HOW TO AMEND OR TERMINATE AN UNFAVORABLE AGREEMENT: a method not only for quarantine and not only for rent
Many companies now have a question: what to do if you cannot fulfill the terms of the concluded agreements or the fulfillment of the agreement will be deliberately unprofitable?
The first thing that comes to mind after the adoption of the law by the Verkhovna Rada on March 17, 2020, which classifies quarantine as force majeure, is the receipt of a force majeure certificate from the Chamber of Commerce and Industry. But the CCI does not issue a certificate for any agreement.
Let’s remember and talk about a completely different way to amend or terminate an unfavorable contract.
What is a substantive change in circumstances?
Article 652 of the Civil Code of Ukraine can come to the rescue. This article states about the amendment or termination of the agreement due to a significant change in circumstances.
A substantive change is considered to be the one in which the circumstances have changed so much that if the parties could have foreseen them, they would have entered into an agreement on different conditions or would not have concluded it at all.
This situation, in contrast to force majeure, does not presume the impossibility of fulfilling obligations under the agreement. The fulfillment of obligations in this case is possible, but due to their unpredictability, at the same time is very difficult.
How to apply the principle of material change of circumstances?
What should the parties do if they intend to use the provisions of this article?
First of all, the parties shall negotiate and decide what they will do next. There are two options to choose from:
- amend the agreement in such way that it corresponds to the current reality;
- make a joint decision to terminate the agreement. Sometimes such solution can be more cost-efficient than continuing cooperation.
If the parties cannot agree, the agreement can be amended or terminated by a court decision.
Conditions for amending or terminating the agreement
It is extremely important to simultaneously comply with 4 conditions:
- when concluding the agreement, the parties proceeded from the fact that such circumstances would not occur;
- the interested party cannot influence the reasons that led to the change in the conditions;
- if fulfillment of the agreement will be continued, then the property interests of the parties will be violated and the interested party will not receive what it counted on when concluding the agreement;
- the risk due to these circumstances is not borne by the interested party.
If the agreement is nevertheless terminated, the court will determine the consequences of such termination. In this case, it will proceed from a fair distribution of costs between the parties that they incurred in connection with the performance of the agreement.
Amendment of the agreement by a court decision is possible only in exceptional cases. Such a measure is allowed if its termination would be contrary to the public interest or would entail damage to the parties that significantly exceeds their costs necessary to fulfill the agreement on the terms amended by the court.
It is actually not so easy but possible to use Article 652 of the CCU. Let’s take a look at a few examples.
Case number 1
The first case under quarantine conditions may provoke interest of suppliers who transfer goods to retail chains on consignment with a deferred payment.
In 2014, the supplier transferred the goods on consignment to the retail chain at a fixed price. The buyer had to settle payments with the supplier for each consignment of goods within 30 days from the date the goods were sold to the end consumer. The parties additionally agreed that the retail chain will provide the supplier with reports on the progress and sales volumes twice a month.
As of 2017, the retail chain paid for only a small part of the goods transferred for sale and has never submitted a sales report to the supplier. The supplier applied to the retail chain with a requirement to terminate the agreement and return all unsold goods to it. The retail chain ignored the requirement.
The supplier filed a claim with the commercial court to terminate the agreement and return all unsold goods. The demands were argued by the fact that for the third year already the supplier could not receive income from the sale of the supplied goods, while its purchase value had more than doubled.
The court satisfied the supplier’s claim, because the arguments and evidence base of the supplier fully met 4 conditions enshrined in Article 652 of the Civil Code:
- The supplier did not expect the product to be sold for such a long period of time.
- The product was to be sold exclusively by the retail chain. Having received its income, the network had to pay the supplier. Therefore, the risk of selling the goods was assigned to the retail chain.
- If the supplier knew that the product would be sold for a long time (three years), then the agreement would not have been concluded.
- The agreement has lost all profitability for the supplier. The overdue sum three years after delivery was completely leveled off by inflation, an increase in the exchange rate and a constant rise in prices on the part of product manufacturers. Therefore, there is no profit margin.
The full text of the court’s decision can be found here https://reyestr.court.gov.ua/Review/68401002.
Case number 2
The second case is about a land lease agreement. And it is about how it was not possible to prove all four conditions of Article 652 of the Civil Code.
The landlord went to the commercial court to increase the rent. The lease should have increased due to the increase in the normative-monetary value of the land plot.
The tenant filed in the same court a counterclaim against the landlord to terminate the land lease agreement. The tenant substantiated his claims with the provisions of 652 of the Civil Code, namely, a significant change in circumstances – an increase in the value of the land plot as a result of rapid inflationary processes that do not depend on the actions of the parties to the agreement, and such processes could not be foreseen when it was concluded.
The court of first instance and the court of appeal upheld the landlord’s claim and rejected the tenant’s counterclaim. The courts proceeded from the fact that the position of the landlord was sufficiently reasoned and stated in accordance with the provisions of the current legislation. The parties in the land lease agreement provided for the possibility of changing the amount of rent for land, which is regulated, which is the basis for bringing the provisions of the land lease agreement in line with the requirements of the law in terms of determining the amount of rent.
The courts refused to satisfy the counterclaim and rejected the tenant’s assertion that the increase in the amount of rent affects the results of the company’s economic activities and makes such a lease economically unprofitable, which is an essential condition and one of the grounds for terminating the lease in accordance with Article 652 of the Civil Code.
The courts proceeded from the fact that the change in the amount of the rent is stipulated by the text of the agreement, as well as from the fact that such a procedure is enshrined in the regulatory legal acts of Ukraine.
There was no evidence in the case file that as of the date of the conclusion of the land lease agreement, the landlord also did not provide for an increase in the rent, although, given the term of the agreement (49 years), the parties to the agreement could not but foresee the possibility of increasing its size, including due to inflationary processes in the country.
The courts also took into account the fact that the case file contained letters from the landlord addressed to the tenant with a proposal to amend the agreement in connection with a change (increase) in the normative monetary value of the land plot, that is, the landlord provided that such a change in circumstances would occur.
The Supreme Court comprised of the panel of judges of the Cassation Commercial Court, recognized the conclusions of the courts of previous instances as legitimate. The parties assumed that such a change in circumstances would occur, which in turn contradicts one of the 4 conditions of Article 652 of the Civil Code, which the principle of a significant change in circumstances shall meet.
The full text of the court’s decision can be found here https://reyestr.court.gov.ua/Review/85808290
Case number 3
For tenants of the shopping and entertainment center who, due to quarantine, cannot conduct their economic activities due to their closure. The tenant wanted to reconsider the lease payments due to the onset of the 2008 global economic crisis. We can easily draw parallels between the economic crisis and quarantine, since both circumstances do not depend on the will of the parties and make it difficult to fulfill their obligations under the agreements.
On February 20, 2012, the Supreme Court of Ukraine ruled that the onset of the global financial crisis did not constitute a significant change in the circumstances that guided the parties to the agreement when concluding it. The economic crisis is of a general nature and affects both parties, therefore, it cannot be the basis for amending or terminating the agreement in court.
The negative consequences of the closure of the shopping and entertainment center due to quarantine are borne by both tenants who cannot carry out their economic activities and landlords who cannot profit from the transfer of premises for rent. Therefore, the quarantine applies to both of them. Based on the mentioned court decision, there is a possibility that the existing lease agreements will not be terminated or amended in court. And here the Law on Quarantine Benefits for Business No. 540-IX of March 30, 2020 will not even save. Indeed, in the final text of the Law, the wording suddenly changed from “released” to “may be released.” Therefore, an exemption from rent is no longer necessary, but only possible.
The full text of the court’s decision can be found here https://zakononline.com.ua/court-decisions/show/22207353
Having studied the established judicial practice, soberly assess the situation in which you find yourself in connection with the quarantine. If you want to terminate or amend the agreement due to a significant change in circumstances, analyze how your situation meets the four conditions of Article 652 of the Civil Code.