We follow with attention the development of the epidemiological crisis, which is already taking a great toll on business worldwide. The spread of a global pandemic of this magnitude was hardly anticipated by anyone, and this in certain cases has its legal implications when it comes to non-compliance with contractual obligations.
Driven by the many questions from our clients and partners, and in an effort to provide you with a summary of the legal consequences for the business, we have prepared this presentation in the form of questions and answers (not representing a legal statement).
- What is the Force Majeure?
Force Majeure is an unforeseen and unavoidable event of extraordinary nature. It occurs after the conclusion of a contract and makes the fulfilment of the obligations thereof objectively impossible – until the event exists. Force Majeure circumstances include events such as natural disasters, accidents, wars, earthquakes, fires, as well as administrative acts of state and municipal authorities, including legislative acts.
- Can the declared state of emergency regarding the spread of COVID-19 be considered as Force Majeure?
In general, it could be assumed that the spread of the virus is an unavoidable and unforeseen event. Completely different story is whether a contracting party can invoke this as a Force Majeure regarding its own obligations, thereby excusing its non-performance.
Assessment of this should be done on a case-by-case basis, taking into account the time of concluding of the contract, its subject, the content of the obligations of the parties and especially – the impact of the event and its consequences on the non-performing party’s ability to meet its obligations.
- Does it matter which law governs our contract with a foreign-based entity, when we claim a Force Majeure event has occurred?
Yes, the applicable law governing our relations with the other party is undeniably relevant. Some legal systems define the content and consequences of Force Majeure differently from the Bulgarian law.
In this regard, and as far as in the contract the applicable law has not been determined explicitly, it should be established pursuant to the rules of private international law. This will then enable the parties to determine what are the implications of the applicable Force Majeure clauses.
- What if our contract does not contain a Force Majeure clause?
In case that the contract does not include a clause relating to such events, then the general rules of the law shall apply. In other words, Force Majeure would normally find application.
- Should the Force Majeure clause explicitly include events such as pandemic, so that we can invoke it?
In most commercial contracts, containing Force Majeure clauses, the listing of those events is non-exhaustive. Although pandemic might not expressly be referred to, inasmuch as the spread of the virus constitutes an unavoidable and unforeseen event making a party unable to fulfil its obligations, such event would be deemed a Force Majeure matte.
- Can we always invoke Force Majeure and not fulfil our contractual obligations?
Referral to Force Majeure is only possible, when:
- The event occurred after the conclusion of the contract;
- The party which is unable to fulfil its obligation due to Force Majeure has notified the other party in writing within a reasonable time of the Force Majeure event and its consequences;
- Implementation has become objectively impossible due to circumstances directly related to the Force Majeure.
- What are the consequences of non-fulfilment under the commercial contract caused by Force Majeure?
For the duration of the Force Majeure, the implementation of the obligations shall be suspended and the party invoking the Force Majeure shall not owe the other party compensation or default interest. Should the Force Majeure last for long enough that parties no longer need fulfilment of their contract as initially agreed, they may terminate it.
- Can we excuse our failure to fulfil our obligations claiming we are out of money, when referring to Force Majeure?
The fact that a party does not have money to fulfil its obligation, does not waive the party’s responsibility, also in Force Majeure events.
- Can we claim a refund of prepaid goods or services we won’t receive within an agreed deadline?
It depends on the specific contract and the obligations arising thereof. As a rule, if the implementation of the contract has become objectively impossible, then the recipient of the amounts should refund them, since their retention would represent an unjustified enrichment.
- How can we handle a situation in which the terms of our contract have become economically unbearable as a result from a Force Majeure event?
Economically unbearable terms are present if circumstances that the parties could not and were not obliged to anticipate occur thereby making the contract unfair.
In such cases, one can request the court to amend or terminate the contract – in whole or in part. Such approach is possible when, after the conclusion of the contract, the balance of the parties’ obligations has changed substantially.
- What other options are there to overcome the situation?
The best option is to renegotiate the existing contracts – voluntarily, through direct negotiations between the parties, or through mediation. A possible outcome is the termination of the agreement by mutual consent.
- What should we pay attention to if we are to sign a contract while in a state of emergency?
In the current situation, it is strongly recommended that the parties are very cautious regarding any commitments they intend to make.
Due to the present emergency situation, parties are expected to make such commitments in their contracts that are feasible in the light of the existing circumstances. Failure to do so would make it difficult to invoke Force Majeure to excuse their failure to perform as obliged.
We shall continue to keep you on the loop with all important legislative changes and implications occurring as a result of the outbreak of COVID-19.
Do not hesitate to contact us, regardless if you have questions related to the current state of emergency, or you need legal assistance with any another legal matter.