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INSTALLMENT AGREEMENTS DURING MARTIAL LAW: DOES THE DEVELOPER HAVE THE RIGHT TO CHARGE A PENALTY?

24 May 2023

Oleksandra FEDOTOVA, Partner, Head of Real Estate & Construction Practice 

Yaroslava  LAHAN, Senior Lawyer of Real Estate & Construction Practice 

The full-scale invasion of the Russian Federation in Ukraine has changed the lives of millions of Ukrainians, and in addition, has made significant adjustments to the activities of enterprises in various sectors of the economy and to the financial plans of their customers. The war also affected the construction market: having recovered from the shock of the first months of the invasion, construction companies are returning to work with customer debts under installment agreements concluded before a full-scale war, and some are charging financial sanctions for late payments.

This practice raises questions about the legality of such claims: isn’t war a force majeure that releases the fulfillment of any obligations under contracts?

The war is indeed an extraordinary circumstance, however, as in any legal issue, in this situation there are important nuances that should be taken into account by the investor when choosing a strategy of behavior in relations with the developer.

First, we emphasize that the occurrence of a force majeure situation does not exempt the parties from fulfilling their obligation in principle. Force majeure exempts from liability for non-fulfillment or late obligation (for example, a fine, penalty), and in some cases (if provided for by the contract) is the basis for suspending the fulfillment of obligations for the duration of emergency circumstances.

Force majeure is confirmed for each contract separately

Military actions that objectively make it impossible to fulfill the obligations stipulated by the terms of the treaty, in accordance with the legislation of Ukraine, are force majeure circumstances – that is, force majeure.

On 28.02.2022, the body certifying force majeure circumstances in Ukraine – the Ukrainian Chamber of Commerce and Industry (CCI), confirmed this by publishing letter No. 2024/02.0-7.1 and noting in it that Russia’s military aggression against Ukraine is extraordinary, inevitable and objective circumstances for the parties to the contract for obligations, the fulfillment of which has become impossible.

However, the mere occurrence of such circumstances, as well as the letter of the Chamber of Commerce and Industry, in which such circumstances are recognized as extraordinary, is not an absolute confirmation of the impossibility of fulfilling the investor’s obligations under the contract with the developer. This conclusion follows from the norms of Ukrainian legislation and is followed by the Supreme Court in its practice (for example, in the legal position in case No. 910/9258/20). The Court emphasizes that in the event of force majeure, the party must prove that these circumstances were force majeure for this particular case of fulfillment of the obligation.

That is, in order to refer to force majeure, the interested party under each individual contract needs to prove the existence of a causal link between, say, hostilities and the inability to fulfill in a timely manner (or at all) its obligations to pay payments under a particular contract.

For liability for non-payment of funds, not everything is so simple

It may not be easy to substantiate that the outbreak of hostilities directly affected your ability to pay timely (or even pay) payments under your specific contract, since the legislation of Ukraine (Part 1 of Article 625 of the Civil Code of Ukraine) contains a rule according to which the debtor is not released from liability for the inability to fulfill his monetary obligation.

From the analysis of this norm, it can be concluded that if, as a result of hostilities, the banking system of the country stopped working in principle (which did not happen in Ukraine), even the technical impossibility to transfer funds (for example, the inability to make payments on time from abroad or exchange funds through queues or non-working exchange offices in Ukraine, etc.) does not relieve the debtor from liability.

The exception, in our opinion, may be cases when the investor is deprived of the opportunity to pay the developer a payment due to the imposition of sanctions on such a developer or related companies after the start of the war – in this case, the investor is simply technically deprived of any opportunity to make such a payment, since it will obviously be blocked by the bank as such that helps to avoid restrictions imposed by sanctions.

In addition, in our opinion, it is quite legitimate to refer to the occurrence of force majeure circumstances in the event that the developer fell under the moratorium on the fulfillment of monetary obligations in favor of persons related to the aggressor state established by the Cabinet of Ministers of Ukraine by Resolution No. 187 of 3 March 2022.

In other cases, the investor has no choice but to pay a penalty at the request of the developer?

To answer this question, it is necessary to analyze the terms of a specific contract between the investor and the developer. In contracts, sometimes there are force majeure clauses, which provide that force majeure circumstances are grounds for suspension of obligations under the contract for the duration of such circumstances.

In this case, it is advisable to contact the developer in the manner prescribed by the contract with a notification of the occurrence and force majeure circumstances, as well as confirm their existence, in order to refer to force majeure circumstances as grounds for suspending payments until the expiration of such circumstances.

If the contract does not contain any force majeure clauses, it is advisable to analyze other provisions of the agreement in the aggregate for the existence of certain mechanisms for protecting the rights of the investor. For example, the legislation of Ukraine (Article 1 (615) of the Civil Code of the Russian Federation) stipulates that in case of violation of an obligation by one party, the other party has the right to partially or fully waive the obligation in cases where it is established by the agreement or the law – the corresponding clause in the contract, if any, may be useful to the investor to waive the obligation, for example, in case of violation of the terms of work by the developer.

How to confirm the presence of force majeure?

What evidence is sufficient to prove force majeure is often determined in the terms of an agreement between the parties — it can be a certificate of the Ukrainian CCI or a regional chamber of commerce and industry. Temporarily, until the end of martial law, regional CCIs are authorized to certify force majeure circumstances on all issues within the competence of the UCCI, that is, the applicant can apply to any CCI of his choice. In order to obtain such a certificate, it is necessary to fill out and submit an application to the CCI, attach supporting documents and pay an administrative fee. In substantiating the application, again, it is necessary to explain and confirm the causal link between hostilities and the inability of the investor to fulfill obligations under a specific contract.

Somewhat more complicated is the question of whether a party can deviate from these provisions of the contract and confirm the occurrence of force majeure with other evidence. In our opinion, the occurrence of force majeure is, first of all, a legal fact that must be proved.

Consequently, if a dispute between the investor and the developer regarding force majeure is resolved in court, the existence of this fact may be confirmed by any appropriate and admissible evidence, as provided for by procedural legislation, including a letter from the CCI and causal evidence attached to it.

Team

Oleksandra Fedotova
Partner, Attorney, PhD in Law
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