Short General Information on Impact of Coronavirus on Contractual Obligations
25 March 2020
The current situation concerning the coronavirus pandemic may considerably affect various sectors of business, more specifically it may affect the ability of entrepreneurs to fulfill their contractual obligations. If the situation may possibly affect the business, as a first step each entrepreneur should carefully review its contracts as they may contain force majeure (vis major) clause or similar clauses that could help him to legally cope with this specific situation.
In case that there are no such provisions in contract, entrepreneurs will probably seek other possible solutions to preserve their business. We mention below some of the measures provided by the Slovak Commercial Code application of which should be also considered:
1. Withdrawal from the contract based on frustration of its purpose due to fundamental change of circumstances
In some cases, the current coronavirus pandemic may be considered as a fundamental change of circumstances under which a contract was concluded (providing that such change of circumstances does not consist in mere change in property situation of a contracting party or in the economic or market situation).
If the basic purpose of a contract explicitly expressed therein is frustrated as a consequence of such fundamental change of the circumstances (coronavirus pandemic), the affected party may withdraw from it.
However, in such case, withdrawing party is obliged to compensate the other party for damages incurred by the withdrawal from the contract.
2. Exclusion of liability for damage due to circumstances excluding liability
If the above-mentioned situation concerning coronavirus prevents a party from fulfilling its contractual obligations, in some cases, it may be also considered as a circumstance excluding liability.
A circumstance excluding liability is defined as an obstacle that
- occurred independently of the intent of the breaching party and prevents the breaching party from fulfilling its contractual obligation,
but only if,
- it may not be reasonably anticipated that the breaching party could have averted or overcome this obstacle or its consequences, or that the breaching party could have foreseen this obstacle at the time the contract was signed.
As a particular regulation applicable in international trade, circumstances excluding liability do not include situation where an official permit (export permit, transit permit or other official permit required to fulfill obligation at the place of fulfillment) which is required at the time of the fulfillment of the obligation is not granted.
According to the Slovak Commercial Code, the breaching party is not liable for damage caused by its breach of contract resulting from circumstances excluding liability.
However, liability for damage is not excluded by an obstacle that:
- occurred at the time when the breaching party was already in default with fulfillment of its obligation,
- arose from the economic situation of the breaching party.
Of course, effects of exclusion of liability for damage are limited only to the time period when the circumstance excluding liability lasts.
The above-mentioned exclusion of liability applies solely to a liability for damages and it does not affect an obligation to pay contractual penalty for breach of contract and similar sanctions. It also does not allow the affected party to withdraw from contract and not to perform the contract; it “only” relieves the affected party of liability for damages caused by such non-performance (e.g. damage caused to a customer who had to purchase goods from another supplier for a price higher than originally agreed with the affected party which failed to deliver the goods due to circumstances excluding liability).
The breaching party is of course obliged to notify the other party on the nature of the obstacles that are preventing or will prevent the breaching party from fulfillment of its obligations and of the consequences thereof.
Similar regulations of exclusion from liability for damages in case of occurrence of force majeure (vis major) may be also found in some common international instruments that may be applicable to international business relations, e.g. the United Nations Convention on International Sale of Good (CISG), Convention on the Contract for the International Carriage of Goods by Road (CMR) etc.
3. Cessation (extinction) of obligation to perform contract due to impossibility of its performance
The current pandemic may possibly also lead to automatic cessation (extinction) of obligation to perform contract due to factual (physical) or legal impossibility.
However, such impossibility to perform has to be objective (impossible for everyone) and of permanent nature.
The performance of contract is not deemed impossible mainly if:
- it may be provided under aggravated conditions (hardship is in general not sufficient), with greater expenses or at a later time or
- it may be fulfilled with assistance from another party.
However, according to some legal opinions, even the economic impossibility to perform a contract may lead to cessation (extinction) of obligation to perform, but only in individual, justified and exceptional cases, e.g. if due to later and substantial change of circumstances the performance of contract would become exceptionally burdensome, extremely costly and/or performable only under conditions, fulfillment of which is on the edge of real possibilities of a party and at the same time the fulfillment of obligation under such circumstances cannot be fairly expected from such party.
The other party has a right to compensation of damage from the party that is not able to perform obligation due to its impossibility only if it is not caused by circumstances excluding liability for damages (as defined in clause 2 above).
This content has been prepared in cooperation with our partner law firm Bartošík Šváby .