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How companies can mitigate risk under force-majeure conditions
The events currently engulfing the world have now reached Kazakhstan, and not only in one region or one area of the economy, but across the country, and as a result, the business community has been facing far greater risks, with many having to default on their contractual obligations, leading to serious losses for many.
Can companies avoid breaches of contractual obligations and survive the experience without damaging their business or by at least mitigating losses? Kazakhstan civil law provides a number of provisions that may apply in the current situation.
One possibility is to trigger force-majeure provisions, which tend to be overlooked during the normal course of business. There is no statutory definition of the term ”force-majeure”, but there is a term “insurmountable force”, which covers emergencies and unavoidable circumstances under specific conditions, such as natural disasters, military action and others. Having said that, there is no exhaustive list of circumstances that may be recognised as an “insurmountable force”. In fact, the circumstances in question are normally clarified in specific contracts.
We need to consider a number of factors before we can trigger “force-majeure” clauses:
· a circumstance should be of an exceptional nature, i.e. non-standard; and should also be unavoidable, i.e. in no way inevitable for contracting party;
· a cause and effect relationship needs to exist between circumstances arising and the failure to execute contractual obligations or their incorrect execution. Any such circumstances should directly serve as a barrier to executing contractual obligations;
· the debtor, i.e. the party that has not executed or not duly executed its obligations, needs to prove that such circumstances exist. The Kazakhstan Chamber of Foreign Commerce is currently responsible for confirming situations of insurmountable force (force-majeure) and “Hardship”;
· any such exemption from material liability is only applicable for those entities with business activities, i.e. only if contractual obligations are breached in relation to activities performed to generate income.
Currently, according to information on the National Chamber of Entrepreneurs’ website, Kazakhstan businesses unable to meet contractual obligations due to the pandemic may apply to the Atameken subsidiary to register a force-majeure.
Even though the NCE has declared the current situation a force-majeure situation, any contractual party wishing to use that to hold itself harmless can only do so if all the factors mentioned above are in place. For example, the 2008 financial crisis led to a number of court cases that either recognised the financial crisis as a force-majeure and ruled on indemnity, or issued the exact opposite ruling, stating that the economic conditions were only a business risk.
It is key that we react as quickly as possible to the situation. If, a carefully studying your contracts you realise that the situation meets all the above conditions or factors, you need to notify the other contractual party of the force-majeure. Frequently, by failing to notify another contract party of an unsurmountable force you run the risk of losing the contractual right to rely on any circumstances that may be considered by a court when resolving disputes.
Furthermore, by law, the unavailability of goods, work or services is not recognised as a circumstance of insurmountable force, and as such this may also lead to differences of opinion and disputes, for example, in situations when the unavailability of goods was caused by a force-majeure. We believe that in this context, it would be important to understand if such circumstances could be predicted when concluding your contract.
In the context of the current situation, an option may be to terminate those obligations on the ground of impossibility of performance due to circumstances that are out of the parties’ control. This approach is optional and will not apply if the parties have opted for a different contractual procedure to resolve similar situations, or another procedure has been stipulated in a special legislative provision. If, after having analysed your contract and any related legislation, you have come to the conclusion that a special procedure for executing those obligations and liability does not apply to you, you can apply the option described above. Likewise, you may be able to justify terminating the execution of an obligation on the basis of a state act that has made it impossible to execute your obligation. This same approach can also be used for the partial cancellation of an obligation, depending on the subject matter of the act and what it prevents.
If both parties agree, we believe it better to draw up this type of arrangement in writing, for example, in an addendum or termination agreement.
The pandemic, as we already understand, not only impacts the present, but without fail will change the future. And to give you the best chance of enduring the consequences, we recommend you start testing your contracts as soon as possible, highlighting “virus” flash points and developing strategies to resolve any consequences of “exposure”.
Author : Assel Assubayeva, Tax & Legal Manager, Deloitte Caspian Region
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