, let’s present the situation. Due to force majeure, the developer delayed the fulfillment of the obligation for three months (there is no provision in the contract that in the event of force majeure lasts for a certain period, the party can unilaterally terminate the contract).
The investor, without waiting for the termination of such circumstances, unilaterally terminates the contract, because such a right is provided by the contract in case the delay lasts more than two months.
It would seem that the developer is not to blame for the delay in fulfilling the obligation, but the contract was terminated. Was such a break legal?
On the one hand, Art. 236 of the Commercial Code of Ukraine is placed in Chapter V of the Commercial Code of Ukraine “Liability for Offenses in the Business Sector”, and Part 2 of Art. 217 of the Commercial Code of Ukraine contains provisions according to which the following types of economic sanctions are applied in the field of business: compensation for losses; fines; operational economic sanctions (in turn, the title of the article implies that economic sanctions are a legal means of responsibility in business relations). In addition, according to the dominant practice of the Civil Court of Cassation as part of the Supreme Court (CCC of the Supreme Court), civil liability is the imposition on the offender of legal, but unfavorable legal consequences, which consist in depriving him of certain rights or replacing the failure to fulfill an obligation with a new one , or in the addition of a new additional obligation to the unfulfilled obligation (see, for example, the resolution of February 10, 2021 in case No. 194/1414/15-ts). Therefore, if operational-economic sanctions are a measure of responsibility, then the norms on force majeure must be fully in effect.
On the other hand, in accordance with Part 3 of Art. 235 of the Commercial Code of Ukraine operational economic sanctions are applied regardless of the fault of the entity that violated the economic obligation.
In this regard, the CCC of the Supreme Court in paragraph 24 of the decision dated 31.10.2018 in case No. 905/2319/17 briefly noted that the application of operational and economic sanctions is the right of a party, and such a right is granted regardless of the fault of the other party, who, in case of disagreement, not limited by the right to challenge such sanctions in court.
Similarly, in the decision of the CCC of the Supreme Court dated March 27, 2018, in case No. 916/1385/17, it is stated that “… Clause 3 of Art. 235 of the Commercial Code of Ukraine establishes that operative economic sanctions are applied regardless of the fault of the entity that violated the economic obligation. The very fact of discovering a violation of the Rules by the plaintiff is the basis for applying to him an operative economic sanction based on the Methodology, regardless of the consumer’s fault in committing such a violation…”. An identical position is reflected in Clause 4.2.6 of the decision of the Supreme Court of Ukraine dated July 4, 2018 in case No. 914/2510/17, as well as the decision of the Supreme Court of Ukraine dated April 17, 2018 in case No. 914/1561/17.
In our opinion, in general, this approach of the Supreme Court should be recognized as correct. First, the Commercial Code of Ukraine directly establishes that the application of operational economic sanctions is possible without fault. Secondly, the Civil Code of Ukraine also unequivocally opposes unilateral refusal of an obligation to measures of responsibility (for example, according to part 2 of Article 615 of the Civil Code of Ukraine, a unilateral refusal of an obligation does not exempt the guilty party from responsibility for breach of obligation). Thirdly, in the theory of civil and economic law, there is also a dominant (though not unequivocal) opinion that measures of operational response (protection) differ in their legal nature from measures of responsibility.
After all, de lege lata (from the point of view of the applicable law), a unilateral repudiation of a contract does not depend on force majeure. However, de lege ferenda (from the point of view of ideal law) this approach, at least under martial law, may be worth reconsidering.