Judicial Practice in Force Majeure Cases

In connection with the martial law, the issue of complete or partial inability of business entities to fulfill their obligations under contracts has become a prominent one. With reference to the Letter of the Chamber of Commerce and Industry of Ukraine on the certification of force majeure of February 28, 2022 No. 2024/02.0-7.1, companies report the occurrence of force majeure and refer to this fact as a reason for non-compliance. We will discuss below whether such a formal force majeure notice will suffice to avoid liability for non-performance, and what consequences of force majeure are in effect in general, analyzing the most interesting Supreme Court decisions on this issue.

1. Force majeure in the lease relationship and the inability to use the leased property – the decision of the Supreme Court in case No. 911/354/21 of December 09, 2021

Description of the case: the regional branch of the State Property Fund and the company (defendant) concluded a lease agreement of state property. The defendant had debts under the lease agreement. At the same time, the defendant sent a letter to the regional branch of the State Property Fund with a notice of force majeure in connection with the introduction of quarantine measures in Ukraine, with a certificate of the Chamber of Commerce and Industry (CCI) of Ukraine. The defendant was sued for rent, and the defendant denied its payment obligations with reference to part 6 of Art. 762 of the Civil Code of Ukraine, according to which the lessee shall be exempt from payment for the entire period during which the property could not be used by it due to circumstances for which it is not responsible.

Foundings of the Supreme Court:

– paragraph 6.10 of the Decision of the Grand Chamber of the Supreme Court of May 08, 2018 in case No. 910/7495/16 states that the basis for the application of part 6 of Article 762 of the Civil Code of Ukraine is to establish the fact that the lessee can not use the property for reasons beyond their control;

– for the application of part 6 of Art. 762 of the Civil Code of Ukraine and the exemption of the lessee from payment for the use of leased property, the determining condition of such exemption is the presence of circumstances for which the lessee is not responsible;

– this regulation defines the basis for exemption from the obligation to pay rent as the objective impossibility to use the leased property (to have access to the premises, to be in it, to store things in the premises, etc.) due to circumstances for which the lessee is not responsible;

–  one should not equate the impossibility of using leased property, i.e. complete lack of access to property, to the impossibility of making a profit in the expected amount during the disputed period, which does not fall under part 6 of Art. 672 of the Civil Code of Ukraine;

–  due to the established circumstances of the defendant’s actual use of leased property, the courts lawfully rejected the certificate of force majeure provided by the defendant;

– when considering such cases, the courts must disclose the content of the force majeure circumstances specified in the certificate of the Chamber of Commerce and Industry in order to find out how these circumstances affected the existence of grounds for exempting the lessee from rent.

2. Force majeure is not a ground for compulsory amendments to the contract, unless the contract itself provides otherwise – the decision of the Supreme Court in case No. 910/9258/20 of June 01, 2021

Description of the case: a business entity filed a lawsuit against another business entity for recognition of a contract for amendments to sublease agreements to reduce payments under these agreements. The claim was substantiated by the fact that the plaintiff could not use the leased premises due to the introduction of quarantine restrictions by the Cabinet of Ministers of Ukraine dated March 11, 2020 No. 211 “On Preventing the Spread of Coronavirus COVID-19 on the Territory of Ukraine”, which is the basis for amending contracts of sublease in terms of reducing rents. The plaintiff referred to Art. 625 of the Civil Code of Ukraine, according to which, in the event of a significant change in the circumstances that guided the parties in concluding the contract, the contract may be amended or terminated by agreement of the parties, unless otherwise provided by the contract or the obligation.

The case file did not contain certificates issued by the Chamber of Commerce and Industry of Ukraine or authorized regional chambers of commerce, certifying the existence of force majeure.

Foundings of the Supreme Court:

– the relevant certificate of the Chamber of Commerce and Industry of Ukraine or the regional chamber of commerce and industry authorized by it serves as the confirmation of the existence of force majeure;

– with reference to a number of other rulings of the Supreme Court, it is noted that force majeure is not prejudicial, and it it arises, the party who refers to it as a ground for impossibility of performance shall prove the existence of such circumstances not only in themselves, but also the fact that these circumstances were force majeure for this particular case of performance of an economic obligation;

– proving the existence of force majeure is the responsibility of the person who breached the obligation. It is exactly this party who must provide the relevant evidence in the event of a dispute;

– confirmation of force majeure may be grounds for release from liability for partial or complete non-performance of contractual obligations (which is not the subject of this case), and not for forced amendments to the contract, unless the contract itself provides otherwise.

3. The fact of the existence of force majeure can be confirmed not only by a certificate of the Chamber of Commerce and Industry, if the agreement is concluded between residents of Ukraine – the decision of the Supreme Court No. 912/3323/20 of July 21, 2021

Description of the case: the plaintiff and the defendant entered into a lease agreement. Due to quarantine, the plaintiff was unable to use the premises in accordance with its purpose – the location of the pharmacy – and filed a lawsuit to terminate such an agreement.

Foundings of the Supreme Court:

– the main point is that force majeure makes it impossible to fulfill the obligation in principle, regardless of the efforts and material costs that the party has incurred or could have incurred;

– the courts of previous instances correctly noted that the mere provision of quarantine to force majeure provided by law does not indicate the existence of force majeure in specific legal relations of the parties, where such a circumstance can become force majeure only if the person proves that a particular a restrictive measure imposed under quarantine (state of emergency, emergency case, etc.) makes it impossible to carry put a specific agreement;

– the courts of previous instances considered that the only evidence of the existence of force majeure is a certificate of the Chamber of Commerce; however, this position is erroneous. The existence of circumstances of force majeure regarding the breach/non-performance of obligations arising from the conclusion of a lease agreement between residents of Ukraine may be proved by any evidence.

4. Force majeure, even confirmed by a certificate of the Chamber of Commerce and Industry, does not in itself indicate the impossibility of using property and conducting business activities – the decision of the Supreme Court No. 911/3067/20 of October 20, 2021

Description of the case: the plaintiff and the defendant entered into a lease agreement. The plaintiff appealed to the court to recover rent arrears. The defendant, in turn, believes that they should be exempted from paying rent at all, given that they could not use the leased property due to the ban on the activities of food establishments during the quarantine period. The defendant provided a certificate of the Chamber of Commerce and Industry on force majeure.

Foundings of the Supreme Court:

– the introduction by the Cabinet of Ministers of Ukraine of restrictive measures during quarantine (including a ban on work involving the reception of visitors) does not in itself indicate a fundamental impossibility of the defendant’s use of leased property within the meaning of part 6 of Art. 762 of the Civil Code of Ukraine. According to the courts, the defendant did not prove their complete cessation of business during the quarantine period, including due to lack of access to property, while the plaintiff during this period provided the defendant with access to leased property and recorded the passage of employees to the premises;

– due to the established circumstances of the actual use of the defendant’s leased property, the courts rejected the certificate provided by the defendant on force majeure;

– the content of the arguments of the defendant’s cassation appeal indicates an erroneous identification of the impossibility of using the leased property, i.e. complete lack of access to property (which they did not prove in this case), with the inability to make the expected profit during the disputed period, which does not fall within the scope of part 6 of Art. 672 of the Civil Code of Ukraine.

5. The moment of existence of force majeure is important – the decision of the Supreme Court No. 910/8040/20 of July 08, 2021

Description of the case: the plaintiff and the defendant entered into a lease agreement. The plaintiff appealed to the court to recover from the defendant the amounts paid by the plaintiff as rent as unreasonably acquired. The plaintiff referred to the fact that they could not use the leased property due to quarantine and, therefore, did not have to pay rent. The plaintiff provided a certificate of the Chamber of Commerce and Industry on force majeure.

Foundings of the Supreme Court:

– the plaintiff’s references to the existence of force majeure, which entitled them to exemption from rent, in support of which the latter provided a certificate of force majeure of the Chamber of Commerce and Industry of Ukraine, are groundless. According to the complainant, those force majeure circumstances were related to the establishment of quarantine on the territory of Ukraine from March 12, 2020;

– the courts of previous instances found that on December 18, 2017, the plaintiff paid in favor of the defendant an advance payment under the contract; on March 10, 2020, they paid rent;

– this means that as of March 12, 2020, the plaintiff had fulfilled their obligations to pay rent under the contract. In other words, there were no force majeure circumstances at the time the plaintiff fulfilled their obligations; accordingly, the plaintiff was not entitled to invoke the existence of force majeure in order to release them from liability for non-performance or improper performance of an already performed obligation under this agreement.

Lawyers of the “Prime” Law Firm will continue to monitor the case law in the field of force majeure, related to the martial law in Ukraine, and inform readers about all interesting decisions.