Manual COVID-19: Effects of coronavirus on contractual relationships

Following the coronavirus disease COVID-19 and the established crisis measures (especially those that prohibit or restrict certain operations, activities and services), it is necessary to think about the business law aspects of the current situation and possible consequences of non-performance or defective performance of contractual obligations and related implications.


COVID-19 IN CONTRACTUAL RELATIONS AND OPTIONS OF THE CONTRACTING PARTIES


Force majeure
  • Exclusion from liability for compensation for damage caused by a breach of a contractual obligation (Section 2913 (2) of the Civil Code);
  • It must be proved that the fulfillment of a contractual obligation has been temporarily or permanently prevented by an exceptional, unforeseeable and insurmountable obstacle created independently of the will of the tortfeasor;
  • It shall not apply if the obstacle arose only at a time when the tortfeasor was already in default with the fulfillment of the contractual obligation;
  • The contractual penalty for breach of contractual obligation, if agreed, is not exempted from liability (in case of disproportionate contractual penalty or exercise of the right to payment of a contractual penalty contrary to good morals, liberation may be important in moderating or determining the invalidity of a contractual penalty);
  • Force majeure provisions may also be part of the contract - the possibility of a disclaimer then depends on the wording of the specific provisions.

Substantial change in circumstances

  • Creation of gross disproportion of the parties of contract by disadvantaging one of them, either by disproportionately increasing the cost of the performance or disproportionately reducing the value of the subject of performance (Section 1765 of the Civil Code);
  • The affected party has the right to claim the renegotiation of the contract with the other party if he proves that (i) neither have expected nor affected the change, and (ii) that the change occurred only after the conclusion of the contract;
  • It does not entitle to postpone performance;
  • Upon failure to reach agreement within a reasonable time limit, a court may, on the application of any of them, decide: to change the contractual obligation by restoring the balance of rights and duties of the parties, or to extinguish it;
  • If the contract contains an agreement on assumption of the risk of a change of circumstances,
  • i.e. the exclusion of the application of a statutory provision on a substantial change in circumstances, the right to claim the renegotiation of the contract does not arise.

Subsequent impossibility of performance

  • If the debt becomes impossible to be discharged, the obligation is extinguished due to impossibility of performance (Section 2006 of the Civil Code);
  • A performance is not impossible if the debt can be discharged under more difficult conditions, at higher costs, with the help of another person or only after a determined period.
  • Impossibility of performance must be notified without undue delay, otherwise liability for damages arises.


COVID-19 IN INTERNATIONAL CONTRACTUAL RELATIONS

Applicable law
  • In the case of contracts with an international element, it is necessary to determine the law of which State governs those contracts and what options the legal system therefore provides;
  • Practically all legal systems have their own regulation of the above-mentioned institutes, especially force majeure, and should therefore be applicable.

Exceptions to the application of applicable law

  • Imperative norms - norms of fundamental importance, the observance of which is crucial for the state concerned in the protection of the public interest and which will be applied regardless of the applicable law (e.g. crisis measures, quarantine and other emergency measures);
  • Public policy reservation - applies in cases where the effects of the application of foreign applicable law would be clearly contrary to the public policy of the State concerned (e.g. protection of fundamental rights);
  • Emergency epidemiological measures and other similar restrictions may be in the nature of these institutes.
CISG
  • The so-called Vienna Convention - regulates agreements on the international sale of goods within the signatory states – there are 89 contracting states;
  • It contains a disclaimer (Article 79) - a party is not liable for a failure to fulfill any obligation if it proves that the failure was caused by an obstacle which was not dependent on its will and in respect of which the party could not reasonably be expected to count on it at the time of the conclusion of the contract or that it would avert or overcome this obstacle or its consequences.
  • The specific use of individual options in contractual relationships, or the use of other options with respect to a specific type of contract, will always depend on the specific situation of the case. We will be happy to discuss your options with you.

Authors: Veronika Odrobinová a Martina Šumavská

The Article has been published on © EPRAVO.CZ