Effect of emergency measures on business relationships

The series of governmental resolutions adopted in response to the coronavirus epidemy has a substantial effect on all aspects of business. Below we summarise the main legal aspects of business obligations/relationships that may be relevant in the current situation.

Agreements must be kept, even if their performance becomes more onerous for one of the parties. However, there are exceptions. When analysing the effect of emergency measures on contracts, it is necessary to review, on an individual basis, specific clauses (if any) concerning the subsequent impossibility of performance or substantial change in circumstances. When concluding new contracts or amending them, it is recommendable to carefully consider using these clauses, while keeping in mind that the current state of emergency can no longer be considered an unforeseeable circumstance.

It is also important to keep in mind that the success in a dispute regarding the interpretation of a contractual clause or damage compensation usually comes late and may not save your business. On the other hand, timely and open communication with business partners and renegotiations of contractual conditions may have immediate effect. Another aspect of concluding contracts that becomes very relevant under present circumstances is concluding distance contracts (a separate text on this issue is being prepared).

Substantial change in circumstances (Sect. 1764 et seq. of the Civil Code) 
If a substantial change in circumstances creates a gross disproportion in the rights and duties of the parties, the affected party may demand renegotiation of the contract, within two months – first from the other party and, if unsuccessful, even in court. 
However, the application of the legal provision on a substantial change in circumstances has often been excluded by contracting parties in their contracts, thereby in effect assuming on themselves the risk of any changes in circumstances.

Force majeure 
Another relevant legal concept is force majeure. In the event of force majeure, which the current situation surely is, the Civil Code allows, for instance, to withdraw from a contract in some cases. Similarly, a force majeure event may suspend the running of a limitation period, and it is also relevant for assessing claims for damage compensation.

Subsequent impossibility of performance (Sect. 2006 et seq. of the Civil Code) 
If it becomes impossible to perform/discharge a debt, the contractual obligation as such is extinguished by operation of law. However, this only applies if performance is not even possible under more difficult conditions, at higher costs, with the help of another person, or after a determined period. The impossibility of performance must be proven by the party unable to perform, which also has to notify the other party of this without undue delay, otherwise it shall be liable to them for the damage caused by the default. If the impossibility to perform is only partial, it is necessary to consider whether partial performance would be of any value for the creditor.

When the contract is silent…
All of the above concepts only apply unless the parties to the contract have regulated their position differently from the law or have simply excluded the application of any of these provisions of the law in the contract. It is therefore necessary to carefully analyse each specific contractual arrangement.
Attention must also be paid to clauses (if any) regarding sanctions, such as contractual penalties or special arrangements concerning damage compensation.

Changing the contract
If the provision of law regulating a substantial change in circumstances is applied, the party adversely affected by the change may demand a change to their obligation. If an agreement is not reached, the claim may be asserted in court. Yet, the court will not be bound by the parties’ proposals in its decision-making and has considerable discretion – obligations may thus be changed, or even cancelled altogether.

Of course, if the parties agree, it is always possible to amend the content of the contract to fit the changed circumstances – within the boundaries of law.

Damage compensation 
If any damage is incurred, we recommend first remembering that it may be covered by insurance. If there is no such coverage, consider claiming damage compensation from the other party, or even from the state.

There is also a special case of force majeure, whereby the person that has inflicted a damage may be released from the duty to provide compensation if they prove that they were temporarily or permanently prevented from fulfilling their contractual duty due to an extraordinary, unforeseeable and insurmountable obstacle created independently of their will. As regards the supply/performance itself, it is still necessary to consider its (im)possibility.

Thus, if a contractual supplier is in default in direct connection with the state of emergency and related measures, it is possible that none of the parties will be liable for any resulting damage.
Under the Crisis Act (No. 240/2000 Coll.), the state must compensate corporate entities and individuals for damage caused in causal connection with emergency measures adopted.

The claim must be made in writing, within six months. So far, the general application of this provisions remains questionable. Making the claims, and, above all, supporting them, will certainly be a challenge, as each claim will most likely have to be reviewed in detail, and possibly asserted in court. However, it is also possible that the state will offer some ad hoc compensatory measures.

Recommendations 
If your business has been affected, a recommendable approach may generally be summarised as follows:
- analyse the situation without delay, including a review of contracts concluded and identification of immediate risks
- take all necessary and possible steps to prevent damage
- communicate adequately with your contractual partners
- document all the above steps sufficiently.

Please contact us if you have any further questions.
 
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