Coronavirus: Effect of the Epidemic on Contractual Obligations
What to do when you cannot fulfil your contracts
What to do when it is impossible for business entities to meet their contractual obligations due to the coronavirus COVID-19 epidemic or related measures imposed by the government? We have summarized typical real-life scenarios relating to the epidemic and its effect on contractual rights and obligations.
Items to consider
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.
If in the situation described there is no possibility for a debtor to fulfill his contractual obligation in a timely manner (e.g. to obtain raw materials by other means), different situations may arise.
Firstly, if a deadline for fulfillment of obligation is an essential element of the contract (by contractual provision or by the nature of the transaction), then the expiry of the deadline means that the contract is terminated by force of the law.
However, the creditor may (but is not obliged to) maintain the contract in effect if, upon expiration, without delay, the creditor informs the debtor that he requires the performance of the contract. If the obligation is not fulfilled even within a reasonable new deadline, the creditor may terminate the contract.
Similarly, if the deadline for fulfillment of obligation is not an essential element of the contract, the creditor may request, and the debtor has the right to fulfill his obligation even after the deadline. However, if the creditor wishes to terminate the contract after the deadline, it must leave the debtor an adequate subsequent deadline for fulfillment.
Since there is no definition of a reasonable or appropriate deadline, these deadlines represent legal standards that are interpreted according to the specific circumstances of each single situation.
When it comes to liability for damage suffered by the creditor as a result of default or delayed fulfillment of contractual obligations, the debtor can be released from liability for damage only if he proves that he has not fulfilled or he has been late with fulfilment of his obligations due to circumstances that he could not prevent, eliminate or avoid after entering the contract. In this respect, the circumstances resulting from the pandemic / epidemic of the new coronavirus may in principle be regarded as force majeure, but this is subject to proof in each individual case, ie. pandemic itself does not necessarily lead to the conclusion that the debtor was not able to properly fulfill his obligations.
2. I have entered into a contract before 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?
In this situation there may be a possibility of applying the change of circumstance clause (rebus sic stantibus). Namely, Serbian contract law provides that if, after the conclusion of the contract, following circumstances arise:
- That make it difficult for one of the parties to fulfill the obligation, or
- The purpose of the contract cannot be achieved because of them,
And in both cases it is obvious that:
- The contract no longer corresponds to the expectations of the contracting parties, and
- It would be, according to the general opinion, unfair to maintain it in force in its present form,
the party which has difficulty in fulfilling obligations, or which cannot accomplish the purpose of the contract, may request termination of the contact.
However, a contractual party does not have this right, if
- It was obliged, at the time of the conclusion of the contract, to take these circumstances into account (an epidemic, by its nature, does not fall under the obligation to be taken into account, however, we believe that there may be exceptions as well - namely, the question arises whether the party that concluded the contract before an epidemic was declared in its territory, but after the epidemic began to spread from China was obliged to take this into account, etc.),
- The circumstances could have been avoided or overcome, or
- If the circumstances arose after the deadline for fulfilling of obligation had expired.
It is important to note that the other party has the power to leave the contract effective by offering or agreeing to modify the relevant terms of the contract. In this regard, the new situation, provided that the above conditions are met, gives an opportunity to raise the issue of contract modification.
If there is no consent of the parties, the court shall decide on the termination or amendments of the contract, taking into account certain statutory circumstances.
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?
In this case, the key question is in which volume the obligation can be fulfilled. Namely, the contract cannot be terminated due to failure to fulfill only a small portion of the obligation.
However, if the part of the obligation that cannot be fulfilled is not insignificant, and the inability to complete this part is due to an event that is outside the responsibility of either contractual party an epidemic could potentially be considered as such an event), the other party may terminate the contract if the partial fulfillment does not meet its needs. Otherwise, the contract remains in force and the creditor's obligation is reduced proportionately.
In case the fulfillment of contractual obligations became difficult, but not impossible, the possibility of applying the change circumstance clause, described in answer to question 2, should be considered.
4. I have entered into a contract with a foreign entity. Are the above rules any different?
Described rules are primarily regulated by the law of the Republic of Serbia. Therefore, if Serbian law is applicable to a particular contractual relationship in accordance with specific contract and rules of private international law, aforementioned rules could apply.
In addition, under certain circumstances, with respect to sale of goods contract, the United Nations Convention on Contracts for the International Sale of Goods (“CISG” or Vienna convention) signed by 89 countries worldwide, including Serbia, may be applicable. These rules stipulate in detail certain aspects of relationship regarding the sale of goods, such as conditions for discharge from liability due to force majeure, obligation to report such circumstances, the consequences of contract termination, etc.