Czech Republic: Force Majeure - Hardship in relation to War and Sanctions

Yes.

The amended Act No. 69/2006 Coll. on the implementation of international sanctions (“Sanctions Act”) is the general legislation, which regulates certain obligations of natural and legal persons in the implementation of international sanctions. Breach of those obligations could lead to financial penalties.

The amended Act No. 40/2009 Coll., Criminal Code (“Criminal Code”) also provides specific crimes related to war and international sanctions such as violation of international sanctions or encouragement of aggressive war.

The amended Act No. 89/2012 Coll. Civil Code (“Civil Code”) does not provide any specific regulation of the consequences of war and/or international sanctions. The Civil Code, however, regulates concepts that could be triggered in the event of war or sanctions, including force majeure, subsequent impossibility of performance, and substantial change in circumstances. 

Force majeure is defined as an extraordinary, unforeseeable, and insurmountable obstacle over which a contractual party has no control and the occurrence of which is beyond its control. Force majeure is regulated in Section 2913(2) of the Civil Code in relation to contractual liability for damage. A contractual party shall not be liable for damage caused by the breach of its contractual obligations if it proves that it was temporarily or permanently prevented from fulfilling its contractual obligations due to force majeure. The contractual party, however, shall be liable for such damage if it was caused by an obstacle that arose from circumstances on the side of the contractual party or if it was in default of performing its contractual obligations, or an obstacle which the contractual party was contractually required to overcome.

Subsequent impossibility of performance is regulated in Section 2006 of the Civil Code and is established when an obligation provided under agreement between the parties becomes impossible to satisfy. Performance is not impossible if the obligation can be satisfied, albeit under more difficult conditions, at higher costs, with the help of another person or with a delay. The impossibility of performance must be proven by the obliged party.

Substantial change in circumstances is regulated under Sections 1765 and 1766 of the Civil Code, which applies when the rights and obligations of the parties become grossly disproportionate by disadvantaging one either by a disproportionate increase in the costs of performance or by a disproportionate reduction in the value of the subject of performance. In such a case, the affected party has the right to request renegotiation of the agreement upon proving that they could neither expect nor affect the change and that the change occurred only after the conclusion of the agreement, or the party became aware thereof only after the conclusion of the agreement. However, this does not affect the obligation to perform. If the contractual parties fail to reach an agreement within a reasonable time, they can submit a lawsuit to the competent court to regulate the contractual provisions. The lawsuit must be submitted within two months after the party became or could have become aware of the substantial change in circumstances. A party cannot invoke substantial change in circumstances if it has assumed the risk of change of circumstances.

Yes, both war and/or sanctions are generally considered as events that constitute force majeure.

Yes. We highly recommend including force majeure clauses into contracts to overcome uncertainty caused by interpretation. Moreover, Czech law regulates force majeure only in relation to liability caused by breach of a contractual obligation, but it does not provide for any related rights of the contractual parties (e.g. to terminate the contract if the force-majeure event lasts for a specific period). Finally, a force majeure clause should always be tailored to the individual contract.

The Civil Code does not define unforeseen circumstances. However, unforeseen can be considered circumstances that:

• arose independently of the will of a contractual party;
• arose after the conclusion of a contract; and
• could not have been reasonably foreseen by a contractual party or any other person in the position of the contractual party exercising due care at the time of the conclusion of the contract.

If the applicable law is legislation of a non-member state, the court of that country will also have jurisdiction (in most cases). This foreign court could either follow or not follow the sanctions imposed by the EU depending on whether that state recognises such sanctions. The foreign court may, therefore, reject the claim by invoking force majeure or unforeseen circumstances as a result of war and/or sanctions.

If the jurisdiction of the Czech court is established, the sanctions imposed by the EU will be considered as overriding mandatory provisions and should apply irrespective of the applicable law. 

Yes. The success of the lawsuit will, however, depend on various factors, such as the contractual terms (e.g. the specific force majeure provision), applicable law (e.g. a force majeure regulation) and jurisdiction.

If the jurisdiction of the Czech court is established, the sanctions imposed by the EU will be applied as overriding mandatory provisions and should, therefore, lead to dismissal of the claim.

The risk of breaching contractual terms by not performing due to war or related sanctions remain a point of attention and uncertainty. Czech law provides certain regulation, but primary regulation should be covered by the contract. The risk that a contractual party can successfully sue the opposite contractual party having its seat in the EU for payment of warranties, damages or compensation for non-delivery is small if a court in a EU Member State has jurisdiction. 

In all cases, we recommend reviewing and/or carefully drafting ''force majeure'' clauses in contracts. In the case of international agreements, it also makes sense to opt for the absolute jurisdiction of the EU Member States courts to safeguard the application of any applicable sanctions imposed by the EU.