The fast-spreading coronavirus is raising many questions and concerns. Our international COVID-19 Task Force: Karin Madisson, Eva Berlaus, Mantas Petkevičius, Alexey Anischenko is at your disposal, should you need advice in any legal issues you are facing.
Below are some tips to help make decisions in a quickly changing situation:
Hold meetings of corporate bodies without personal presence
Check an opportunity to hold meetings of shareholders or board meetings without attending them in person, eg via electronic communication or via absentee voting. Please keep in mind that there may be limitations on conducting meetings without personal presence.
If there are no other options to conducting corporate meetings in person, we recommend undertaking at least some precautionary measures. Relocate the meeting to somewhere with a lower level of COVID-19 threat (please check in advance if this is permitted by applicable laws, internal regulations, and shareholder agreements), ensure that no travel restrictions apply, and try to limit the duration of the meeting and contacts between attendees.
Exchange documents via electronic means
Visits to state authorities for filing reports or other documents are another source of risks related to the coronavirus infection. The best option for dealing with these risks is to decrease the number of personal visits to state authorities to the absolute minimum and use all available opportunities for electronic filing.
The same should apply to exchange of documents with counterparties. Consider alternatives to signing contracts at in-person meetings and, if possible, switch to electronic signing or exchange signed documents by mail. Try to exclude all contractual requirements for personal presence unless this is unavoidable. For example, M&A contracts customarily require representatives of the parties to be present at closing, although this is often not crucial for the process. Some of the closing documentation can usually be exchanged via email, as well as by using an electronic signature or equivalent. We recommend checking the availability of this option under the applicable law and transaction documents, and as far as possible agree with all transaction participants to use electronic means.
Create conditions for working from home, if the job permits
In Estonia and Latvia employers can usually require employees to work from home if conditions to do so exist. At the same time, employees need their employer’s consent to work from home. In Lithuania and Belarus, remote work is possible only if both the employer and employee agree, ie, employers cannot require employees to work from home. Remote work is paid for as usual.
In Belarus the law does not directly envisage temporary work from home. Under local labour law, in order to work remotely the employer and the employee must agree separately, ie, the employment agreement should stipulate that the employee works remotely. So there are two options: (i) formalise remote work on paper, and as soon as need no longer exists, change the employment agreement back to the original terms; (ii) leave the employment agreement as it is, and reach unofficial agreement between the employer and the particular employee on temporary work from home.
We also recommend employers to set up practical policies or guidelines on remote work, eg, on working time, employee accessibility, general work safety, use of working tools and other practical matters.
- Paid leave is an option for someone not on sick leave but if working from home is also not an option. In this case, employees must be fully paid, the same as they would have been under normal circumstances. Essentially, this would constitute extra paid leave, unless the employee agrees to voluntarily take a vacation.
In Belarus this option is possible only if provided in a collective agreement – a company’s legal act regulating labour, social and economic relations, concluded between the employer and employees represented by the employees’ representative body, eg a trade union).
- Regular annual leave can be taken outside the vacation schedule only by mutual agreement between employer and employee. If vacation schedules are already drawn up, a self-isolation period can be included in annual paid leave, circumstances permitting. Otherwise, if annual leave was not already planned for this period, employers cannot require employees to use their annual leave during self-isolation.
- Unpaid leave is not a valid option for the self-isolation period. The employer cannot require an employee to take unpaid vacation or sick leave without disease symptoms. So unpaid leave is possible only if the employee agrees.
- Sick leave if the employee displays disease symptoms. Employers cannot require a sick person to come to work but they can send an employee home. The employee should then contact their general practitioner and take sick leave for at least 14 days or other period recommended by a medical professional.
Follow data protection and employee privacy rules
When requesting information from employees, employers must remember to follow data protection rules and keep in mind that asking undue questions is not lawful. For employees who inform their employer that they have the coronavirus, the employer must not publicise the fact that a certain employee has been infected. Instead, the employer must only generally indicate to other employees that someone infected with the coronavirus has been at the workplace.
According to local regulation, employees must refrain from acts which may harm the life or health of others. It is reasonable to expect that anyone who has been travelling to a risk area who is confirmed as being infected with the coronavirus will not come to the workplace in order to avoid spreading the virus. At the same time, it is debatable whether an employer has a legitimate interest in requiring employees to report if they have been infected with heavily infectious viruses so that the employer can take necessary measures to stop the virus from spreading at the workplace.
In case of economic difficulties, consider the following options:
- Reviewing remuneration policies to identify possibilities to decrease bonuses, other variable pay and benefits. Generally, this should be possible where variable compensation is not agreed in a contract but is provided at the company’s discretion.
- Decreasing pay can be an option for employers who cannot provide employees with agreed full-time work. This allows employers to reduce payment and switch to part-time work schedules. Before implementing this option, businesses should consider additional requirements regarding working hours and remuneration applicable in the specific country, as well as procedures for implementing any such material changes.
- Idle time may be a valid option if reducing hours and pay is not a sufficient measure for a company that cannot objectively provide employees with agreed work. In case of idle time employees will not have to come to work, and their pay could be reduced significantly (eg, to 40% of average employee remuneration in Lithuania and Belarus).
- Redundancies may be a necessary option for severely affected businesses. If you think that this may be necessary in the near future, we recommended starting the planning process without delay due to the additional time that may be needed for information & consultation with employee representatives and other time-consuming procedures.
Check whether the coronavirus can be recognised as force majeure, which is a basis for relief from contractual liability.
We believe this possibility does exist. As a rule, the terms of the contract include a provision on force majeure with a list of events that the parties recognise as force majeure, and the legal consequences of the occurrence of force majeure events.
Inclusion in the list of such events as “epidemics”, “healthcare emergencies”, “actions by the authorities”, strengthens the position of a party relying on a force majeure clause, but they must still prove that the coronavirus or measures to combat it (eg, closing borders, travel bans, and other measures taken by the authorities) amount to force majeure.
If the contract does not incorporate a force majeure clause, then a violation of the contract because of coronavirus can be seen as justified under the United Nations Convention on Contracts for the International Sale of Goods of 1980 (Vienna Convention), arguing as follows:
- the coronavirus / relevant measures by the authorities of a particular state are an impediment beyond the counterparty’s control;
- the parties could not reasonably be expected to have taken into account the outbreak and spread of the coronavirus at the time of concluding the contract (ie, for contracts concluded prior to the outbreak of the coronavirus);
- in certain cases, it was impossible to avoid or overcome the coronavirus or measures by the authorities.
However, in situations where it was essentially possible to fulfil an obligation but this became difficult / expensive ‒ for example, due to the need to look for alternative routes to avoid closed regions ‒ then it is a matter of qualifying the circumstances as “hardship” and applying the consequences.
To illustrate, such a situation is taking place with CNOOC, China’s largest buyer of liquefied natural gas, which stopped accepting supplies, invoking force majeure because of the coronavirus. The CNOOC’s counterparty rejected the force majeure notification, stating that “if quarantine is introduced in all ports of loading and unloading in China, we will be able to accept this as a real case of force majeure. This is currently not the case”. Similarly, Chinese copper merchants announced suspension of orders and cancellation of supplies due to force majeure.
In addition, the fact of recognition of force majeure is not an automatic basis for relief from contractual liability.
How to confirm the existence of force majeure?
A party that is unable to fulfil / has not fulfilled its contractual obligations due to force majeure should contact the competent authority of the country where force majeure has emerged, to arrange issue of a corresponding certificate by the authority ‒ including the chamber of commerce.
For example, in China the competent authority is the China Council for the Promotion of International Trade (CCPIT). On 21 February 2020 the Council issued more than 1,600 force majeure certificates to companies in over 30 business sectors for a total of some USD 15.7 billion in contracts.
Despite the well-known existence of the coronavirus, if you plan to refer to it, we recommend documenting force majeure in order to use the documentation as evidence.
Additionally one should keep in mind that contracts usually regulate concrete procedures on how the parties must inform each other about force majeure and consequent inability to fulfil their obligations. Violation of these procedures may result in the counterparty refusing to recognize the circumstances as force majeure in order to relieve the notifying party of its contractual obligations.
Is there liability for non-performance?
Generally, recovering a penalty or damages from a counterparty is unlikely, since they have the right to expect exemption from liability for the entire period of force majeure. At the same time, a party may demand compensation for damages:
- if the counterparty failed to notify about force majeure circumstances (or failed to do so in good time) and their impact on performance under the contract;
- if the counterparty has not taken all possible measures to minimize damage to the party affected by non-performance.
Is it possible to terminate the contract?
Yes ‒ but only if the contract so provides. In the absence of such a provision, it is difficult to terminate a contract, since the fact of occurrence of force majeure prolongs the period for contract performance, but (usually) does not end the obligation to perform altogether. However, a party may try to prove that it is no longer interested in performance ‒ and on that basis demand contract termination.
If there is no force majeure clause in your contract
If you intend to conclude a foreign trade contract now, you should consider incorporating a force majeure clause and when drafting it to take into account the Model clause of the International Chamber of Commerce (Publication No. 650). Moreover, “coronavirus infections” or epidemics / pandemics in general could be included.
Country specific regulations:
Estonian law regards force majeure as a situation and circumstances which are beyond the control of the obligor and could not reasonably have been expected, taken into account, avoided or overcome. The general existence of a force majeure situation is not sufficient, but the event must impact the performance of a specific obligation or contract. Thus if the coronavirus outbreak causes non-performance, it could be regarded as force majeure and thus non-performance of the contract would be excused and the liability of the obligor removed.
If the obligation is monetary (eg payment of a sum of money), the situation requires more detailed analysis. Under Estonian law the obligee may require performance of the obligation to pay the money regardless of force majeure. However if force majeure prevents the other party from performing the obligation for which the payment is due, the party obligated to pay is entitled to withhold the payment.
If one party does not perform its contractual obligations because of force majeure, the other party still may withhold performance of their obligation, withdraw from or cancel the contract or reduce the price. Moreover, in certain cases, eg, if provided by law or agreed between the parties to the contract, the obligee can be held liable for non-performance regardless of whether force majeure has occurred.
Under Latvian legislation, the element of complete impossibility to fulfil obligations is of particular importance for the party invoking the coronavirus. If all the other elements are present but fulfilment of obligations is still theoretically possible – even if very cumbersome – the circumstance will not be considered by the court to constitute “force majeure”. However, if the contract incorporates “epidemics” in the “force majeure” clause, then coronavirus could be considered as “force majeure”.
A party cannot terminate the contract because of force majeure if the contract does not allow it, and damages caused by force majeure are not compensable. Also, for a fee the Latvian Chamber of Commerce may issue a certificate that “force majeure” circumstances have occurred.
Under the Lithuanian Civil Code four conditions are necessary in order to recognise a circumstance as force majeure:
- the circumstance did not exist at the time the contract was concluded and its occurrence could not reasonably have been foreseen;
- the circumstance renders the contract objectively unenforceable;
- the party failing to perform the contract could not control or prevent the circumstances;
- that party did not assume responsibility for the risk of the circumstance or its consequences.
Note: force majeure applies only when a defaulting counterparty informs the other party about the circumstances and the impossibility of fulfilling its obligations.
While these conditions may seem to be fulfilled in the case of the coronavirus, note that the Resolution of the Lithuanian Government (15 July 1996) On Approval of the Rules for Relief from Force Majeure lists events that can be considered as force majeure. In this situation, two cases prescribed in the Resolution are relevant in determining what circumstances may be recognized as force majeure (subject to the above conditions):
- actions ‒ legitimate or unlawful ‒ by state institutions (eg, mandatory office closures, full or partial lockdown of cities, travel bans, closures of ports while trying to prevent the spread of the coronavirus); and
- other force majeure (as the list of circumstances is not exhaustive).
Therefore, if the coronavirus itself may not have such an effect on contract performance as could be recognized as an irresistible force, decisions by the state authorities to impose a number of restrictions can be recognised as force majeure.
It should also be noted that, in order to recognize an event as force majeure, the contractual provisions governing the matter are of great importance. If the contract stipulates that an epidemic can be considered as force majeure, it is much easier to rely on it.
Under the Civil Code, a party may use the following remedies:
- termination of contract;
- suspension of performance of the contract;
- claim for payment of interest;
- confirmation of force majeure.
Under Article 5 (11) of the Lithuanian Law on Chambers of Commerce, Industry and Crafts, Chambers of Commerce, Industry and Crafts will issue certificates attesting to force majeure in line with the procedure established by the Lithuanian Government. Note: this institution issues certificates only regarding circumstance that occurred in Lithuania.
Additionally the Lithuanian Supreme Court has commented on the legal significance of the certificate issued by Lithuanian Chambers of Commerce, Industry and Crafts.
According to precedents, “a certificate of force majeure issued by the Chamber of Commerce, Industry and Crafts, as such, shall have no material legal effect. The material legal consequences, that is, exemption from liability for non-performance of the contract, exclusion of civil liability (Articles 6.212, 6.253 Civil code) are determined by the existence of force majeure circumstances, but not by the issuance of a certificate attesting to them. A certificate attesting to circumstances of force majeure has only procedural legal significance, since it is to be regarded only as evidence in a civil case concerning the performance of contractual obligations or the application of civil liability”.
Therefore it is vital to follow contractual conditions and procedures regulating the rights and obligations of the parties in the event of force majeure.
Article 6.212 (1) of the Civil Code states that force majeure does not include such circumstances as absence in the market of goods needed for performance of an obligation, or a party’s lack of the necessary financial resources. Also according to the same provisions, violation of obligations by business partners cannot be a basis for relief from contractual liability.
The latter issue is important in cases where a party acts as an intermediary and, because of force majeure with its business partner (eg, a Chinese supplier), has not fulfilled obligations to the counterparty. In such a case the party acting as an intermediary will not be released from contractual liability. Moreover, it is unlikely that a business partner (eg, a Chinese supplier) will compensate damages arising therefrom.
Belarusian law regards force majeure (“irresistible force”) as extraordinary and unavoidable circumstances, and the consequences of the coronavirus outbreak may be regarded as such.
Thus, a Chinese counterparty may be exempted from liability for the entire period of the coronavirus. If you intend to rely on force majeure circumstances it is important to properly document their existence, otherwise the court may not take into account circumstances if unconfirmed by written evidence.
According to unofficial information, the Belarusian Chamber of Commerce and Industry (BelCCI) is also being asked to issue a force majeure certificate.
If you act as an intermediary and, because of force majeure with a Chinese or Italian supplier, have not fulfilled obligations to end customers, this most likely will not release you from liability. It is unlikely that a Chinese company will compensate your damages arising therefrom. At the same time since the WHO has declared the coronavirus outbreak as a pandemic and more countries are introducing preventive bans and border restrictions, the risks need to be assessed in each particular case.
It is possible to terminate a contract only if it so provides. In the absence of such a provision, it is difficult to terminate a contract, since the fact of the occurrence of force majeure prolongs the period for contract performance but does not end the obligation to perform altogether. However, a party may try to prove that it is no longer interested in performance ‒ and on that basis demand contract termination.
Follow these recommendations:
If you find that coronavirus may affect contractual obligations that involve your participation, we offer the following general recommendations (to the extent applicable):
- Inform counterparties in writing that unenforceable circumstances have arisen.
- Pay attention to the completion dates of foreign trade operations, and, if necessary, take steps to extend them.
- Assess and take steps for damages reduction.
- Gather evidence on the force majeure occurrence and on the above steps.
- Work out a plan for further action (to terminate the contract, negotiate amendments, not conclude new contracts and / or seek legal advice, for example, for filing a lawsuit / initiating arbitration).
Work health & safety
We recommend consulting your work health & safety specialists or service providers and assessing whether you should take any additional steps to ensure a safe work environment, such as additional cleaning of work premises, providing hand sanitizers, the possibility to perform employee temperature monitoring, instructions to employees on proximity to each other, or discouraging handshakes at meetings.
Our international COVID-19 Task Force
Country Managing Partner, Latvia