Coronavirus crisis and its impact on contract obligations

An obstacle caused by force majeure does not in itself relieve any of the parties of the obligation to fulfil their duties. If such an obstacle arises, the party may be relieved of a liability for damage due to an extraordinary, unforeseeable and insurmountable obstacle arising independently of the performing party’s will. In order to be relieved of responsibility, all three aforementioned elements must be met cumulatively. Therefore, in the current situation with respect to contracts concluded after the first lockdown, it is necessary to examine whether the obstacle caused by force majeure was really unforeseeable. This also applies if the right to renew the contract negotiations under Section 1765 (2) of the Civil Code is exercised, in which case it is necessary to examine, by analogy, whether a change of circumstances could have been reasonably foreseen.

Is it possible to avoid the obligation to pay a contractual penalty?

Renegotiation of an unbalanced contract as a result of a material change in circumstances

Should there be a material change in circumstances as a result of force majeure, which would establish a gross disparity in the rights and obligations of both parties, the affected party may seek the resumption of negotiations on an already concluded contract. If the parties do not agree on new terms, the contract may be cancelled by the court on a proposal from one of the parties. However, it will again depend on the specific contractual relationship and its terms. In a number of more robust contracts, the possibility of danger of a substantial change in circumstances is also contractually excluded by the parties.

Failure to perform caused by a permanent obstacle

In the event that after the conclusion of the contract a permanent obstacle will occur, due to which the obligation (e.g. delivery of goods) cannot be fulfilled, the contract expires. However, the impossibility of fulfilling the obligation is assessed objectively, i.e. in relation to all persons in such a position. In the event that the fulfilment of the obligation would only become more difficult (for example, the delivery of goods with increased costs), the obligation of, e.g., the delivery of goods as such continues to exist. 

Rules that may apply to a contract concluded with a foreign entity

In certain circumstances, the United Nations Vienna Convention on Contracts for the International Sale of Goods (CISG) may be relevant, of which Czech Republic is a signatory in addition to 88 other countries, including China. In the event that your purchase contract is governed by the Vienna Convention, i.e., if your contractual partner is an entity with a place of business in the State that acceded to the Convention and the application of the Convention is not excluded in the contract, special rules will apply to your contract. These 

rules govern in more detail certain aspects, in particular the duration of force majeure, the reporting obligation or the circumstances of force majeure on the part of the subcontractor. In particular, the rule of Article 79 will apply, according to which a contracting party is not liable for failure to fulfil any of its obligations if it proves that that failure was caused by an obstacle which did not depend on its will.

Termination of contract negotiations without penalty

Czech law allows a contract to end without penalty in certain circumstances. It applies that it is at the discretion and decision of the parties, whether the contract will be concluded and with what contents. Thus, in the words of the law, everyone can conduct negotiations on the contract freely and is not responsible for not concluding it. However, there are a few exceptions to the above rule in the law. One of these are the situations where the parties go so far in their negotiations that the conclusion of the contract seems highly likely or practically certain. If such a situation occurs, then the person who, despite the reasonable expectations of the other party, terminates the negotiations on the contract, acts dishonestly (unlawfully). However, even in such a case, the rule of law allows for the end of the proceedings without penalty. However, there must be a fair reason for such a procedure.