BAKU, Azerbaijan, May 11
Trend:
General information
As it is known due to the rapid spread of Coronavirus infection (COVID 19) around the world, most countries have taken serious measures, air and land borders between countries have been closed and trade relations have been limited. Many companies suspended their activities and have applied to remote working.
A special quarantine regime has been applied in Azerbaijan as well, the movement of people has been restricted and most companies have been suspended their activities. At the same time Azerbaijan has closed its air and land borders with neighboring countries.
As a result of the measures taken within the framework of the special quarantine regime, some companies may have some difficulties in connection with the fulfillment of their obligations. Therefore it is necessary to clarify whether the special quarantine regime is a force majeure or not.
Azerbaijani Legislation
First of all, let's clarify definition of "force majeure". The literal translation from French means "greater force". The legislation of Azerbaijan does not use a single term related to “force majeure” institution.
For example, the term of "force majeure" clause is not used in our Civil Code at all. Nevertheless, the term "irresistible force" of the same nature has been used.
Let’s view provisions related to force majeure / irresistible force in our legislation:
Article 448.4 of the Civil Code – “The debtor shall not be liable for the violation of the obligation, if he proves that the violation was caused by the circumstances beyond its control and that he was not able to take into account thereof at the time of the conclusion of the contract or to expect until he can exclude or eliminate the said circumstance and its consequences....” Article 557.1 of the Civil Code – “If as a result of an act adopted by a state or municipal body, the performance of the obligation is completely or partially impossible, the term of performance of the obligation is extended, then the obligation shall be totally or relevantly terminated...” Article 1.0.9 of the Custom Code - “force majeure - emergency situations, natural disasters or social and political events which are in advance unpredictable and prevent and slowdown individuals from performance of their obligations as a result of the impossibility of avoidance them in appropriate conditions”. Sample of the “Procurement contract for goods (works and services)” (Article 21.2) approved by the Resolution No.34 of the Cabinet of Ministers dated 28 February 2003 – “Impacts of irresistible force include events that are not controlled by the Customer and Contractor, do not occur as a result of their fault or negligence, and are unpredictable. These include wars or revolutions, floods, epidemics, epizootics, quarantines, embargoes, state and governmental decisions, and other related cases. ” Article 6 of the “Model Form of the agreement on payment of earmarked funds from the state budget to public legal entities established on behalf of the state” - “The parties shall not be liable for failure to perform their obligations, if force majeure effects the execution of the contract. Force majeure is the events, which are beyond the control of the contracting parties and are not occurred as a result of their fault or negligence and are unpredictable. These include wars or revolutions, epidemics, epizootics, quarantines, floods, earthquakes, other natural disasters and emergency situations, embargoes, also significant changes in the legislation affecting the terms of the contract, decisions of state bodies (institutions).”
In particular, we would like to emphasize that in the Civil Code, “irresistible force” is mainly reflected as a case(s) that stops the flow of time, excludes liability, and the basis for termination of the contract. Let’s consider the following articles of the Civil Code:
- Article 379.1.1 – as a case that stops the flow of the claim period;
- Article 588.2 – as a case that excludes the seller's liability for quality guarantee;
- Articles 813 və 831.3 – as a case that respectively excludes liability of commission agent and owners of the hotel or restaurant;
- Article 847.1 – as a basis for termination of the contract by carrier or passenger;
- Articles 1108.1, 1111.2 və 1131 – liability is excluded if it is proved that the damage was caused by irresistible force.
Along with the Civil Code, the term “irresistible force” was used in the Merchant Shipping Code, Law on Environmental Protection, Law on Transport, Law on Motor Transport and Rules of trade, catering, household and other services in the Republic of Azerbaijan.
Additionally it is referred to the term of “force majeure” in the Law on Post (Art.17.4.1), Law on Energy (Art.25), Law on Electricity (Art.11), Law on Subsoil (Art.18), Law on Electricity and Heating Stations (Art.7) and Law on Patents (Art.20).
Similar definitions
We noted that definitions of “irresistible force” and “force majeure” have the same nature. However, there is a definition of “significant change of circumstances” in the Civil Code, which is sometimes mixed up with the definition of “force majeure”. But these definitions are different. This issue is reflected in the Decision of the Plenum of the Constitutional Court dated 7 September 2018:
“We should distinguish significant change of circumstances from irresistible force (force majeure event). Thus, while irresistable force makes performance of the contractual obligations impossible, a significant change of circumstances leads to the performance of obligations under extremely difficult conditions and does not eliminate the possibility of its performance. In this case, the execution of the obligation is possible. But such an execution becomes economically loaded for the one party or all the parties as result of significant change of circumstances that existed at the time of the conclusion of the contract. Significant change of circumstances means change of the economic, legal and other factors in the country which existed at the time of the conclusion of the contract and are independent from parties.”
Agreement on production sharing
Agreements on production sharing, which are widely used in the oil and gas industry, also contain a "force majeure" clause. The provisions governing force majeure are the same or similar in almost all agreements.
For example, according to the Article 21.1. of the Agreement on the Exploration, Development and Production sharing for the Shafag - Asiman offshore block in the Azerbaijan sector of the Caspian sea “Non-performance or delays in performance on the part of any Party of its obligations (or any part thereof) under this Agreement, other than the obligation to pay money, shall be excused if occasioned or caused by Force Majeure. “Force Majeure” means any event which prevents, hinders or impedes Petroleum Operations and is beyond the ability of the affected Party to control such event or its consequences using reasonable efforts, including without limitation, extraordinary events, natural disasters (for example lightning and earthquake), wars (declared or undeclared) or other military activity, jurisdictional change with respect to the Contract Area, fire, labour disputes, insurrections, rebellions, acts of terrorism, riot, civil commotion, and laws, treaties, rules, regulations, decrees, orders, actions or inactions of any governmental authority which prevent hinder or impede Contractor’s conduct of operations or which substantially impairs or threatens Contractor’s rights under this Agreement ...”
Private international law
According to the Article 7.1.7 of the UNIDROIT Principles of the International Commercial Contracts, non-performance by a party is excused if that party proves that the nonperformance was due to an impediment beyond its control and that it 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. When the impediment is only temporary, the excuse shall have effect for such period as is reasonable having regard to the effect of the impediment on the performance of the contract.
The Publication No. 650 of the International Chamber of Commerce also discusses “force majeure” and “significant changes in circumstances”. For additional information you can use the following link:
https://iccwbo.org/content/uploads/sites/3/2017/02/ICC-Force-Majeure-Hardship-Clause.pdf
Practical problems, solutions and recommendations
As you can see force majeure situation is not regulated in detail in the legislation of Azerbaijan. There is a need to improve the legislation in that part, to generalize the judical practice on force majeure and to interpret Articles 448.4 and 557.1 of the Civil Code by the Constitutional Court.
As explained, the lack of a clear definition of "force majeure" in the legislation can lead to disputes. If a dispute arises between the parties over which force majeure circumstances are considered, of course, you must first pay attention to the contract. In general, in order to avoid such a dispute, we recommend that the force majeure situation be regulated in detail in the contract. If the contract does not regulate the force majeure in detail, then we will have to refer to the above-mentioned provisions.
A party facing difficulties in fulfilling its obligations under the quarantine regime and wishing to rely on force majeure shall be obliged to prove the followings:
The violation arises from the act that the party is not responsible; The inability of the party to take this into account at the time of the conclusion of the contract; The inability of the party to overcome this situation and eliminate its consequences; Informing adverse party about current situation in compliance with the notice period (otherwise, the liability of the parties for non-performance and damages is not excluded).
In other words, the party must prove that the reason for non-performance of the obligation under the contract is directly related to the application of a special quarantine regime. The introduction of quarantine regime itself (automatically) does not entail force majeure circumstances. The party should use all reasonable endeavors for performance of its obligation and make every effort to mitigate the risks and losses. Thereafter, the party may refer to the occurrence of force majeure.
If the force majeure events last for a long time (this period may vary depending on the nature of the contract. From the perspective of the International Chamber of Commerce, this period is defined as 120 days) the parties may terminate the contract by considering the notice period.
In addition, we note that in the event of force majeure, the parties may benefit from alternative dispute resolution methods (mediation, arbitration) by mutual agreement.
We also recommend that in the event of a dispute over force majeure, a professional lawyer be engaged at an early stage. Because sometimes the problems are so complex that even when you engage a lawyer, it becomes not that useful.
Biography of co-authors:
Fuad Gashamov received his bachelor degree in law from Qafqaz University in 2008 and his master degree from Baku State University, International Law Department in 2011. He is a partner at EKVITA and leads Dispute Resolution Practice Group along with Real Estate, Intellectual Property and Regulatory sectors. He is the member of the Bar Association since 2014.
Farida Jabrayilova received her bachelor degree in law from Baku State University in 2015 and her Master of Law (LL.M.) degree from Friedrich Schiller University Jena (Germany) in 2016. She is a lawyer at EKVITA.