Due to the rapid spread of Covid-19, the World Health Organisation has recently declared that we are facing a pandemic and thus rose the level of the threat above that of a Public Health Emergency of International Concern that it had announced at the end of January. During the last week, the new coronavirus has had a rapid spread in Romania also, and the total number of positive results recorded is growing continuously.
In response, the authorities have made a series of scenarios and action plans that involve the taking of (more and more) restrictive measures. Although absolutely necessary to slow down the spreading of the pandemic, they are inevitably going to affect the citizens’ rights and liberties.
The measures that have been taken affect certain companies directly (e.g. aerial transport operators, event organisers, private education institutions, small stores organised within or in the nearby area of education institutions or the cleaning companies operating within such institutions) and, in certain cases, may imperil their ability to execute the contractual obligations undertaken towards their contractual partners (be they suppliers, clients, lessors or even employees).
According to the Civil Code, the agreement is the “the law of the parties” and its performance is not optional for the contractual partners, it is mandatory for them. Thus, as a matter of principle, any non-performance triggers the contractual liability of the party in default. As a matter of exception, the law allows debtors (parties who must execute contractual obligations) to benefit, under certain conditions, from being exonerated from the performance of their contractual obligations.
The coronavirus pandemic as well as the measures taken by the authorities in this context will lead, on a case by case basis, to delays, difficulties and/or additional significant costs or even to the impossibility of executing contractual obligations. Such situations may represent, in certain circumstances, objective justifications to suspend the performance of one’s obligations, to protect oneself against indemnity claims or even to terminate the agreement.
Thus, if the performance of the agreement becomes temporarily or definitively impossible, the concept of “force majeure” is activated. Furthermore, if due to unpredictable events, the performance of an agreement becomes excessively burdensome for one of the parties, such party may rely, under certain circumstances, on another exception from the compulsory nature of agreements, namely on hardship.
What is force majeure?
Although the local market is not governed by agreements of a sophisticated nature, in their largest extent they include a force majeure clause in the agreement’s final section, under “Miscellaneous”. The typical clauses have the wording used by the Civil Code, indicating as force majeure causes such as external, unpredictable, absolutely invincible and inevitable events. In other words, a force majeure situation is that which is generated by circumstances beyond the parties’ control and that may render the performance of the agreement impossible. A fortuitous case, on the other hand, is that event which is relatively unpredictable, inevitable and invincible for the liable person (some situations that do not represent force majeure may, however, qualify as fortuitous case).
Usually, force majeure refers to situations such as extreme weather, riots, war, terrorist attack or invasion, governmental or regulatory actions, famine, epidemics and/or embargos. Although less common to see force majeure clauses that expressly include a global health emergency, a pandemic or epidemics, we believe that under certain circumstances even such events – such as the current coronavirus crisis – may be included in the applicability area of a force majeure clause. Hence, force majeure presupposes an unpredictability of an objective, even of an absolute nature.
However, the case law has traditionally adopted a relatively restrictive conception in qualifying force majeure facts. For example, it was established that events such as the following are not force majeure causes: strikes, when they were foreseeable, failure to timely receive budgetary funds granted by the municipality, financial blockage (not being an unpredictable and inescapable circumstance that renders it absolutely impossible for the debtor to fulfil its obligations), lack of available financial resources, atmospheric conditions consisting of low temperatures in Romania or prolonged drought (as they can be predicted), the extinguishment of the object matter of a leasing agreement (as the debtor’s obligation was to pay an amount of money, and moneys, as generic goods, do not get extinguished by fortuitous case or force majeure).
Nevertheless, recently, the tendency seems to change, as the courts of law have become more and more tolerant in assessing force majeure.
Is the coronavirus a force majeure case?
The current conditions of trade activities require a more relaxed approach in relation to the assessment of clauses that trigger obligation performance exemptions, even if temporary ones, precisely to guarantee that contractual relations have a decent level of stability.
Thus, the Covid-19 epidemics may represent a force majeure event if it stands the test of the conditions provided by the law: (i) the event is certainly external from the parties’ will; (ii) unpredictability must be analysed relative to each particular case invoked, thus, although one may argue that the threat of Covid-19 had already started last year in December, in reality the local market is only just beginning to feel the concrete effects of the pandemics; (iii) the inescapable nature of the pandemics must again be assessed on a case by case basis, and the parties must make a concrete analysis of the generating event and of the causality link between the event and the obligation that needed to be executed. Below are some real-life examples.
In any case, we must emphasize that no external event can justify a fortuitous impossibility to perform in relation to generic goods, such as the obligation to pay an amount of money.
The impact on labour agreements. The Labour Code expressly stipulates that employers can invoke force majeure to suspend labour agreements by the operation of law. For example, if the authorities will decide to close commercial centres, retailers will be forced to invoke force majeure against their employees and possibly even against the owner of the commercial centre. In what concern the employees, the suspension determines the termination of labour performance and the non-payment of the salary. Separately, the available measure for employers is that of unilaterally and temporarily changing the workplace, as well as the obligation to give free days to those employees who have children, throughout the period the schools are closed. For example, an aerial transport operator would not be able to invoke force majeure against its personnel ensuring flights to Italy, if such personnel can be relocated to other flights. For these reasons, the measure must be thoroughly assessed before being implemented, as recommended by the interim minister of labour on Thursday, 12 March. Employers must consider that such a measure may be challenged in court and, if the claim is successful, employees will have the right to be fully indemnified (even for other damages generated directly by a possibly illegal measure), and would even be able to receive moral damages.
It is, of course, to be expected that especially in what concerns employees, the state would intervene with special protection measures and possibly by new legal provisions to protect them in case of unemployment.
The impact on the agreements with suppliers. The absolute impossibility to perform the agreement will have to be analysed on a case-by-case basis. It is very likely that a supplier of authentic Italian products who had to travel to the affected areas to purchase and subsequently deliver the promised products, will invoke travel restrictions as a cause of force majeure, if he proves that he could not purchase those products from other areas / by other means. Also, a supplier of face masks or disinfectants may invoke the unexpected increase in orders to justify delays in delivery. In contrast, manufacturers of furniture or auto parts should not (yet) be able to rely on this (the situation may change if authorities decide to close the factories, similar to the measures taken in Wuhan, China).
The impact on credit agreements. Companies should review the clauses of existing credit agreements in order to assess the ability to comply with their medium- and long-term conditions, given the specific disruptions in their activity. To the extent that the performance of the agreement would become excessively burdensome due to an exceptional change of the circumstances considered at the time of its conclusion, which would render manifestly unjust to force the debtor to perform its obligation, the debtors may invoke hardship, and the court may order the amendment of the agreement in order for the resulting losses and benefits to be fairly distributed between the parties, or even the termination of the agreement (please note that, inter alia, the debtors need to have tried in advance, within a reasonable timeframe and in good faith, to negotiate the reasonable and fair amendment of the agreement, so, already, these formalities should be started in relation to the banks).
The impact on lease agreements. As long as the use of the good is not affected by the external case invoked, the debtor cannot be exempted from paying the rent. For example, in a recent case, the tenant invoked the impossibility of performing the rent payment obligation (which concerned mountain pasture lands) due to an epidemic (“blue tongue disease”) that caused him to sell the livestock that grazed on those lands. The courts considered that there is no fortuitous impossibility to use the rented land, which could, in fact, be repopulated with other livestock. However, if due to a measure ordered by the authorities, access to certain office buildings is prohibited (e.g. disinfection carried out by the DSP (Public Health Directorate) as a result of a positive case/positive cases), then force majeure may be invoked in order to suspend the performance of the lease agreement.
Formalities and effect
If an event (or series of events) activates a force majeure clause, the party relying on it may suspend, delay or may be discharged from its contractual duties, without being held liable.
However, in order for force majeure to operate, it is not sufficient for the party to invoke such a clause. First, the interested party will have to analyse the wording used in the agreement, especially for those where the force majeure clause was negotiated and limited. If the parties did not stipulate anything in the agreement, the legal provisions will apply. Alternatively, force majeure will not apply if expressly agreed as such by the contractual parties.
Secondly, one needs to analyse whether the aforementioned conditions are complied with (although there are some older opinions according to which the mere specification of the events in the agreement is sufficient to qualify the event as force majeure). Moreover, certain agreements impose a series of preliminary conditions, which imply the notification of the contractual partner (failure to comply with such a notification in due time may trigger the revocation of such right of the interested party).
In order to benefit from the effects of force majeure, it is essential for the event qualified as such to have occurred before the obligation arising from the agreement to became due or before the debtor is placed in default for non-performance (e.g. the payment of outstanding rents will not be exempted).
In addition to invoking force majeure, many courts also require that the party relying on force majeure prove that it attempted to perform the agreement despite of the occurrence of the event and sought to identify an alternative source of performance.
If stipulated by the agreement, the interested party will also have to request the release of a certificate by the Chamber of Commerce and Industry, certificate which is not free of charge. It seems that in China more than 3,000 such certificates have been issued so far. They do not guarantee the qualification of the event as force majeure. The ultimate test will be carried out by the court/arbitral tribunal, as the case may be.
Therefore, the contracting parties must remain cautious before declaring the existence of a force majeure event based on the recent coronavirus outbreak. Such a declaration, if it proves to be unreasonable, will result in the declaring party’s obligation to indemnify the injured partner and to bear the legal costs.
History has shown that in most major crises, panic has created more damage than the crisis itself, because the fear of the unknown is likely to cause us to unreasonably and irrationally exaggerate the potential effects of those situations, thus forcing us to take decisions no longer based on reason, but on instinct and emotion.
Although the means made available by the legislator are welcome in order to address real cases of impossibility to perform ongoing agreements, our recommendation is that the implementation of any measure be preceded by a thorough analysis of the impact on the relationship with the contractual partners (risk of causing a chain damage reaction) and, above all, the risk of going to court and losing the trial to qualify the event invoked as force majeure.