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Coronavirus: Effect of the epidemic on contractual obligations

What to do when you cannot fulfil your contracts

What to do when it turns impossible for entrepreneurs to meet their contractual obligations due to the coronavirus COVID-19 epidemic or related measures imposed by the government? We have summarised typical real-life scenarios relating to the epidemic and its effect on contractual rights and obligations.

What is worth considering?

  1. I am a supplier with a contractual obligation to supply goods to customers. However, the supply of raw material from my own subcontractor is delayed because of logistics issues caused by border restrictions. Due to the delay caused by my supplier, I am unable to supply goods to customers on time. Do I still have the legal obligation to fulfil my contractual undertakings despite the epidemic?An outbreak of an epidemic may be considered as a force majeure.

    Force majeure as such does not release any party from its contractual obligations. Nevertheless, under certain circumstances, it may release a party from its liability for damages caused by a failure to perform (a failure to supply goods or services within the agreed-upon deadline) as a consequence of an extraordinary, unexpected and insurmountable obstacle (i.e. force majeure).
  2. I have entered into a contract but after the outbreak of an epidemic, my position has deteriorated significantly and the contract is highly disadvantageous for me as I am unable to deliver contracted supplies on time. How could I address the situation – is it possible to renegotiate the contractual terms?

    If the outbreak of an epidemic caused a major change in circumstances resulting in a significant disproportion in the rights and obligations of both contracting parties, the affected party may seek renegotiation of terms of already concluded contract. If the parties fail to agree on new terms and conditions, the contract may be revoked by a court at the request of either party, depending on the specific contractual relationship and its terms. We note that a number of robust contracts often include a disclaimer regarding the risk of a major change in circumstances for both contracting parties.
  3. I have entered into a contract but due to the epidemic, I am unable to fulfil my obligations completely; for example, I can only supply a limited amount of goods. Will the contract continue to exist? What should I do when the contracted performance is not entirely impossible but very difficult?

    If a permanent obstacle arises after entering into a contract and as a result of this an obligation (e.g. supply of goods) is impossible to fulfil, the contract will cease to exist. However, the inability to fulfil an obligation is assessed objectively, i.e. in relation to all persons in such a position. In the event that the fulfilment of an obligation only became more difficult (e.g. supply of goods with increased costs), the obligation as such (e.g. supply of goods) remains unchanged.

    However, an epidemic is usually just a temporary obstacle and, after it passes, the obligation will be possible to fulfil. In relation to an epidemic, an obligation which will likely cease to exist will principally relate to contracts with a limited time frame under which the obligation has to be fulfilled within a specified period (e.g. in just-in-time systems).
  4. I have entered into a contract with a foreign entity. Are the above rules any different?

    Under certain circumstances, the United Nations Convention on Contracts for the International Sale of Goods (“CISG”) may be applicable, signed by 89 countries worldwide, including the Czech Republic and China. If your contract is governed by CISG, meaning that if your business partner is an entity operating in a country that acceded to CISG and the application of CISG is not ruled out by the agreement, your agreement will be governed by specific rules. These rules stipulate in detail certain aspects, especially the duration of force majeure, notification duty or force majeure circumstances on the part of a sub-contractor. In particular, Clause 79 shall apply, providing, in particular, that a contracting party will not be responsible for a failure to perform any of its obligations if it proves that the failure was due to an impediment beyond party’s control.

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Sabina Softić

Sabina Softić

Partner

Sabina is the audit Partner-in-Charge for the Deloitte’s South Central Europe Region (Bosnia and Herzegovina, Croatia, Montenegro, North Macedonia, Serbia and Slovenia). She is a certified accountant ... More