Contributed by Ijdelea Mihailescu
How might businesses in your jurisdiction be impacted by the Covid-19 pandemic?
Certain businesses have taken a severe hit and the entire business community is worried about the final toll this will take both at the individual company level and on the overall economy. Like everywhere else, the industry most affected is tourism, as the COVID-19 pandemic has led to huge losses for all companies active in this field (especially travel agencies and hotels), many foreseeing bankruptcies on the medium and long terms. Certain travel agencies have already closed their businesses and suspended employment agreements. Restaurants and shops of any kind (except for supermarkets and other shops selling groceries or/and other necessary products) are not far behind and, as of March 16, 2020, Romania is in a state of emergency, with many having already temporarily closed or reduced their programs. The other most-affected industry is transportation (especially international transportation) which is frozen, most definitely leading to huge losses for the two Romanian airlines as well as other transport companies.
Probably, the flip side is that some companies will be profiting in the short term from the large sale of certain products but, however, in the long run, everybody will suffer losses.
Through the Presidential Decree by means of which the state of emergency was declared on March 16 for a 30-day term, various general measures have been enacted in order to provide some temporary support to both employers and employees. However, the substantial measures meant to offer some kind of support scheme for businesses are expected to be further enacted by the Government.
In your jurisdiction, if it becomes impossible for a party to perform its contractual obligations because of an external event beyond its control (such as the Covid-19 pandemic), can that party cancel its contract?
As per the Romanian Civil Code, the following rules apply:
- In cases of force majeure or fortuitous event, a party is exonerated from liability.
- For certain agreements (such as a transportation agreement) the law provides that only force majeure events exonerate a party.
- If the force majeure or fortuitous event is permanent, the contract shall be terminated by law.
- If the force majeure or fortuitous event is not permanent (such as the COVID-19 pandemic), the contract may only be suspended, providing that the obligation can still be performed subsequent to the cessation of the force majeure or fortuitous event, as the case may be.
- If the execution of a certain obligation can be effectively performed only on a certain date or period (within the COVID-19 pandemic), the rightful party may request the termination of the contract.
- Neither force majeure nor a fortuitous event can protect contractors from liability in relation to obligations regarding the supply of generic goods (such as money). However, the proper qualification of goods as being generic should be assessed considering the overall effects of the COVID-19 pandemic as it might be that goods normally considered generic will be generic no more.
Force majeure is defined as "any external, unpredictable, absolutely insurmountable and unavoidable event" while a fortuitous event is defined as "an event that cannot be foreseen nor prevented by the person who would have been called to respond if the event had not occurred." As per the applicable case law and legal literature, both events need to unpredictable, the main difference being that force majeure needs to be also external and absolutely insurmountable and unavoidable while a fortuitous events need to be solely insurmountable and unavoidable for the said party.
Contracts can include specific clauses which extend or limit the legal provisions related to force majeure and fortuitous event. Usually, contracts provide for exoneration of liability only for force majeure (excluding fortuitous event) and include a detailed process to be followed (notifications, timeframe in which the contract can be suspended and conditions in which it can be terminated). Although not common, contracts can provide that a party shall be liable even in case of force majeure.
Thus, having in mind the actual particularities of the contract (object and moment of execution) as well as its provisions (if any):
- COVID-19 pandemic might be considered force majeure, a fortuitous case, or none of the above;
- A party's liability may or may not be triggered liable and such party may or may not be entitled to cancel the contract.
Please see below two examples:
- If a supply contract was executed in 2019, it is likely that certain cases of failure to comply with the supply obligation will be considered force majeure or a fortuitous event;
- If a supply contract was executed in March 2020 (when the potential effects of the COVID-19 pandemic could have been envisaged), it is very unlikely that any failure to comply with the supply obligation will be considered force majeure or a fortuitous event.
In your jurisdiction, if a party’s performance of its contractual obligations is adversely affected by an external event beyond its control (an “FM Event”) but does not become completely impossible, can that party typically seek relief from compliance with its obligations?
As explained above:
- If the contractual obligation does not become completely impossible in the sense that it can be performed at a future date in time, and in the absence of any contradictory contractual provisions, the contract shall be suspended and none of the parties shall be liable for the respective delay.
- If the event beyond the party’s control was not absolutely insurmountable and unavoidable, it may constitute a fortuitous event (as opposed to force majeure) making it probable that the party will not be able to seek relief (depending on the contract's object and related provisions).
- If the event does not constitute an fortuitous event or if it does but the affected party remains liable, the affected party may try to amend or terminate the contract. The grounds for such claim would be the hardship clause, i.e. the right to terminate or amend the contract as the obligations have become substantially more onerous due to unpredictable change of events leading to an inequitable distribution of risks and contractual balance. This will not be possible if the contract expressly excludes the hardship clause.
If yes, what considerations should be borne in mind by such parties, in particular in relation to:
Any notification obligations (Is the affected party typically required to notify any counterparties of the FM Event within a specific time period?)
The other party must be notified as soon as possible in relation to the FM Event. What is the meaning of “as soon as possible” depends on case by case basis but usually it means within maximum one day since the party was aware of the FM Event assuming that such does not prohibit him also to notify (this is not the case for Covid-19 pandemic)
Failure to notify in due time may trigger contractual liability for any damages occurred due to the notification delay.
Any causation requirements (Is the affected party typically required to demonstrate that it would have performed its contractual obligations but for the FM Event?)
The failure to comply with the contractual obligation must directly derive from the FM Event. This causation requirement must be proved by the affected party.
It is possible for the party to request a certificate attesting the existence of force majeure, issued by the Chamber of Commerce and Industry of Romania. This would represent an extra-judicial proof of causation requirement, but it can be challenged in front of the courts of law.
However, force majeure cannot be used as a reason for the delay/refuse to comply with a contractual obligation if this would have been the case also in lack of the FM Event. Thus, the affected party must invoke the FM event in good faith.
Any mitigation obligations (Is he affected party typically required to demonstrate that it took specific steps to avoid the impact of the FM Event as far as possible?)
The affected party should take specific steps in order to avoid the impact of the FM Event. Moreover, usually, this specific obligation is included in contracts.
Thus, if no appropriate steps have been taken, the debtor shall be liable for the damages causes by its lack of action.