Force majeure (lat. vis maior) is a special legal fact, consisting of an extraordinary, unpredictable, unavoidable and not induced event that causes harm. It may be an uncontrollable state order or a natural event.

The negative effects of Coronavirus on the economy are already evident. For that reason, it is necessary to consider whether Coronavirus can be considered as a vis major, that is to say a liberalization reason for liability for failure to fulfil contractual obligations.

As for the so-called force majeure, the following two situations may occur:

1. The contract contains a force majeure arrangement

The concept of force majeure is precisely defined in the contract and the contract regulates the consequences and actions of the parties in case of force majeure (e.g imposes a reporting obligation). In any case, it is necessary to assess individually, on the basis of a contractual definition of force majeure, whether the occurrence of Coronavirus or Coronavirus pandemic, e.g. in conjunction with government measures or, in general, only government measures meets the definition contained in the contract. If it meets, it is necessary to assess whether the obstacle in the form of Coronavirus, or related governmental measures was the cause of the failure to meet obligations properly and in time. For example, an automotive company cannot justify its delay in delivering referring to Coronavirus, unless the government orders the closure of plants or a substantial part of its employees

was quarantined or ill.

The party concerned is not in default, i.e. it does not breach the contract if the following conditions are cumulatively met:

(a) the contract contains the aforementioned force majeure arrangements;

(b) a case of force majeure defined in the contract occurs;

(c) a case of force majeure is the cause of not fulfilling the obligation; and

(d) the party concerned complies with the conditions agreed in the force majeure arrangement, e.g. reports the existence of force majeure.

If the party concerned does not breach the contract as a result of meeting the above conditions, the other party has no right of withdraw from the contract (unless agreed in the contract) or the right to damages or a contractual penalty.

2. The contract does not contain a force majeure arrangement

The legal regulation of liability in commercial and legal relations is based on the principle of objective liability. Pursuant to Sec. 373 of the Commercial Code, a person who breaches its obligation under a contractual obligation is obliged to compensate the damage caused to the other party, unless it proves the existence of liberalization reasons. Liberalization reasons, however, do not apply to the obligation to pay a contractual penalty, i.e the liable party is obliged to pay the contractual penalty even if there is a vis major.

Liberalization reason for liability arising from a contractual relationship is the existence of force majeure (so-called vis major), i.e. unforeseeable circumstances that (i) arose independently of the will of the liable party, (ii) prevent it from fulfilling its obligation, and (iii) the liable party could not avert or overcome the obstacle or its consequences. Obstacles can be e.g. natural disasters, wars, disease epidemics, facts of an internal political nature (strikes, legislative-character measures) or foreign-political ones (imposition of an embargo by the international community, etc.)

Vis major obstacles can only be invoked if they occurred prior to the default of the liable party and at the same time did not originate in the liable party's economic circumstances.

In general, Coronavirus is an unforeseeable circumstance that has arisen independently of the will of the liable party. However, it is necessary to assess individually whether it was an obstacle to the fulfilment of contractual obligations or whether its consequences could not be averted or overcome. 

In the event of the supplier's delay in the delivery of goods or services, the customer shall be entitled to claim damages and to withdraw from the contract. The supplier could only be relieved of liability if it could prove that the closure of the plant due to Coronavirus could not be predicted in any way what can now be difficult to prove, since Coronavirus is already widespread in most countries and the closure of factories can already be foreseen in some countries now (e.g., China, Italy). Therefore, in the case of new supply contracts, it is recommended to add directly to the contract that the supplier is not liable for damage and cannot be sanctioned in any way if the goods are not delivered due to the closure of the factory due to Coronavirus.

Termination of contractual obligations due to the Coronavirus pandemic

1. Impossibility of performance of the contract (so-called additional impossibility of performance): However, this is only provided that the performance cannot be provided even under difficult conditions, at a higher cost, with the help of another person or after the agreed time.

Example: operation of the florist is prohibited and the customer has ordered decorations for the wedding for a certain day and is not interested in the decoration for another date. This is the case of impossibility of performance of the contract and the obligation expires.

However, the impossibility of performance of the contract  would not be the case if the entrepreneur, on their own initiative, decided to interrupt production at their own plant for preventive reasons.

The liable party shall be obliged to notify the other party without undue delay after it becomes aware of a fact that makes performance impossible. If remuneration/advance payment has already been provided for not realized performance, it must be refunded.

Given that, in the case of Coronavirus, the party has not caused the impossibility of performance, it will not be obliged to compensate the other party for the resulting damage, unless the damage is caused to the other party by late notification of the impossibility of performance.

2. Destruction of the basic purpose of the contract, which was expressly expressed in it because of a substantial change in the circumstances under which the contract was concluded. Pursuant to Sec. 356 of the Commercial Code, the party affected by the destruction of the purpose of the contract may withdraw from it.

Therefore, if the basic purpose of the contract has been destroyed as a result of Coronavirus and related measures, the liable party may withdraw from the contract for this reason. The party that has withdrawn from the contract in this way is obliged to compensate the other party for the damage it has suffered, which should be taken into account when terminating the contract due to the destruction of its purpose.

3. Withdrawal from the contract: If, as a result of Coronavirus, the party is in delay in fulfilling its obligation under the contract and is not in a situation of impossibility or delayed in case of force majeure, the other party has the right to withdraw from the contract under the terms agreed in the contract.

Unless the contract stipulates withdrawal, the other party may withdraw from the contract after an additional reasonable period of performance has been provided in the case of a minor breach of the contract, or without unnecessary evidence after the breach has been found in respect of a material breach of the contract.

To prevent breaching of contractual obligations, we recommend:

• review the contractual terms agreed with their counterparts, including the agreed liberalization reasons (i.e. vis maior), the possibility of early termination of the contractual relationship, as well as sanctions agreed in case of breach of contractual relationship or impossibility to fulfil contractual obligations,
• review the insurance contracts (scope of insurance coverage) and credit agreements (consequences of non-compliance with the company's economic indicators),
• communicate with their contractors and inform each other about the fulfilment of contractual obligations. In the event of a threat of default or inability to fulfil obligations, negotiations on a change in contractual terms or on a possible termination of the contractual relationship should be discussed in due time,
• in the event of the inability of their contractual partners to fulfil their obligations under the contracts, provision must be made for substitute performance in view of the general obligation to take measures to prevent or mitigate the damage,
• not to rely on the extinguishment of the obligation or the exclusion of liability for the existence of circumstances excluding liability, since their application is the subject of legal disputes. The contractual relations may be modified in various ways or may be linked to a foreign law which may not allow the extinction of obligation or the exclusion of liability assumed for the existence of a vis major.

CONCLUSION:

We are constantly monitoring the situation and we will inform you in time about new facts. If you have any questions or requests, please do not hesitate to contact VGD Legal s.r.o., we will be happy to provide you with advice. For more information click on our website, Facebook or Linked-In. We would like to inform you about another two articles with the topic of COVID-19. Read more about the impact of the coronavirus pandemic on the contractual relations HERE. More information about deferral of tax for persons without electronic communication obligations until May available HERE.

VGD Legal s.r.o.

JUDr. Ondrej Šuriak, Managing Director and Attorney-at-Law

Disclaimer: The information provided to the Client is up to date as of 16.03.2020, it is for informational purposes only and does not replace any legal service pursuant to Act No. 586/2003 Coll. on Advocacy. VGD Legal s.r.o. does not assume liability for the completeness and accuracy of the information referred to in the paper. In case of questions about the information provided to the Client, the customer may ask VGD Legal s.r.o. for provision of legal services for this purpose.