Does COVID-19 Relieve Us of Contractual Obligations?

Who can plead force majeure in relation with the coronavirus and when?

With a resolution of the National Assembly on March 13, 2020, a state of emergency has been declared in relation to the growing pandemic of the COVID-19. In accordance with Order No. 01-143 of March 13, 2020 issued by the Minister of Health, any visits to restaurants, bars, clubs, big trade centres and the like have been prohibited. Stricter measures may also be introduced in the coming weeks. Even though the state of emergency has only been announced for a few days, its severe economic consequences are already a main topic of discussion.

In this crisis, the term ‘force majeure’ – often wrongly interpreted as an excuse for a party to a contract not executing its contractual obligations – is frequently mentioned.

What is force majeure?

According to the Commercial Act, force majeure is constituted by such an unpredictable and unavoidable event of exceptional nature which has occurred after the conclusion of the contract. Its unpredictability consists in the fact that the parties could not have predicted its occurrence at the time of conclusion of the commercial contract. The unavoidability stems from its extraordinary nature – the consequences of force majeure cannot be overcome even through exercising due care in executing one’s obligations.

In case of force majeure, the contracting party is not liable for negligence for as long as force majeure circumstances stand. However, that only applies in case the obliged party was not delaying the obligation before the occurrence of the force majeure circumstances.

For example, let us say that a venue in the capital has been fully booked in advance until the end of March. Let us assume that the consumption has been pre-paid by the client. The venue could not have possibly predicted the ban from March 13, 2020 and regardless of the actions the venue undertakes, the Minister’s order cannot be changed. The venue could plead force majeure. If the force majeure continues for such a long time that the company which booked the venue no longer has interest in the execution of the obligation, the client company can terminate the contract and demand a refund of the pre-paid money.

Who can plead force majeure?

Force majeure is only available to parties to a commercial contract. It is not necessary that both parties be legal entities who are merchants. A contract with a natural person could also be a commercial contract by operation of law, in the case of absolute commercial contracts, as provided for in the Commercial Act. Such are for example bank and insurance contracts, transport contracts, contracts for hotel and tourism services, contracts for sale and purchase of personal production, etc. Aside from the case where a contract’s commercial nature is defined by law, the commerciality of a deal is established based on whether it was concluded by a merchant and, if so, whether it is related to the merchant’s business activity. Determining the commercial nature of a contract is of critical importance as the right to plead force majeure only arises for parties to such deals. The qualification of a contract as a commercial one is therefore often a disputed matter in the judicial practice.

On the other hand, parties to a non-commercial contract can also protect their interests in the ways, provided for in the Obligations and Contracts Act – the debtor is not liable if its failure to execute the contract is not due to its fault, but to circumstances beyond its control. However, the lack of financial resources does not qualify as such a circumstance. For instance, the measures imposed under the state of emergency regime have forced your employer to put you on unpaid leave. Due to not receiving your salary, you are deprived of means to pay the rent, but this deprivation of salary does not result from any behaviour on your part which might amount to a fault. Nevertheless, you will still be liable to your landlord, as the obligation has a pecuniary character. The same applies to obligations under bank credits and financial leasing contracts.

When can we plead force majeure?

The existence of a state of emergency does not in itself relieve a party from its contractual obligations. It is essential that the circumstances claimed to constitute a force majeure have objectively prevented the party from fulfilling its obligations under the contract.

For instance, let us say that a company based in Burgas manufactures components in the automotive industry field. Let us assume that at the beginning of March, the company accepted an order from a client based in Sofia for the production and delivery of 1000 components by March 15, 2020. The emergency measures in force at that time do not result in the discontinuation of production for the Burgas company. Thus, if the manufacturer fails to fulfil its obligations within the agreed deadline, it will be liable for breach of contract and will have to pay damages for the delayed execution. The situation would be different however the buyer is a company based in Vienna. If the delayed delivery was due to increased border control measures, closure of the Austrian border and other similar measures, directly resulting from the state of emergency, the delay would constitute the immediate consequence of circumstances qualifying as force majeure.

How to act in case of force majeure?

If you are unable to fulfil your obligations under a contract due to force majeure circumstances, you must inform the other party in writing about the nature of the force majeure and its possible consequences for the contract. Failing to do so, you will owe a compensation for damages.

The fulfilment of both sides’ contractual obligations is suspended for the duration of the force majeure circumstances. In the case of a prolonged force majeure – when the interest of one of the parties in receiving the execution of the contract has objectively disappeared – the latter has the right to terminate the contract. Before referring to the legal provisions governing force majeure, however, it is important for the party to verify how the issue of force majeure is treated in the contract and whether there are any specific provisions regarding the conditions in which a party may excuse itself from executing its obligations.

Force majeure in the context of the current situation in the country

As it was pointed out above, pecuniary obligations cannot be deferred due to force majeure. With the restrictive measures of March 13, 2020, many venues do not operate and cannot generate revenue. Nevertheless, their obligations under their commercial leases remain.

The situation is different with regards to private schools and kindergartens, where monthly instalments are due. The legal relations under these contracts do not constitute a commercial transaction, respectively there is no force majeure.

The Order from March 13, 2020 suspends the carrying out of school activities and visits to kindergartens for children. Although schools and kindergartens are closed for reasons beyond their control, the right of these structures to the agreed upon monthly remuneration still depends on the effective provision of educational and childcare services. Thus, as for the period during which measures under the state of emergency regime remain in force, such a service has ceased to exist, parents will only have to pay the monthly instalments after the services have been reinstated. That being said, the clauses of each individual may contain provide for a different solution to such a hypothesis.

The events connected to COVID-19 in the country do not justify the existence of force majeure as a general rule. Whether force majeure is present must be assessed on a case-by-case basis and according to the specific facts surrounding each case. The current situation of crisis – with its duration and intensity – will surely have an impact on the way commercial contracts are concluded. Thus, if so far the force majeure clause was present only in few commercial contracts, this would probably change in the future as the parties would more carefully define what constitutes a force majeure event.

This article is published in The 24 Hours Newspaper

Author: Teodor Todorov, Attorney-at-law