COVID 19, force majeure and changed circumstances

One of the indubitable consequences of the COVID 19 pandemic that is already manifesting on the economy is galloping decrease of the volume of turnover in business and business itself, which leads us to a necessity of consideration of further treatment, considering the need for changes in the contractual terms of business and the final regulation of payment methods in obligation relationship.

Art. 263 of the Law of Contracts and Torts stipulates in the provisions which are defining redressing damage and release of debtor from liability for loss upon proving his inability to perform the obligation, or that his delay in performing the obligation was due to circumstances taking place after entering into contract which he was unable to eliminate or avoid. Therefore, the application of the provisions implies that the injury or loss shall be a diminution of someone’s property and preventing its increase.

Besides that, according the Subsection V, Section IV defines the “Repudiation or alteration of contract due to changed circumstances (hardship)” and further articles regulates and elaborates the prerequisites for repudiation, duty of notification the other party on his intention to request repudiation immediately after becoming aware of the emergence of such circumstances, while Art. 133 provides that the contract will not be terminated if the other party offers or agrees to justify the terms of the contract. As well, Art. 135 of the Law of Contracts and Torts prescribe that while deciding on repudiation of contract or on its alteration, the court shall be directed by principles of fair dealing, while especially taking into consideration the purpose of the contract, the normal risk involved with such contracts, general interest, as well as the interests of both parties.

Undoubtedly, the consequence of changed circumstances may not necessarily be repudiation of the contract. In changed circumstances it is possible to think about alteration of contract as well.

How does the aforementioned in the circumstances of force majeure and the specific situation affect the contractual relations of the entities in the economy?

For instance, imagine a contract of lease (or hire agreement) relating to real property. The lease-holder has a bed time in business, because of the emergency situation in the country the market is bad and goods don’t sell well. According to that, the agreed lease is not related to the current (and projected) economic situation on the market and in the lack of intent of lease-holder to pay agreed lease we are wondering how could this obligation relation survives.

Is the one and only option to repudiate the contract, or according to the Law of Contracts and Torts we shall consider alteration of contract in changed circumstances?

In view of the foregoing legal (business and life) problems should be kept in mind that a party requesting repudiation of contract may not claim changed circumstances emerging after the expiration of time limit determined for the performance of his obligation.

In accordance with all the above, existence of the contract during changed circumstances  depends on if the other party offers or accepts that the relevant terms of contract be altered in an equitable way – first of all it is necessary to offer alteration of contract, in the case of a dispute, while deciding on repudiation of contract or on its alteration, the court shall be directed by principles of fair dealing, while especially taking into consideration the purpose of the contract, the normal risk involved with such contracts, general interest, as well as the interests of both parties (for example, according to the above example – the amount of the lease).

Art. 137 of the Law of Contracts and Torts defines a matter of fact when performance of obligation by one party in a bilateral contract becomes impossible due to an event not attributable to either party.

Assuming that in the context of the current COVID-19 virus pandemic, we can speak of partial impossibility of performance be due to events not attributable to either party, one party may repudiate the contract should partial performance fail to meet his needs; otherwise the contract shall remain valid, while the other party shall be entitled to request proportionate reduction of his obligation.

Finally, according to the example above, if it is assumed that the lease-holder wants the contractual relationship to remain in force, or to modify certain provision of a contract because of changed circumstances (e.g. accordingly rent reduction), than should after concluding the contract circumstances emerge which hinder the performance of the obligation of one party having difficulties in performing the obligation, namely the party being unable, due to changed circumstances, to realize the purpose of contract, may request its repudiation (Art. 134 of the Law of Contracts and Torts), and we believe that it should be valid even if the contract is maintained with correct and just changes.

It is not possible to cite the unambiguous standpoint of court practise on this issue, but it is quite certain that in order to use the experience due to current situations, it is necessary for economic entities in their contracts to explicitly define rights and obligations and the possibility of (temporary) modification of their contractual relations, all in case of scenario which includes force majeure and emergency situation in republic.

Disclaimer: This text is written for informational purposes only as well as to give general information and understanding of the law, not to provide specific legal advice. For any additional information feel free to contact us.