MG Law Office, through the contribution of partners Archil Giorgadze and Nicola Mariani, joined by senior associates Ana Kochiashvili, Tamar Jikia, associate Mariam Kalandadze, Junior Associate Ana Jikia and Paralegal Lasha Machavariani is partnering with GEORGIA TODAY on a regular section of the paper which will provide updated information regarding significant legal changes and developments in Georgia. In particular, we will highlight significant issues that may impact businesses operating in Georgia.
Today the world is facing a global challenge that it must overcome promptly to prevent the further spread of the novel virus COVID-19 (“COVID”). The outbreak of COVID first occurred in Wuhan, China in 2019, and has spread worldwide since. On 11 March 2020, the World Health Organization declared COVID to be a pandemic
The first confirmed case of the spread of COVID in Georgia was identified on 26 February 2020 and since then the number of patients has increased although at rates lower than some of the hardest-hit countries. This triggered the adoption of several corresponding governmental regulations to prevent the spread of COVID. On 21 March 2020, the President of Georgia adopted Decree No. 1, which was later approved by the Parliament of Georgia and which declared a state of emergency on the whole territory of Georgia until 21 April 2020 (the “State Emergency Decree”).
The State Emergency Decree restricts the following rights guaranteed by the Constitution of Georgia: (i) human liberty; (ii) freedom of movement; (iii) right to personal and family privacy; (iv) right to fair administrative proceedings; (v) right to property; (vi) freedom of assembly; and (vii) freedom of enterprise. The State Emergency Decree stipulates that specific limitations to the above-listed rights will be provided by the decree of the Government of Georgia (the “GoG”). On 23 March 2020, the GoG issued Ordinance N181 regarding Approval of Measures to be Taken for the Prevention of Spreading of the New COVID-19 (the Ordinance on COVID-19). Since its adoption, the Ordinance on COVID-19 has been amended multiple times to address the rapid changes and challenges of the existing situation in the country.
The GoG has recently strengthened the security measures and established the Operations Office to be able to better respond to the spread of COVID. The Operations Office will be authorized to establish exceptions to certain restrictions established by the Ordinance on COVID-19. The head of the Operations Office will be appointed and its regulations will be adopted by the Prime Minister of Georgia.
While the GoG takes steps to prevent the spread of COVID, restrictive measures have put a strain on businesses, preventing them from being able to satisfy their obligations under contracts. This article aims to provide answers to frequently asked questions and provides general guidance on legal issues around the COVID-19 pandemic.
General Considerations for Contractual Obligations
In light of the above restrictions, businesses are suffering major losses as forced closure of businesses has significantly disrupted their processes and have put the performance of contractual rights and obligations under question. Therefore, frequently asked questions in these cases relate to force majeure clauses or other provisions or legal concepts that companies may rely on to avoid defaults on their contractual obligations.
The answer to these questions depends on the particular circumstances and the drafting of the relevant contractual provisions. Due to a lack of similar events that have taken place previously, there is little to take from experience on how to handle business relationships during epidemics or pandemics. The obvious route would be engaged in direct negotiations with contractual parties with a view of reaching mutual understanding. If such negotiations are successful, it could result in a better position for both parties as they will avoid litigation costs and termination of the contract.
The parties could agree on any commercially acceptable outcome, including an extension of performance deadlines, temporary suspension of the contract, reduction of price or even termination of the contract. Before proceeding with negotiations, the businesses would be advised to: first, examine the relevant contract, second, evaluate its options and third, seek legal advice, if necessary. Depending on the outcome of the parties’ negotiations, legally effective and enforceable agreements may be required to document the terms reached in those negotiations.
The threat of default on their obligations has become a real risk for businesses, especially ones subject to forced closure. Accordingly, we are seeing contractual parties invoking two major concepts to address this risk: force majeure and adaptation of contracts to the changed circumstances.
Force Majeure and the Effect of COVID-19
Force majeure refers to a defense under which a party may be relieved from liability for non-performance if unforeseeable circumstances beyond the party’s control prevent or delay the party from fulfilling its obligations under a contract. In Georgia, force majeure clauses may be explicitly set forth in a contract, but it can also be invoked as a matter of Georgian law.
Contractual Clauses: The specific contractual provisions shall be reviewed first to determine whether COVID-19 rises to the level of a force majeure event. The clause may specifically name epidemics or pandemics as events of force majeure or provide a general list of events. It is a question of interpretation of the clause whether the parties intended the present events to be covered.
In addition, any procedural requirements established under the contract must be followed, such as a requirement to give notice of its intention to rely on the clause to the other party within particular timescales, including any formalities required for the service of notices. Some clauses may also require updates to be provided and/or an express obligation to mitigate.
Force Majeure under Georgian Law: The Georgian law does not expressly define the notion of force majeure. The Georgian Civil Code (the GCC) provides a similar notion of “overwhelming force,” which is treated as a synonym of the notion of force majeure by Georgian courts and commentators. The Georgian courts construe Article 401 of the GCC as a provision containing the overwhelming force/force majeure rule. The case law of the Georgian courts suggests that such impediment to the performance of a party’s obligation under Article 401 of the GCC is (i) beyond parties’ control and will, (ii) is extreme and inevitable by its nature, (iii) was not foreseeable at the time the contract was made, and (iv) materially influences or makes it impossible to perform contractual obligations in due time.
Given the unprecedented nature of the virus outbreak and/or the actions of governments around the world in response, it is likely that the virus would constitute a force majeure event since by its nature it is extreme and inevitable; it is beyond the parties’ control and was not foreseeable in terms of those contracts that were concluded prior to the outbreak of the virus. The material influence or impossibility of the performance of the obligations should be assessed on a case-by-case basis. If the imposed restrictions prevent the party from fulfilling contractual obligations, the virus could qualify as a force majeure.
Notably, it is for the party seeking to rely on a force majeure clause for non-performance or late performance to satisfy a court or other tribunal that this is the effect of the clause. In unprecedented circumstances like the present, the courts may declare that a particular event, such as the COVID-19 pandemic, is a force majeure event faced by the parties, who have encountered genuine difficulties in performing their obligations. However, as noted, such parties will still need to show that their non-performance, or late performance, was truly outside their control and could not have been prevented or mitigated.
It is noteworthy that the Chamber of Commerce and Industry (CCI) issues assessments of specific events. Namely, CCI studies the relevant application and issues its assessment within 10 business days, unless additional documents are requested. Assessment of CCI is based on the specific facts of each case and will either confirm or deny the existence of force majeure events over a specific period of time. The service fee is at least GEL500 and could be higher in certain cases. CCI’s assessment is only one of the forms of evidence that may be submitted to a court. It may have a higher weight as evidence; however, it is not an absolute guarantee that the defaulting party will be released from liability due to force majeure.
Consequences of Force Majeure: The purpose of the force majeure clause is to exempt the party from liability for the non-compliance or delayed performance of its contractual obligations. The particular effect of the force majeure depends on the impact of the force majeure on the affected party’s ability to perform its contractual obligations.
If a party has been impacted by the pandemic and ensuing governmental restrictions, it may be entitled to (i) unilaterally avoid performance thereof and terminate the contract, if performance is no longer possible or the non-defaulting party has lost interest in performance; or (ii) extend the time for performance established under the contract and perform the primary obligation after the force majeure events end. If the party shows that their non-performance, or late performance, was truly outside their control and could not have been prevented or mitigated, it is excused due to overwhelming force/force majeure and the other party to the contract cannot have a claim arising out of the breach of the contract, including a claim for penalties or damages.
Fundamental Change of Circumstances
The unprecedented nature of the outbreak, as well as the restrictions that followed, have placed contractual parties under different circumstances compared to those that existed at the time when they entered into a particular contract. Georgian law envisages a particular remedy in these situations and allows parties to request a renegotiation of the terms of the contract. The nature of this remedy is to help the party whose conditions have worsened to achieve those economic results from the contract that it would have achieved had the circumstances remained unaltered. The aim is not an avoidance of performance, rather facilitation to reach a mutually beneficial solution.
The remedy is set out in Article 398 of the GCC, according to which if the circumstances that constituted grounds of the conclusion of a contract change, or if the understandings which constituted the grounds for the conclusion of the contract prove to be wrong, the party for whom such changed circumstances have a detrimental effect is entitled to request from the other party adjustment of the contract to these changed circumstances.
Requirements to Rely on this Remedy: According to the case law of the courts of Georgia, a party may request an adjustment of the contract to changed circumstances if the following criteria are met:
a) such change of circumstances occurred after the conclusion of the contract;
b) the change of circumstances could not have been foreseen and it was beyond the control of the party requesting amendment of the contract;
c) the changed circumstances extremely aggravate the performance of the contract;
d) a causal link exists between the change of circumstances and the complication of aggravation of performance; and
e) a risk for change of circumstance shall not be allocated to any of the parties under the contract.
Procedures for Relying on Article 398:A claim regarding the adjustment of the contract due to a fundamental change of circumstances should be made immediately after such circumstances occur and the failure of a party to initiate renegotiation may cause the unenforceability of their right.
The amendments to the contract may have a specific time duration, depending on how long the grounds mandating such amendments last. A clear example of such a “special” period would be the duration of a state of emergency and the related restrictions. The parties to the contract are free to make any mutual amendments. However, as a general rule, the idea of negotiations shall be the solution of consequences suffered by the party due to fundamental changes in circumstances. The negotiations should be carried out in good faith with the aim of preserving the agreement. If a party uses the existing situation to trade for benefits that are not related to the changed circumstances, such party may be considered not to be negotiating in good faith.
In case it is established that the fundamental change of circumstances occurred, but the parties cannot adjust the contract, or the other party refuses to adjust its terms, then the party relying on Article 398 may terminate the contract.
In light of the present circumstances amid the spread of the virus, it is strongly advisable that the arising contractual issues be resolved amicably. The respective legal mechanisms discussed above should be implemented with great diligence. It is highly recommended to explore other routes and remedies, either under contract or through variations to contracts with other parties, and to seek legal advice early, since determining the effect of these mechanisms is a highly fact-sensitive exercise.
Note: this article does not constitute legal advice. You are responsible for consulting with your own professional legal advisors concerning specific circumstances for your business.
MG Law is the first full-service law firm in Georgia to be founded by international partners. The firm advises a diverse group of Georgian and foreign companies, financial institutions, investment funds, governments, and public enterprises. Among many other areas, the firm primarily focuses on the following sectors: Banking & Finance, Capital Markets, Arbitration & Litigation, Labor & Employment, Infrastructure and Project Finance, Energy Law, Real Estate, Tax and Customs, Investment Law, Corporate Law, and Cryptocurrency & Blockchain.
For more information, please contact Archil Giorgadze at firstname.lastname@example.org or Nicola Mariani at email@example.com