Home / News / Impact of Covid-19 on contractual relationships

Impact of Covid-19 on contractual relationships

22/06/2020

The impact of the COVID-19 pandemic and measures taken to prevent the spread of the disease have been increasingly impacting commercial relations. As a result, the ability to fulfil contractual obligations could be substantially reduced. The following article explains how to deal with certain issues.

Contractual relations - general

Under various provisions of the Commercial and Civil Code the pandemic may be perceived as an objective obstacle for which the contractual party is unable to deliver the contract in a timely manner. This objective obstacle is also known as vis major or force majeure. Force majeure as such does not relieve a party of its duties to fulfil its obligations. However, under certain conditions, force majeure may relieve a contracting party of liability for damage caused by delay and thus failure to fulfil its contractual obligations as a result of an unforeseeable and unavoidable event. Non-delivery or delayed delivery of goods or services would be a typical example. Thus, based on force majeure, the delay does not cease on its own, but responsibility for the delay may cease. 

If the circumstances related to the fulfilment of contractual obligations change in the context of the pandemic and these circumstances would not be sufficiently serious to render the obligation impossible, the contract could not be terminated. If the essential purpose of the contract is undermined, the contracting party concerned shall have the right to withdraw from the contract. Although the situation caused by Covid-19 is serious, our legal system has a general tendency to classify such a situation as a business risk. This is due to the fact that it does not consider the change as a circumstance that obstructs the underlying purpose of the contract in the given economic or market conditions. 

If, after the conclusion of the contract, an event arises due to which the obligation cannot be fulfilled, the obligation and thus the contract will cease as well. In case a part of the contract cannot be fulfilled, the obligation ceases only in relation to that part. It should also be noted that the other party has the right to withdraw from the contract. If the fulfilment of the obligation would only become more difficult, then it does not cease. Generally, a pandemic is regarded only as a temporary obstacle after which the obligation can be fulfilled. Thus, in the context of a pandemic, the termination of an obligation concerns mainly temporary contracts.

In case of contractual relations with a foreign entity, the provisions of the UN Convention on Contracts for the International Sale of Goods, the so-called Vienna Convention (hereinafter referred to as "CISG"), are also applicable. In addition to the Slovak Republic another 88 Contracting States are signatories to the Convention. These contracts will be subject to CISG rules, unless otherwise agreed. The Convention also regulates, for example, the duration of force majeure, the obligation of a contractual party to notify  their counterpart of the occurrence of the force majeure. 

In the case of Covid-19 pandemic, the provisions of Article 79 of CISG apply. According to these provisions a contractual party is not liable for a failure to fulfil its obligations if it proves that the failure was caused by an obstacle which was not dependent on their will and which could not have been reasonably expected by the party at the time the contract was concluded.

Leases

On 22 April 2020 an amendment to Act no. 62/2020 Coll. on certain extraordinary measures in connection with the spread of dangerous contagious human disease Covid-19 (and in the judiciary and amending certain laws) was approved by the Slovak parliament (hereinafter referred to as the “Act”).

According to the Act, the lessor may not unilaterally terminate a lease of real estate, including rental of an apartment or non-residential premises, based on a delay in paying rent and payments for associated services as a result of circumstances originating from the spread of Covid-19 until 31 December 2020.

The purpose of the Act is to provide comprehensive protection to lessees who find themselves in an unfavorable situation in connection with Covid-19 pandemic an are temporary unable to pay the rent. 

In case of non-payment of rent and related payments, statutory (or contractual) interest on arrears will generally accrue. Furthermore, there will be a right to payment of a contractual penalty if agreed in the contract and the lessor will continue to be entitled to use the rent guarantee or a bank guarantee provided.

The lessor's ban on termination of the lease is conditional on the lessee's delay being due to circumstances originating from the spread of Covid-19. However, the reason for the delay must be sufficiently proved by the lessee.

Supplier - Customer relations

In case of supplier-customer relations, force majeure may be regulated by the contract between the parties. The contract may contain an arrangement whereby one or both contracting parties are not in delay of fulfilling contractual obligations in a case of force majeure. However, simply fulfilling the definition of force majeure is not enough. It is essential that the obstacle, in this case the Covid-19 pandemic or impact of associated government measures, are the cause of the failure to meet the contractual terms. 

The implications of Covid-19 and the associated government measures can be felt on both, the suppliers' and customers' side. For example, the supplier may have to change the way in which his products are shipped, thereby increasing his costs. The question may arise whether the party affected has to bear the consequences by itself or it can call for a reduction or increase in the price agreed in the contract. The Slovak legislation does not provide for a legal provision which, in the event of a substantial change in circumstances, would allow the affected party to unilaterally change the terms of the contract, including a reduction or increase of the agreed price. In general, therefore, the affected party cannot proceed unilaterally to increase or decrease the agreed price without fulfilling other conditions. If one of the parties sought to change the agreed price to protect its position, it would be justified to argue for good manners and fair-trade relations.

Force majeure is relevant in the supplier-customer relationship, even if it is not regulated by the contract. The Commercial Code regulates force majeure in case the contract does not specify otherwise. From the wording of the law it follows that if an unforeseeable, irreversible and insurmountable obstacle prevented a party from complying with its obligation, which occurred independently of its will, that party is not obliged to compensate the related damage. 
The obstacle in the form of Covid-19 occurred independently of the will of the liable party, since it could not influence the occurrence of the pandemic and the related government measures. The condition of unforseeability would have to be examined with regard to the time of the conclusion of the contract - whether at that time the spread of Covid-19 and its consequences were reasonably foreseeable. Similarly, the unavoidability and insuperability of the obstacle in the form of Covid-19 must be assessed on a case-by-case basis.

Although the party affected by the obstacle is not liable for the damage, that party is in breach of the contract and must therefore take into account all the associated consequences, such as the possibility of withdrawal from the contract by the other party or the obligation to pay a contractual penalty.
 

Related people

Picture of Peter Simo
Peter Šimo
Managing Partner
Bratislava
Pavel-Straka-CMS-SVK
Pavel Straka
Associate
Bratislava