Important Aspects in Case of Impossibility to Fulfill Contractual Obligations Due to COVID-19

• Priority actions in connection with the impossibility of fulfilling obligations due to COVID-19

Due to the pandemic caused by the coronavirus infection (hereinafter – COVID-19) and the various restrictive and prohibitive measures introduced by governments, some companies may face an inability to fulfill their contractual obligations.

Therefore, in certain cases COVID-19 and the related governmental restrictions, as well as their consequences, may be recognized as force majeure circumstances (hereinafter – FM).

For such companies, the application of rules on exemption from liability for non-performance of contractual obligations and obtaining a deferral of performance becomes of primary importance. Below we provide our recommendations on this matter.

According to the general rule established by paragraph 2 of Article 359 of the Civil Code of the Republic of Kazakhstan, a party may be released from liability for non-performance (or improper performance) of an obligation if it proves that proper performance was impossible due to force majeure circumstances. This rule includes suspension of performance, but it does not release from the obligation itself.

To apply the above-mentioned exemption, the following actions are recommended:

a) Analyze the contract for FM clauses and procedures for their application.

It is important to review the terms of the contract under which performance has become impossible due to FM. Most contracts contain force majeure clauses. However, their content and list of events constituting FM may differ significantly. Therefore, it is recommended to examine the FM clause and, taking its content into account, develop a negotiation strategy (in the format of official correspondence) with counterparties.

b) Notify the counterparty of the occurrence of force majeure circumstances.

A timely notice should be sent to the counterparty about the occurrence of FM, with a detailed description of the connection between FM (introduced restrictions and related consequences during the FM period, including references to acts of state authorities) and the impossibility of fulfilling obligations (describe reasons why the consequences of FM could not be avoided). A notice should also be sent upon termination of FM.

It is important to check the notice deadlines and strictly follow the formal procedure established in the contract.

At the same time, such notice should preferably include a proposal to revise the terms of the contract, for example, to agree on deferral / suspension of performance (if the FM clause does not expressly provide for this).

IMPORTANT: Under Article 349 of the Civil Code of the Republic of Kazakhstan, a party must immediately notify its counterparty of the emerging impossibility of proper performance.

IMPORTANT: Late or improper notice of FM may deprive a party of the right to be released from liability.

This is because FM clauses often state that failure to comply with the notice procedure deprives the party of the right to invoke FM. Lack of notice may also impose liability for losses that could otherwise have been avoided.

c) Obtain confirmation of force majeure circumstances.

Apply to the authorized bodies to certify the FM circumstance that caused non-performance. It is recommended to collect other significant documentary evidence confirming the impossibility of performance due to FM.

In the Republic of Kazakhstan, confirmation of the occurrence of force majeure circumstances is issued by the Foreign Trade Chamber of Kazakhstan.

In certain cases, confirmation from foreign authorities may be required if FM (COVID-19) occurred abroad and the non-performance is connected with that country's restrictions.

• Amending the contract or terminating it due to FM

In the FM notice to the counterparty, we recommend including a proposal to amend the contract in order to defer (suspend) performance proportionally to the duration of FM and exclude liability for obligations breached due to FM.

The parties may hold negotiations (through official correspondence) and agree on other amendments, such as changing the method of performance, including COVID-19 in the list of FM events, and recognizing it as grounds for exemption from liability.

We note that, as a general rule, the law of the Republic of Kazakhstan does not provide separate grounds for requiring a party to amend the contract due to unforeseen and unavoidable circumstances. Therefore, under Kazakh law, it is not possible to compel a counterparty in court to amend the contract. An exception applies when the contract contains a provision allowing amendments to be made upon the occurrence of FM—in this case, the parties may demand amendments (including through the court).

If the parties are no longer interested in performance, they may also agree to terminate the contract with mutual return of all received under the contract and final settlement. Some FM clauses specify a time period for the duration of FM after which the parties may terminate the contract.

• Consequences and actions if the counterparty does not recognize FM and does not agree to the proposed amendments

If the counterparty does not acknowledge FM circumstances stated in the notice, the availability of documents confirming FM along with legally correct pre-trial correspondence will in any case strengthen the party’s position in court. In such a scenario a dispute arises.

Accordingly, the party that failed to perform obligations due to FM risks being held liable for non-performance or improper performance.

Liability may include payment of penalties, fines, withholding of amounts due under the contract, and in some cases may be substantial. Liability may also include compensation for damages and loss of profit.

Additionally, in certain cases the counterparty may demand termination of the contract despite FM objectively preventing performance.

Two scenarios may develop:

• The party may perform the obligation (deliver goods, perform work / services) after FM ceases. If the counterparty refuses to accept and pay, the performing party may file a lawsuit demanding that the counterparty accept the result. In such case, proving FM and its impact on performance will be essential. All collected evidence of FM will play a significant role.
• The counterparty may file a claim demanding termination of the contract on the grounds of material breach and recovery of damages (penalties, etc.). In such case, it is also important to prove the absence of fault and the occurrence of FM that prevented performance. A counterclaim under scenario 1 may be filed.

These scenarios are the most common in practice, but each dispute requires individual analysis and legal assessment to choose the best strategy for protecting interests.

Businesses should also revise their strategy when entering into new contracts, paying special attention to FM clauses and including provisions related to COVID-19—specifically recognizing that the epidemic constitutes FM if it makes performance impossible.

If you have any questions regarding the above matters, please feel free to contact us. We will be pleased to assist you.