Legal aspects of doing business during the COVID-19 pandemic
10 April 2020
Almost in every sector business has been affected by the coronavirus infection and is now struggling to adapt to the constantly changing "rules of the game". Legislative and executive authorities are taking various measures aimed at supporting business and mitigating negative implications. Below is a brief summary of the most significant changes in the federal legislation helping business in Russia keep afloat during the current pandemic.
Federal Law No. 98-FZ “On amendments to certain legislative acts of the Russian Federation on the prevention and liquidation of emergency situations" endorsed on 1 April 20201 introduced significant changes embracing diverse branches of law and areas of business (hereinafter, Law No. 98-FZ).
Moratorium on bankruptcy
In the event of natural and man-made emergencies, dramatic changes in the Rouble exchange rate and similar circumstances, the Government of the Russian Federation (hereinafter, the Russian Government) has the right to impose a moratorium on bankruptcy proceedings initiated by creditors and to set a moratorium timeframe, as well as to extend it, if there are grounds for doing so.
Consequently, all transactions involving administration of the debtor's property performed during the moratorium period are considered null and void, excluding those completed in the ordinary course of the debtor’s business and not exceeding 1% of the debtor's assets.
Restrictions on commencement of bankruptcy proceedings apply to creditors, while debtors retain the right to file for bankruptcy during the validity period.
The law suspends certain provisions during the moratorium, in particular, regarding the obligation to file an application for declaring a person bankrupt and the possibility of foreclosure on mortgaged property.
Administrative and criminal liability
Amendments to the Code of Administrative Offences of the Russian Federation (hereinafter, CAO RF)2 and the Criminal Code of the Russian Federation (hereinafter, CC RF) toughen responsibility for offences posing risks in the context of the spreading coronavirus infection, in particular, for public dissemination of false information by citizens and organizations in case of dissemination of such information through mass media (Articles 207.1, 207.2 of the CC RF, Article 13.15 of the CAO RF).
The CAO RF is supplemented with new Article 20.6.1 establishing responsibility for non-compliance with the rules of conduct when a State of High Alert is introduced in areas where an emergency situation may arise (e.g. an epidemic) or in the zone of the declared emergency. Administrative liability is established in the form of fines of up to RUB 1,000,000 and as administrative suspension of activities.
Besides, Article 14.4.2 of the CAO RF has been supplemented by Part 4, stipulating responsibility for entrepreneurs and other entities and individuals for sale or release of medicines with violation of pricing rules. Administrative liability is established as a fine in the amount of twice the excess revenue received from sale of medicines as a result of unlawful hiking of prices regulated by the state for the entire period during which the offense was committed, but not more than one year.
Article 236 of the CC RF has been amended to cover breaches of sanitary and epidemiological rules, the criminal liability for which has been increased to 7 years of imprisonment as the maximum penalty.
Law No. 98-FZ has endorsed one of the government initiatives to support lessors and lessees during the coronavirus proliferation.
In respect of lease agreements entered into force before federal or regional government authorities adopted a decision in 2020 to introduce a State of High Alert or emergency in a certain territory of the Russian Federation, the lessor is obliged to sign a supplementary contract to the real estate lease agreement within 30 days following the lessee’s request for a grace period with respect to lease payments due in 2020. The requirements for the terms and conditions of such postponement are established by the Russian Government3. The amount of rental payments under such contracts may be changed upon the parties’ consent at any time during 2020.
Under real estate lease agreements a lessee has the right to demand a reduction in rental payments for the period of 2020 because of inability to use the property due to the federal or regional government authorities’ decision to introduce the appropriate regime in a certain region of the Russian Federation.
By mutual agreement, the parties can alter the effective term of a contract in 2020, as well as the contract price, unit prices of goods, work and services, if a force majeure event occurred in the course of fulfilment of the said contract in connection with the spread of the coronavirus infection, or in other cases stipulated by the Russian Government.
Also, until 31 December 2020, public customers do not have the right to demand from small businesses to ensure the execution of the contract, and the Russian Government has the right to use other grounds for purchasing from a single supplier than those specified in the Federal Law.
Inspections of small and medium-sized businesses (hereinafter, SMEs)
SMEs are exempted from inspections from 1 April to 31 December 2020, unless otherwise established by the Russian Government, except for inspections initiated on the grounds that harm has been caused or a there is threat of causing harm to the life or health of citizens, or if an emergency has occurred. The Article sets forth specifics of conducting such inspections of small and medium-sized businesses and applies to all types of inspections.
Registration and wholesale turnover of medicines
The Russian Government is vested with the right to state registration of medicines that are intended for use not only in situations of military operations and emergencies, but also in the conditions of their prevention.
It should be noted that the spread of the coronavirus infection, which coincided with the financial crisis in Russia, entailed risks of non-performance or improper performance of the existing contractual obligations in many business sectors, and, in some cases, implementation of the signed contracts has become impossible or illegal.
In some areas, such as regulation of lease relationships, the state permits businesses to refer to the above legislative initiatives. In other cases, an outbreak of the coronavirus infection may trigger amendments or even termination of a contract due to the material adverse change in circumstances (Article 451 of the Russian Civil Code), become a force majeure event (Article 401 of the Russian Civil Code) or render contract execution impossible subject to the state authority’ act (Article 417 of the Russian Civil Code).
According to paragraph 3, Article 401 of Russian Civil Code, unless otherwise provided for by the law or contract, a person, who has failed to perform or improperly performed an obligation in the course of business activity, shall bear responsibility unless it is proved that proper performance was impossible as a consequence of a force majeure event, that is, extraordinary and unavoidable circumstances under the current conditions.
To date Russia has not introduced a state of emergency. However, the spread of the coronavirus infection is recognised by the Russian Chamber of Commerce and Industry as a force majeure event.
Anyway, it is necessary to take into account the specifics of legal relationships in each particular case. In addition to being an extraordinary and inevitable event, there must be a direct link between the current situation and the impossibility to fulfil the contract, and, in the absence of this link, the spread of the coronavirus may not be considered as a force majeure event.
Material adverse change in circumstances
The adverse change of the circumstances shall be recognized as material, if they have changed to such an extent that in case the parties could have wisely envisaged it, the contract would not have been concluded by them or would have been concluded on the essentially different terms.
It should be taken into account, when applying Article 451 of the Russian Civil Code, that a material adverse change in circumstances does not give the right not to fulfil the obligation and does not relieve a non-fulfilling party from responsibility. Accordingly, if the coronavirus pandemic in this case is considered as a material adverse change in circumstances, the obligated party has only the right to require the other party to terminate or modify the contract.
Termination of an obligation pursuant to decisions of a federal, regional or local authorities
Impossibility can also be legal, when an obligation can be physically performed, but its performance will contravene the law. In particular, Decree of the Mayor of Moscow No. 12-UM of 05 March 2020 “On the introduction of the State of High Alert” introduces a ban on holding sports, entertainment, public and other mass events. And there is a limit on the number of participants for cultural and entertainment events — not more than 50 people at a time. Accordingly, pursuant to Article 417 of the Russian Civil Code, if, subject to an act adopted by the federal, regional or local authority, the performance of an obligation becomes impossible wholly or partially, the obligation shall terminate wholly or in the respective part.
Declaration by the Russian President of a week off from 30 March to 5 April due to the coronavirus pandemic sparked off a lot of debate how to interpret this measure. Decree of the Russian President No. 239 of 02 April 2020 “On measures to ensure the sanitary and epidemiological welfare of the population in the Russian Federation in connection with the spread of the new coronavirus infection (COVID-19)” established non-business days from 4 April to 30 April 20204. This Decree does not apply to all organisations. Work can be continued by those who work remotely and organisations that are in the exemption list, including continuously operating entities.
The specifics of formalising employment relations in the context of measures taken by the state to prevent the spread of infection create difficulties for employers, including the objective need to change the working conditions (for example, transition to remote work), and increase the risk of violation of the employees’ rights and guarantees provided by the applicable law.
The Russian Labour Code provides employers with opportunities to:
- Transfer an employee without his/her consent to another job with the same employer for a period of up to one month (Part 2, Article 72.2 of the Russian Labour Code). The employee’s salary shall be paid for the work performed, but not lower than the average earning for the previous work (Part 4, Article 72.2 of the Russian Labour Code).
- Agree remote working with an employee and, in this regard, establish a lower salary, as agreed by the parties.
- Establish a part-time working schedule, as agreed by the parties, (Article 72 of the Russian Labour Code).
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1 Federal Law No. 98-FZ “On amendments to certain legislative acts of the Russian Federation on the prevention and liquidation of emergency situations" dated 1 April 2020.
2 Introduced by Law No. 98-FZ.
3 The terms and conditions of a grace period apply to contracts of lease of premises in administrative, business and shopping centres concluded for a period of more than 1 year, according to the list of industries most affected by the spread of COVID-19. The list of such industries is contained in Resolution of the Russian Government No. 434 dated 3 April 2020 "On approval of the list of sectors of the Russian economy most affected by the deterioration of the situation as a result of the new coronavirus infection spread ".
4 Decree of the Russian President No. 239 of 02 April 2020 “On measures to ensure the sanitary and epidemiological welfare of the population in the Russian Federation in connection with the spread of the new coronavirus infection (COVID-19)”.