Of interest.

Non-performance of contract as a possible consequence of the coronavirus epidemic (COVID-19)

The ongoing coronavirus epidemic (COVID-19) and the related restrictive measures issued by public authorities are currently causing situations when a contractual party unintentionally happen to be in default with fulfilment of its contractual obligations and becomes subject to legal sanctions. In the following article, we will briefly present how to deal with such situations.

In general

First of all, it is necessary to take into account the fundamental principles of private law. Private law protects only juridical acts that do not cause unreasonable harm to others and such legal protection is not only based on the principle of pacta sunt servanda, i.e. that contracts should be respected, but also on the protection of human life and health, principles of good morals, public order and prohibition of abuse of right.

In general, therefore, there is a legal framework for successful avoiding from performing contractual obligations with reference to the consequences of the coronavirus epidemic. However, it does not mean that all contracts that are difficult to comply with due to coronavirus epidemic can be breached without risk of sanction, especially if the parties agreed on the unconditional consequences of the breach of contract. The abovementioned general correctives must apply without any exception though, irrespective of contractual arrangement, since no business can overrun the public interest over the imminent threats to human lives. In the Civil Code, number of situations are regulated specifically, as described below.

Change in circumstances

The uncontrollable spread of coronavirus epidemic may create a so-called substantial change in circumstances within the meaning of Section 1765 (1) of the Civil Code, i.e. an emergence of gross disproportion in the rights and obligations of the contractual parties. It should be reminded though that the affected party must not have assumed the risk of change in circumstances pursuant to Section 1765 (2) of the Civil Code, since in recent years this has become a very frequent arrangement in virtually all types of contracts and it may now have adverse consequences.

If the prerequisites for the application of the Civil Code provisions on the substantial change in circumstances are met, the affected party is entitled to claim renegotiation of the contract with the other party. However, the affected party must prove that it could not have reasonably expected or influenced the change in circumstances. Nevertheless, the exercise of this right does not entitle the affected party to postpone any performance and only if the parties do not subsequently agree to change the contract, it is possible to seek a change of contract or its cancellation at court, provided that the other party was called to the contract renegotiation within a reasonable period of time (two months, unless proven otherwise).

Unfortunately, the discussed legal measure, although currently widely mentioned as possible and appropriate way to deal with emergencies caused by a coronavirus epidemic, actually is very impractical to use, especially if cooperation of the other contracting party cannot be expected and it is necessary to rely on the court’s interference. In the vast majority of conceivable cases, the affected party will need a swift change of the contract, while the court proceedings tend to last even for years. Thus, the use of court protection can be considered rather for long-term framework contracts, where, as we believe, the coronavirus epidemic is unlikely to cause problems for so long. In most disputes, nor will the potential use of a threat of court proceedings contribute to the settlement of mutual contractual relations.

Debtor’s default and harm – vis maior as a ground for release from liability

If the unpredictability condition is met, the coronavirus epidemic can be legally considered as an act of force majeure which is remembered in the Civil Code in connection with (non-)responsibility for default of performing or even for failure to perform the contractual obligation which results in its termination of contract (so-called fixed obligations where the other party cannot be interested in late performance) and for the damage incurred.

In accordance with Section 2913 (2) of the Civil Code, tortfeasor is released from the duty to provide compensation if he proves that he was prevented from fulfilling his contractual duty due to an extraordinary, unforeseeable and insurmountable obstacle created independently of his will, such as force majeure. However, it is important to point out that force majeure cannot be invoked if it occurred while the party was already in default.

Furthermore, we consider necessary to point out that force majeure, as a reason for release from liability, focuses only on liability for damage as a result of breach of contract, not on contractual sanctions. Thus, by invoking the force majeure, the affected party may be discharged from liability for damage caused by a breach of contract, but not automatically exempted from the obligation to pay a contractual penalty for such breach, for example. This can be countered successfully, for example, by pointing out the contradiction with principles of morality and public order.

Subsequent impossibility of performance

In practice, the coronavirus epidemic may also lead to situations in which the fulfilment of contractual obligation becomes objectively impossible, without the opportunity to perform obligation at a later date, with help of another person or with greater efforts or higher costs. In such case, this could be considered as the so-called subsequent impossibility of performance provided for in Section 2006 et seq. of the Civil Code, which entails the automatic cessation of the concerned non-fulfilled obligations. In that cases, the debtor should not be legally penalized for non-performance provided that it informed the creditor thereof in a timely manner.

Given the temporary nature of the public law restrictive measures issued in connection with the coronavirus epidemic, we believe the obligations that were made impossible to be performed in due time, do not cease to exist, even though the discussed measures prohibited the debtor to act in line with the contract, simply because they do not preclude the fulfilment of the obligation at a later date. Obligations for which the delayed performance is of no relevance to the creditor should in principle be subject to the aforementioned fixed obligations under Section 1980 of the Civil Code, i.e. cease to exist as a result of the debtor’s default itself.

Conclusion

As can be seen from the above discussion, settling disputes arising from the non-fulfilment of contractual obligations as a result of the coronavirus epidemic and public law measures, which limit or prevent proper and timely performance, will not be an easy matter in practice. It may be problematic even to assess whether the obligation ceased to exist or not in particular cases and whether legal sanctions can be applied thereafter. Hence, it can be recommended to solve any complications regarding proper and timely performance by prompt notification of the creditor and subsequent mutual agreement of the contracting parties on contract readjustment.

As for the creditors, we recommend to stay vigilant about possible efforts of debtors to use the coronavirus epidemic as an excuse for failure to fulfil contractual obligations that are either unrelated to the epidemic in any way or that the debtors might and should have anticipated.

Should you have any questions regarding the above or the impact of the current situation on the contractual relationships, please feel free to contact us at any time.

 

PhDr. Mgr. Jan Ptáčník, attorney – ptacnik@plegal.cz

Mgr. Tereza Dvořáková, junior lawyer – dvorakova@plegal.cz

 

www.peytonlegal.cz

 

19. 03. 2020

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