March 2020 was the beginning of a new stage in the life of not only Ukraine, but the whole world. Just a few weeks ago, the words “virus” and “pandemia” did not seem to concern us. Now, the quarantine has been introduced in Ukraine and a number of temporary restrictive measures have been taken that have radically affected the lives of all Ukrainians and forced business owners to adapt to new conditions.
Let’s try to understand the legal aspects of this situation and develop a specific plan of actions that will help businesses survive the quarantine and avoid inner problems.
So, let’s start with the new legal realities. In order to limit the spread of the COVID-19 coronavirus, the Cabinet of Ministers of Ukraine (the CMU) established the quarantine in Ukraine and took a number of temporary measures, including:
– the ban on all mass events in which more than 10 people take part;
– the cessation of catering establishments, shopping and entertainment centers, fitness centers, cultural institutions;
– the prohibition of the passengers’ carriage by rail transport in all types of internal traffic and by road transport in suburban, intercity intraregional and interregional traffic.
In addition, the Supreme Council of Ukraine (the SCU) adopted the Laws aimed at preventing the spread of the COVID-19 coronavirus No. 530-IX of 17.03.2020 and supporting businesses during the period of quarantine No. 530-IX dated 17.03.2020, which provided, in particular:
– the responsibility for the quarantine violation (administrative and criminal);
– the ban on regulatory agencies from conducting scheduled inspections of companies until May 31, 2020;
– the recognition of the quarantine as force majeure, that is, circumstance of superior force;
– the ability of the employer to entrust the employee with performing work remotely;
– the change in the calculation of the leave period without paying wages;
– the release of citizens from liability under consumer loan agreements;
– the abolition of penalties for violation of tax laws, failure to pay or late payment of the single social contribution (the SSC), failure to submit (untimely submission) reporting about the SSC’s payment;
– the postponement of the submission of tax returns and annual declarations for civil servants and so on.
In addition, during the recent days, the introduction of the emergency state in Ukraine has been actively discussed at the highest level, but at the moment of this article writing, this issue has not been resolved.
Despite measures taken by the country’s leadership to support businesses during the quarantine period, the economic forecasts for the near future remain unconsoling. According to the statement of the President of the Ukrainian Chamber of Commerce and Industry (the CCI) Gennadiy Chizhikov, about 600-700 thousand enterprises and educational institutions that employ almost four million people have stopped work due to the quarantine. The forced cessation of enterprises activities (especially small and dependent on daily customer flow) can have significant negative consequences for the economic welfare of the country.
The severe times require severe measures and quick responses. Everyone has to adapt and adjust to new temporary realities. In this article, we offer to consider specific steps and measures that can help mitigate the blow from unplanned and radical changes.
So, what is the first thing you need to pay attention to businesses and what steps to take to minimize the adverse effects of the measures introduced?
- Understand what the force majeure is, whether the quarantine is considered as the force majeure and what are its legal consequences
The SCU simplified the task for entrepreneurs by adopting the Law of Ukraine No. 530-IX of 17.03.2020, which amended Art. 14-1 of the Law of Ukraine “About Chambers of Commerce and Industry in Ukraine” by supplementing the list of force majeure circumstances (circumstances of superior force) with the quarantine established by the CMU.
In accordance with the Law of Ukraine “About Chambers of Commerce and Industry in Ukraine”, force majeure circumstances (circumstances of superior force) are emergency and inevitable circumstances that make it objectively impossible to fulfill obligations stipulated by the terms of the contract (contract, agreement, etc.), duties in accordance with legislative and other regulatory acts. A person who has violated an obligation shall be released from liability for violation of an obligation if he/she proves that this violation occurred as a result of an incident or circumstance of superior force.
Previously, the CCI of Ukraine explained that it did not have the general authority to recognize the quarantine and the coronavirus outbreak as a force majeure and exempt the parties from liability for non-fulfillment or improper fulfillment of obligations under the contract. Now this issue has been resolved, therefore, the first and foremost step is the analysis of agreements with counteragents, namely the wording in them about force majeure – its definition, conditions, grounds, terms and order of application, and most importantly – its legal consequences.
It is worth noting that the absence of provisions about force majeure in the contract does not deprive a party of the right to require exemption from liability for failure to fulfill obligations under the contract directly on the basis of the provisions of Art. 617 of the Civil Code of Ukraine (the CC) and Art. 218 of the Economic Code of Ukraine (the EC). However, the wording in the contract also matters, since it can determine the terms and the method of force majeure notification, as well as an extended list of circumstances that can be recognized by the parties as force majeure.
It should be understood that the fact of the quarantine does not exempt a party from fulfilling an obligation. In the event of force majeure, it is only a matter of exemption from liability for violation of obligations (payment of a fine, penalty, losses, etc.). The obligation does not disappear anywhere, but you can, for example, avoid paying fees for delays, as well as cancel the contract if force majeure circumstances continue to exist for too long.
But, there is one very important nuance! Between the circumstance of force majeure and the inability to fulfill obligations under the contract, a causal relationship must be established. For example, the inability to use the premises due to the introduction of restrictive measures entails the inability to timely pay the rent for the food court to the owner of the shopping center in connection with a temporary cessation of work.
The exemption from liability due to force majeure is not automatically applied. In the case of a dispute, the courts in the overwhelming majority of cases recognize only the CCI certificate as the only relevant and admissible evidence of the occurrence of force majeure – the certificate issued by the CCI to confirm force majeure circumstances (in particular, this is indicated in the Order of the Supreme Economic Court of Ukraine of 12.07.2016 in the case No. 910/28476/15). Therefore, it is necessary to contact the CCI, provide the appropriate package of documents and obtain the CCI certificate about the effect of force majeure circumstances.
After obtaining the certificate, it is necessary to immediately inform the counteragent about the occurrence of force majeure circumstance. It is important to adhere to the terms, method and form of the partner’s notification in accordance with the contract, since violation of the notification procedure can make it impossible to apply the provisions about force majeure in the case of a dispute in the court.
It should also be remembered that in accordance with the CCI Regulations about certification of force majeure circumstances, in any case, the financial and economic crisis, default, official and commercial exchange rates of foreign currencies to national currency, violation of their obligations by the debtor’s counteragent, absence in the market of goods necessary for the fulfillment of an obligation, lack of necessary funds at the debtor, and so on will not be considered as force majeure circumstances. All of the above falls into the ordinary risk category of the entrepreneur.
- Analyse other provisions of the contract
Among other things, it is worthwhile to find out whether contracts with counteragents provide for the possibility of delaying the fulfillment of obligations, reduce/recover losses or cancel contracts.
In addition, you should pay attention to whether the following provisions are provided for by the contract.
- Alternation or cancellation of the contract due to a significant change in circumstances (hardship).
This is the case where a party can objectively fulfill its obligations, however, due to a change in circumstances, such a fulfillment is poinlessly for it or the final result will not be the one that it was counting on at the beginning, but extremely unprofitable. This situation is widely known in the world practice and has received the name hardship. Classical examples of this situation are a significant change in the exchange rate of the contract (due to which its fulfillment becomes excessively expensive) or rapid inflation (when the price specified in the contract does not even cover the costs for its fulfillment).
Such cases are often attempted to be considered as the occurrence of force majeure circumstances, however, one nuance must be taken into account: force majeure or superior force make fulfillment of obligations impossible in principle, regardless of the efforts and material costs that the party incurred or could incur. Here we are talking about the fact that a party can objectively fulfill the terms of the agreement, however, given the changing circumstances, such execution is poinlessly for it.
In this case, it becomes necessary to adapt the contract terms to the circumstances that have changed significantly. It should be noted that Ukrainian legislation expressly provides for the possibility of amending the contract or terminating it in the event of a significant change in the circumstances, both by mutual consent of the parties and by the court in the cases specified by law.
According to p. 1 of Art. 652 of the Civil Code of Ukraine, a change in circumstances is significant if they have changed so much that if the parties could have foreseen this, they would not have concluded a contract or would have concluded it under other terms. In the case of a significant change in the circumstances by which the parties were guided in concluding the contract, the contract may be amended or terminated by the parties’ agreement, unless otherwise provided by the contract or does not follow from the obligation essence.
Legal opinions and conclusions regarding a significant change in circumstances in accordance with the Ukrainian legislation are issued by the CCI and this may be the basis for amending the contract.
If the parties have not reached an agreement about bringing the agreement in accordance with the circumstances that have substantially changed, or regarding its termination, the agreement may be terminated or, in certain cases, amended in the court order at the request of the interested party. However, it should be taken into account that in this case the law binds the possibility of amending the contract directly not with the presence of a significant change in circumstances, but with the presence of four conditions defined in p. 2 of Art. 652 of the Civil Code of Ukraine, namely: 1) at the moment of the contract conclusion, the parties proceeded from the fact that such a change in the circumstances would not occur; 2) a change in the circumstances is caused by the reasons that the interested party could not eliminate after their occurrence with all the care and discretion that were required of it; 3) the contract fulfillment would violate the balance of property interests of the parties and would deprive the interested party of what it had counted on when concluding the contract; 4) it does not follow from the essence of the contract or business customs that the risk of a change in the circumstances is borne by the interested party. This conclusion was reflected in the Order of the Kiev Economic Court (the KEC) in the composition of the Supreme Court (the SC) of 12.19.2019 in the case No. 910/5573/19.
- Limitation of liability (liquidated damages), reimbursement of losses, recovery of forfeits (fines, penalties).
The possibility of applying limited liability is more relevant to the contracts concluded under the Anglo-American law, because the rules governing the parties’ ability to limit liability in advance have been excluded from the Economic Code of Ukraine. Contractual sanctions are not allowed in the national legal systems of countries belonging to the Anglo-Saxon legal family, therefore, after determining in the contract the amount to which liability is limited (the maximum predictable amount of losses), the injured party is exempted from the obligation to provide evidence of the amount of losses incurred. It is believed that the agreed amount of damages to be reimbursed is already predefined in the contract.
Therefore, it is worth analyzing which contracts provide for reimbursement of losses, recovering penalty, other liability, and prioritize the fulfillment of obligations depending on possible risks.
- Disputes resolutions (negotiations, mediation, international arbitration or courts of general jurisdiction)
Then analysis of the choice of law and jurisdiction in the contracts will help to assess the possibility and expediency of compulsory collection of problem debts.
- To analyze the possibility of reducing the costs for the company maintaining
Firstly, obviously, budgets for advertising and investments in new projects will suffer. However, it will not be amiss to reconsider the terms of payment for the premises rental, especially those that are not used during the quarantine, and ask the lessor for a discount on rent for the quarantine, delay, or even temporary cancellation of payments.
Do not wait, send letters to counteragents, clients about the situation in which you are in, asking for understanding. Do not forget to draw up new arrangements with additional agreements to this contract or, if not possible, fix the arrangements in letters and emails in order to avoid misunderstandings in the future.
Do not forget to draw up new agreements with additional agreements to this contract or, if not possible, record the agreements in letters and emails in order to avoid misunderstandings in the future.
- Optimize expenses for wages and other costs
The optimization of expanses for wages should be carried out carefully and the provisions of labour legislation should be observed. For the quarantine period, employees are given the opportunity to work from home or receive unpaid leave during the entire quarantine period.
In addition, the Ministry of Economy and Labour provided their recommendations on the organization of work during the quarantine. In particular, the following is proposed:
- The employer may allow employees to work remotely while maintaining wages in the event that the employee can fulfill his/her duties remotely, at home.
In this regard, we recommend urgently developing and sending employees the Instruction on the procedure for remote work, providing a clear algorithm of the relationship between the company/company administration and the employee. Among other things, the procedure should be established for setting and communicating to the employee the tasks and deadlines for their fulfillment, monitoring their fulfillment, as well as other conditions necessary to ensure effective remote work.
- If an employee cannot fulfill duties remotely, he/she may request the unpaid leave during the entire quarantine period. Art. 84 of the Labour Code of Ukraine (the LC) provides that for family reasons and for other reasons, leave without pay may not exceed 15 calendar days per year. Unpaid leave in connection with the quarantine is provided in addition to the 15 calendar days established by the LC, and is not included in this period.
- An employer can arrange a downtime if the activities of the enterprise are temporarily suspended, in particular, by the Resolution of the Cabinet of Ministers of Ukraine No. 215 (catering establishments, shopping and entertainment centers, and other entertainment establishments). In accordance with Art. 113 of the LC during the downtime, the employee retains average earnings.
- If an employee cannot work during the quarantine full time or during all working days, at his/her request, he/she can be given part-time work for the quarantine period in accordance with Art. 56 of the LC with recalculation of wages for the quarantine period.
- Review and optimize business-processes
Transferring employees to remote work will require more active use of information and communication technologies for communication. Fortunately, now everyone has access to email, Skype, Slack, Telegram, Whatsapp, as well as a large number of different CRM-systems that allow you to optimize business processes from a distance. But it should be balanced approach to the use of paid software (software). During a crisis, it is necessary to reconsider which software is really essential for the company operation, and without which you can do it while saving costs.
In addition, the responsible person should be instructed in advance to take appropriate measures to ensure the protection of personal data and other confidential information that the remote employee creates, uses and transmits while fulfilling his/her duties remotely.
The impossibility of physical meetings with a counteragent or partner is another reason to refuse paperwork. For example, a legal and full-fledged alternative to the exchange of paper copies of documents is the conclusion of an agreement by applying an electronic digital signature (EDS). You can issue an electronic digital signature using the services of https://online.minjust.gov.ua/, Privat24, key systems and other qualified providers of trust services. Such a document has legal force and is recognized as a concluded transaction.
Separately, pay should be made to electronic correspondence. At the moment in Ukraine there is still a risk that a simple exchange of emails may not be qualified by the court as a transaction confirmation. Now, correspondence by e-mail cannot replace a contract certified with a handwritten signature. However, judicial practice is changing every year and emails are becoming more and more a subject of research and can be taken into account by the weight of evidence. Thus, the KEC in the in the composition of the SC in its Resolution of November 27, 2018 in case No. 914/2505/17 noted that the exchange of information by the parties in fulfilling contractual obligations by sending emails has long been a part of business customs in Ukraine. In accordance with Articles 3, 5, 8 of the Law of Ukraine “About Electronic Documents and Electronic Documents Circulation”, electronic documents have long been a part of the business process and the legal force of an electronic document, as evidence, cannot be denied solely because it has electronic form.
Finally, we will not repeat that any crisis brings new opportunities. This phrase in recent days is not remembered only by the lazy. It is difficult to think about opportunities in a situation where processes built up over the years are being destroyed. However, difficult times, indeed, test the system for is verified for strength. Definitely, the victory is for those who know how to answer calls, quickly adapt and play by the new rules.
Senior Lawyer VigoLex Bagmet Irina
Junior lawyer VigoLex Polina Parachina