CORONAVIRUS NEWS: FORCE MAJEURE AND ITS IMPACT ON CONTRACTUAL OBLIGATIONS DURING THE COVID-19 PANDEMIC DISEASE
In the context of the pandemic of Covid-19, caused by a new type of coronavirus called SARS-CoV-2 (hereinafter referred to as “Coronavirus”), individual countries of the world community are undertaking a number of public measures to prevent it from spreading to the population as much as possible. However, the negative consequences of this disease are already beginning to occur very quickly in a number of areas.
The pandemic of Coronavirus has undoubtedly a significant impact on contractual obligations in the business sector, especially in the field of supplier-customer relationships, both international and domestic. The ability to fulfill the individual contractual obligations is becoming increasingly affected and questions arise on how to proceed in this difficult situation. Therefore, here is a brief summary of the most important legal institutes that may be the way out of this difficult situation.
A. CORONAVIRUS AS A FORCE MAJEURE (FORCE MAJEURE, VIS MAIOR)
It needs to be mentioned at the outset that the current Czech legislation does not provide a detailed and accurate definition of the force majeure, therefore the precise content of this term can only be found in the decision-making activities of courts. According to the Court of Justice of the European Union, the force majeure can be understood as an unusual and unforeseeable circumstance that is independent of the person invoking it, and at the same time the consequences of which could not be prevented despite all the care taken. [1] At the same time, however, it must also be a circumstance that could not have been foreseen at the time of the commitment, which implies that the force majeure regime will be different for the contracts that were concluded before the pandemic broke out and the contracts concluded in the present situation – which should be carefully reflected in such contracts.
It can be stated that the Coronavirus generally fulfills the abovementioned definition of force majeure in relation to the contracts concluded prior to the pandemic outbreak. However, this may not always apply, as the definition of force majeure can be modified by the contractual parties (i.e. limited to a specific list of circumstances which the parties consider to be force majeure). Therefore, as a first step, it is appropriate to thoroughly analyze all contractual documentation and identify provisions referring to the scope of force majeure. If the contract contains such provisions, it needs to be thoroughly evaluated to come to a legally relevant conclusion whether the Coronavirus can be subsumed under the contractually modified scope of force majeure.
B. FORCE MAJEURE CLAUSE CONTAINED IN THE CONTRACT
Probably the best starting position for the affected contractual parties are cases, where the so-called force majeure clause is included directly in the contract. These clauses will most often include the procedure of contractual parties if such circumstances occur (e.g. the obligation to notify force majeure, the form and time limit for the notification, etc.). At the same time, this clause should also determine the consequences of the application of force majeure. Most often it will be the presumption that a particular contractual party is not in delay with the fulfillment of its obligation. However, the failure to fulfill such an obligation must be causally linked to the circumstances which have arisen. If all conditions relating to the application of the agreed clause are met, a party who, as a result of a force majeure event, is unable to fulfill its contractual obligations, shall not be liable for a breach of that obligation.
C. ABSENCE OF FORCE MAJEURE PROVISIONS IN THE CONTRACT
In cases where the circumstances of force majeure and the resulting rights and obligations of the contractual parties have not been regulated in any way, Act No. 89/2012 Coll., The Civil Code, as amended (hereinafter referred to as “CC”) contains several institutes which offer at least a partial protection in the event of such unforeseeable circumstances.
FORCE MAJEURE AS A LIBERATION CAUSE FOR DAMAGES
If a party breaches its obligation under a contract, that party is generally obliged to compensate the other party for any damages resulting from such breach. Given the current situation, such situations will often occur.
The civil code, however, considers such situations in the Section 2913 (2) of the CC, according to which a party that breached an obligation under a contract shall be released from the obligation to pay compensation if it proves that an exceptional, unforeseeable and insurmountable obstacle prevented the fulfillment of the obligation and at the same time such an obstacle arose irrespective of the will of the party which has breached its contractual obligation as a result of such an obstacle. However, further prerequisites must also be fulfilled, i.e. the obstacle must not arise as a result of the personal circumstances of this party, nor must it occur at a time when that party was already in default with the fulfillment of the agreed obligation and at the same time that party did not contractually undertake to overcome this obstacle.
Based on the abovementioned, it can be concluded that the conditions for exemption from liability for breach of contractual obligation will be met in relation to the pandemic of Coronavirus. Thus, a party that has breached its contractual obligation will be able to exempt from the obligation to compensate the other party for damages resulting from such breach.
But beware! The waiver of liability for damage caused by the breach of contractual obligation does not mean that the party is no longer obliged to fulfill the primary obligation. In addition, the waiver of liability shall not apply to the obligation to pay a contractual penalty unless otherwise agreed between the parties. The concept of a contractual penalty is based on the fact that the debtor who has breached the secured contractual obligation is obliged to pay the contractual penalty, irrespective of its fault. It can, therefore, be assumed that the conditions under which the debtor breached its contractual obligation are not legally relevant from the point of view of the creditor’s right to payment of the contractual penalty. [2] However, the way the courts will proceed in the future in the light of the current emergency situation regarding the Coronavirus cannot be foreseen at the moment – the court’s right to reasonably reduce the contractual penalty is highly eligible under these circumstances.
Simultaneously, the other party to the obligation also retains any other rights which it has under the law, which means that if the contractual or statutory conditions are met, it may withdraw from the contract.
RIGHT OF CONTRACTUAL PARTIES TO REQUEST CHANGES, RESP. CONTRACT CANCELLATION
Another legal institute, which in its provisions foresee the circumstances of force majeure, can be found in the Sections 1765 and § 1766 of the CC, which concerns the so-called substantial change of circumstances (clausula rebus sic stantibus).
The civil code introduces in these provisions that in the event of a substantial change in circumstances (under which the Coronavirus pandemic can undoubtedly also apply), either party is entitled to request the other party to resume negotiations on an already concluded contract. However, the condition of such a request is that the substantial change of circumstances will create a particularly gross disproportion in the rights and obligations of the parties, either by disadvantaging one of them either by disproportionately increasing the cost of fulfillment or disproportionately reducing the value of the subject-matter fulfillment. At the same time, the party requesting the resumption of the contract negotiations must prove that it could not reasonably have anticipated or influenced such a change and that the change of circumstances occurred or became known to the party concerned after the conclusion of the contract.
If the parties fail to agree within a reasonable time, the court may, on the basis of a proposal by either party, decide that the contractual obligation shall be altered by restoring the balance of rights and obligations, or the court may even terminate the contractual obligation on the date and under the conditions specified in the court decision. The court shall reject the proposal for contract alteration if the concerned contractual party has not exercised the right to resume the negotiation of the contract within a reasonable period during which the change of circumstances had to be identified. In relation to that, the law creates a rebuttable legal presumption that 2 months are considered to be a reasonable period.
Given the established practice and possibility of contractual modification of these provisions of civil code, it should be noted that the application of these provisions is often excluded by the contractual parties. If there is such an arrangement, the contractual parties assume the risk arising from a substantial change of circumstances and the application of the provisions of § 1765 and § 1766 is no longer possible. It is also necessary to point out that due to the quite recent incorporation of this institute into the Czech legal system, the case-law in this area is not yet sufficiently developed and thus very difficult to predict.
D. OBLIGATIONS WITH THE INTERNATIONAL ELEMENT
We also consider appropriate to mention the impact of the Coronavirus on obligations with an international element, i.e. contracts concluded with a foreign entity. In such cases, the legal analysis of the solutions offered as a result of force majeure will always be preceded by the assessment of the law applicable to the obligation, i.e. the law that will be applied between the parties to the obligation. It is worth mentioning that not all states have the concept of force majeure in their legal systems and any interpretation of the concept of force majeure will vary from state to state.
In these cases, it is also very important to analyze whether the force majeure clause was contractually agreed upon or not. The UN Convention on Contracts for the International Sale of Goods (CISG), which contains rules on force majeure circumstances, may also be a relevant and important document in case of absence of force majeure arrangements.
E. CONCLUSION
Given the confusing and dynamically evolving situation of the Coronavirus pandemic and the consequent increase in the need for in-depth analysis of legal documents and related legal services, we recommend that you seek qualified advice from experts to help you find effective solutions to problems arising from this difficult situation.
For more information on this subject, please feel free to contact:
Vojtěch Makovec, partner
rutland & partners, advokátní kancelář s.r.o.
tel: +420 226 226 026
email: vojtech.makovec@rutlands.cz
References:
[1] judgment of the Court of justice of the European Union from 5.2.1987, C-145/85, Denkavit Belgium, point 11
[2] HULMÁK, Milan a kol. Občanský zákoník V. Závazkové právo. Obecná část (§ 1721–2054). Nakladatelství C. H. Beck, 1. vydání, 2014, s. 182.
