Contributed by Arzinger
How might businesses in your jurisdiction be impacted by the Covid-19 pandemic?
We can specify direct and indirect consequences of the impact of the Covid-19 pandemic on Belarus: direct consequences can be observed at the moment and have already influenced the profits of a business in the short term, and the indirect ones are presumed to become apparent along with the changes in economies of key trade partners of Belarus.
Among the main consequences, we can mention the following:
a. Transportation services
Transportation services, particularly automobile and rail, generate a great part of the revenues of Belarusian businesses. Private business is concentrated in the automobile sphere providing transportation, logistic, and forwarding services supporting trade turnover between Russia and the Asia region from one side and the European Union from the other.
An imposition of quarantine by the EU member states and other neighboring countries, as well as the ongoing tense situation in China, not only suppresses international freight traffic but also reduces demand for these services by foreign clients.
Export of machinery and industrial production
The Covid-19 pandemic has led to a gradual decrease in the pace of implementing projects in the industrial, mining, and energy spheres in neighboring states, and Russia, the main trade partner of Belarus, is in a particular focus here. Even considering that the Covid-19 has not greatly influenced the Russian economy yet, in perspective investors seem to keep from introducing new powers and exploiting new production fields. Most Belarusian machinery production is export-oriented and significantly exceeds domestic consumption of these goods, and this can add risks to the profitability of Belarusian industrial giants.
b. Construction works
In recent years, Belarusian construction companies have achieved meaningful progress in the export of construction services: both the private and public sectors are actively involved in road, energy, and residential construction in Russia, Ukraine, and the Baltic states.
The pandemic can create additional borders for Belarusian contractors with transportation of machinery and business trips of specialists.
c. Rent services and tourism
Currently, tourism does not make up an important percentage of Belarus's GDP, but it received a boost during the World Hockey Championship in 2014. Since then, the number of tourists has dramatically grown, as has the role of businesses that work in the renting, hotel, accommodation, and excursion spheres.
Following the global trend this year, Belarus's domestic hospitality business may face a decreasing client base and a growth of cases of canceled reservations. As the tourist season is only starting, businesses in this sector need to find new solutions to maintain their revenues.
In your jurisdiction, if it becomes impossible for a party to perform its contractual obligations because of an external event beyond its control (such as the Covid-19 pandemic), can that party cancel its contract?
In general, the current situation with the Covid-19 pandemic provides two possible remedies for contract parties unable to perform their obligations: (I) substantial change of circumstances and (II) force majeure.
Substantial change of circumstances
In Belarus canceling a contract due to a substantial change of circumstances is possible only upon a court decision (if the parties are unable to settle the situation by themselves).
A substantial change of circumstances has specific classifying criteria: the parties would have not concluded the contract or would have concluded it under absolutely different terms if they had been aware of these circumstances initially.
In each case a court shall seek for the following legal grounds in aggregate for canceling a contract by an interested party:
- while concluding the contract, the parties presumed that they would not face that circumstance;
- the change of circumstance was caused due to reasons that the interested party could not avoid while acting in good faith;
- the execution of the contract in the new circumstances would break the balance of interests of the parties and entail damage for one of the parties if this damage would largely deprive it of contract benefits;
- the contract does not provide that the interested party bears the risks of a substantial change of circumstances.
Upon a claim of one of the parties, the court is entitled to specify canceling consequences considering expenses incurred by the parties in relation to execution of the contract.
Classification of the Covid-19 pandemic as a substantial change of circumstances will differ for each particular situation. For example, let’s trace the classification points above in an air cargo delivery contract.
The initiation of quarantine in European and Asian states has caused serious damage to both air passengers and cargo air transportation. It is quite clear that numerous air carriers are now unable to perform their contractual obligations due to cancellation of flights, and this entails a serious damage for their clients.
If an air carrier asks a court to cancel a contract, the weak point here may be the requirement to prove that the parties could not presume this situation in advance: in light of the total quarantine and prohibition of cross-border transportation a carrier should have borne in mind such risks.
Alternatively, a carrier could have known about anticipated quarantine, but did not perform its obligations when there was an opportunity – with a high probability a court would dismiss the claim to cancel a contract.
Force majeure
The second possible remedy for a party to avoid liability for non-performance of its obligations under a contract is force majeure. Domestic legislation and court practice do not give a precise clarification of force majeure and do not provide a list of relevant cases – it just stipulates that these circumstances shall be extraordinary and unavoidable.
Some examples of force majeure are provided in sub-statutory regulations. Epidemic and epizootic are mentioned in one of legislative acts of Belarusian government concerning commercialization of results of scientific and scientific-technical activities by state bodies. This act had a narrow scope and already ceased to be in force. However, it can guide court and state bodies while analyzing a current pandemic situation. Belarusian law doctrine also tends to classify epidemics as a force majeure.
Parties to a contract can provide additional characteristics of force majeure in their agreement and specify a virus pandemic or epidemic as a legal ground for canceling the contract. However, in this case a party failing to perform its obligations may be required to prove that the current situation has an extraordinary and unavoidable character and should indeed be classified as an “epidemic.”
The situation gets sophisticated for Belarusian business due to the fact the Belarus has not declared a state of emergency: the state has not initiated domestic quarantine and has not closed borders with neighboring states yet. From a legal perspective, it complicates the ability of an entity or person to prove in court that a force majeure is actually taking place, even if the pandemic has affected their business.
The generally recognized commercial tradition is to include a reservation in contracts that any force majeure circumstance shall be proved with a certificate of a competent body of a relevant state. For Belarus this body is the Belarusian Chamber of Commerce and Industry which can potentially characterize the Covid-19 pandemic as a force majeure and give a party to a contract necessary evidence in court proceedings. However, this certificate is not absolute proof: the other party can always provide additional evidence of absence of extraordinary and unavoidable circumstances. As of now, we have not yet observed cases involving the issuance by the BelCCI of certificates regarding the situation with the Covid-19 virus.
In any case, the court will investigate details of each particular case and verify if the negative circumstance (namely, the Covid-19 pandemic):
- is unforeseen, exceptional, and unavoidable for a party to a contract seeking relief;
- took place exactly in the period of time when a party to the contract cancelled or did not perform it;
- to what extent it caused the cancelation or non-performance of the contract.
In your jurisdiction, if a party’s performance of its contractual obligations is adversely affected by an external event beyond its control (an “FM Event”) but does not become completely impossible, can that party typically seek relief from compliance with its obligations?
Belarusian law does not make a clear distinction between obligations completely impossible to perform due to an FM event and obligations which are adversely affected by an FM event. There are no special legal remedies for parties able to perform their obligations only partially and/or by commercially unreasonable means. In both cases, the court will seek classifying points of a substantial change of circumstances or force majeure and analyze all circumstances in total evaluating business risks that a party initially bore while concluding a contract.
However, having at least a theoretical possibility to perform obligations despite negative conditions beyond control, a party may be required to provide additional evidence that performing the contract in good faith can lead to disproportional damage and loss of a commercial sense of the deal.
What is vital here is that Belarusian legislation and courts consider a partial alteration of a contract as a much more serious interference in the business relations of parties that its cancellation.
In order to alter a contract upon a claim of one of the parties, in addition to all classifying features of a substantial change of circumstances, a court shall also ascertain that the cancellation of the contract is contrary to the public interest or can entail material damage to parties.
Thus, in case of settlement a dispute in court it seems to be easier for a party to claim cancellation of the contract than alteration of some specific obligations that this party is unable to perform due to an FM Event.
If yes, what considerations should be borne in mind by such parties, in particular in relation to:
Any notification obligations (Is the affected party typically required to notify any counterparties of the FM Event within a specific time period?)
Belarusian legislation does not provide mandatory notification obligations. However, a party shall prove that it has acted in a good faith (both before and after a substantial change of circumstances/FM event). In this regard, a party shall notify the other party of the impossibility to perform is obligations under the contract as soon as possible under the current circumstances.
Additionally, commercial contracts usually include a reservation that a party may refer to force majeure only in case of immediate notification of the other party in specified terms.
Any causation requirements (Is the affected party typically required to demonstrate that it would have performed its contractual obligations but for the FM Event?)
As mentioned above, while establishing the fact of the FM Event a court shall analyze to which extent the FM Event caused the cancelation or non-performance of the contract. A court may request evidence that the FM Event is the only ground for non-performance of the contract and that it is not just a cover of bad faith of a party.
Any mitigation obligations (Is he affected party typically required to demonstrate that it took specific steps to avoid the impact of the FM Event as far as possible?)
Mitigation obligations are not directly specified in legislation, however, it should also be analyzed in view of good faith conduct of parties: each party shall seek all commercially reasonable means to perform its obligations under the contract before referring to the FM Event.
By analogy with other aspects of an FM reservation in contract, parties may specify an algorithm of obligatory actions in case of alleged FM, which can include provisions related to the mitigation of consequences of FM Events.