News 6/2020

Coronavirus and force majeure in contractual relations

A) Force Majeure

The current outbreak of coronavirus disease has very serious implications for commercial relationships. Thus, given also the officially declared pandemic, the outbreak of Covid‐19 may be considered to be a force majeure event.

In the event of a breach of contractual obligations due to the existence of force majeure circumstances, the liability of the defaulting party for breach of the contract is usually excluded. However, this applies, as a rule, solely to the liability for damage incurred. The question whether a force majeure event shall affect the cancellation of punitive instruments securing the performance of contractual duties (contractual penalty) depends on the legal provisions applicable to a given case as well as on the contents of the contract in question.

In any case, it should be examined whether all cases where the performance has become difficult or impossible are in fact casually linked to the pandemic, due to unforeseeable, unavoidable or
insurmountable circumstances. Contracting parties must always exercise their best efforts to perform the contract. The mere fact that performance has become difficult, does not release them from their responsibility (Section 1765 of the Commercial Code, CC).

B) Compensation for damages

According to Section 2913 (2) of the Civil Code, tortfeasors (e.g. persons being in default in supplying goods or services) may be released from their duty to provide compensation for damages if they prove that they were prevented from fulfilling their contractual duties due to an “extraordinary, unforeseeable and insurmountable obstacle created independently of their will.“ However, it is important to note that such an obstacle must arise before the tortfeasor is in default in performing the duty.

The party must prove the existence of the obstacle (force majeure), the force majeure event having to be the main reason for the default.

C) Negotiation of a change of contract (substantial change in circumstances)

Theoretically, there is a right to require that the other party resumes the contract negotiations according to Section 1765 of the Civil Code, due to a substantial change in circumstances. If there is such a substantial change in circumstances that creates a particularly gross disproportion in the rights and duties of the parties, the affected party has the right to claim the renegotiation of the contract with the other party. Asserting this right (unlike force majeure) does not entitle the affected party to suspend the performance. The affected party shall not acquire the right if it assumed the risk of a change in circumstances in the contract (this is a quite frequent contractual clause).

However, a change in circumstances does not entirely concern force majeure events since it applies to cases where the situation existing at the time of conclusion of the contract changes significantly after the conclusion of the contract, in particular in the political, economic and technology sphere, thereby substantially disturbing the balance of rights and
duties of the parties in a manner going beyond normal commercial risk.

D) Extinction of contractual obligations (impossibility of performance)

Also, a contracting party may claim impossibility of performance. Where an obligation becomes impossible to fulfil after it has arisen, it shall extinct due to the impossibility of performance. However, the impossibility of performance may be disputed particularly in case of pandemic measures, considering that certain obligations can be met, for example, with the help of another person or after the deadline. Thus, the above provision may only be applied in exceptional cases, or having regard to the nature and duration of the restrictive measures as well as the nature of the contractual obligation (after a certain period of time, some obligations can no longer be fulfilled).

E) Practical recommendations

Notification of the other contracting party

Under Section 2902 of the Civil Code, a person who has breached a legal duty, or who can and should know that they will breach it, shall, without undue delay, notify the person who may suffer the resulting harm, and warn such a person of the possible consequences. This obligation is often expressly provided for in certain commercial contracts. The purpose of this obligation is to prepare the other party for a breach, thereby enabling it to take measures to prevent or mitigate damage.

In certain cases, in particular in international trade, it may be appropriate for a party to obtain a Force Majeure Certificate issued currently by the Czech Chamber of Commerce. For further details on the conditions and the procedure of issuing the certificate please refer to the website (here).

Examination and analysis of important contracts

It is recommended that existing contracts are examined, in particular with regard to more detailed or different provisions on force majeure, taking into account, among other things, the right by which the contractual relation in question shall be governed (in the case of contracts with foreign persons or entities).