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COVID-19 -an excuse not to perform contractual obligations?

Covid-19 has been declared as pandemic by WHO. The pandemic has caused the global markets tumble and triggered massive government intervention for saving the economy as the economic activity sharply fell and panic spurred in financial markets. Many businesses now face situations where it is much more onerous or near to impossible to perform their obligations vis a vis their employees, but more importantly their counterparts and contractors.

In such instances the legal system of a given jurisdiction provides for back up legal regime to address (presumably effectively) the eventualities in connection with such hardships. This is where the “force majeure” regulations come into play in determining the continuing liability for performance of the obligations caused by events beyond the control of the participants of economic activity.

Armenia Civil Code provides for exemption from performance of obligations if failure to properly fulfill the obligations is proved to have been impossible due to force majeure — that is as a consequence of emergency and unpredictable circumstances in given conditions.

For those participants who have concluded contracts for international sale or purchase of the goods need to be aware of UN Convention on Contracts for the International Sale of Goods (Vienna 1980), ratified by RA which provides in more clear terms that the party is not liable for if he proves that the failure was due to an impediment beyond his control and that he could not reasonably be expected to have taken the impediment into account at the time of the conclusion of the contract or to have avoided or overcome it, or its consequences. The emergency situation, even if mentioned in the contract as a force majeure event, cannot itself exclude liability in case of failure to perform obligations. The parties shall prove that it directly resulted in making impossible or partially possible the performance of duties in order to be excluded from liability and proving this direct effect can become a big challenge.

But is the emergency situation declared in Armenia is force majeure and how can it affect the party’s liabilities?

Businesses need to pay attention to the terms of the emergency situation if it directly disallows the carriage of activity or performance of any action which makes it impossible for them to perform their obligations vis a vis their counterparts. A good example of force majeure would be the non-payment of the rent of a retail shop located in the shopping mall as the emergency decree directly prohibits the activities of the shopping malls.

In such case the law provides that the obligation shall terminate due to the impossibility of fulfilment, if this has occurred as a result of such circumstances for which neither of the parties is responsible. Where as a result of promulgation of an act by a state or local self-government body the fulfilment of the obligation becomes fully or partially impossible, the obligation shall terminate fully or in the relevant part. 

Thus, if its direct influence on fulfillment of obligations is proved, emergency situation, as a force majeure event, will become a ground to be released from liability in case of non-performance or partial performance of obligations.

Authors

Gor Margaryan, Partner

Anzhela Abrahamyan, Associate

Contacts:

Legelata LLC

26/1 Vazgen Sargsyan str, Yerevan 0010, Armenia

Phone: +374 11 520510

Email: info@legelata.am

Website: www.legelata.am

 

Disclaimer:

This material is produced by Legelata LLC. The material contained in this newsletter is provided for general information purposes only and does not contain a comprehensive analysis of each item described. Before taking (or not taking) any action, readers should seek professional advice specific to their situation. No liability is accepted for acts or omissions taken in reliance upon the contents of this material.

Legelata LLC, 2020

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