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Execution of Contractual Obligations During the State of Emergency

Execution of Contractual Obligations During the State of Emergency

Serbia
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When it comes to performance of contractual obligations, the basic postulate of the Serbian general contract rules is that such obligations must be duly executed – conscientiously, in the manner predicted by the contractual provisions, and timely – within a deadline stipulated by the contract.

But, what happens when the fulfillment of contractual obligations is not possible due to objective circumstances that may be qualified as the “force majeure”?

Force majeure is a legal notion that refers to a certain event that could have not been foreseen, avoided or surmounted.

That is the case with the declaration of a state of emergency not only in the Republic of Serbia, but globally, due to the pandemic of the COVID – 2019 virus, which resulted in the closure of borders and lockdown.

In such context, if the debtor (e.g. a legal entity that, as the consortium leader, is obliged to produce and deliver software to the contracting authority, for which production the participation of other members of the consortium is necessary) in the performance of the contract requires the physical presence of its associate(s) from abroad, which is not possible in the aforementioned circumstances, and consequently leads to the impossibility of fulfilling the contractual obligation in a timely fashion during the state of emergency, what is the possible fate of the contract? Does the state of emergency excuse the debtor and, on its own, maintains the contract in force?

Firstly, answers to the previous questions depend on specific type of contract at hand.

Namely, if termination of the contract initiated by one of the contractual parties cannot occur in an inconvenient time by operation of law (which as such applies only to lease or order agreements), such contractual relationship is rather safe during the state of emergency which, in this case, may be regarded as the „inconvenient time“.

Absence of the aforementioned statutory restriction on cancelation of a specific contract, naturally, requires that the focus must be shifted to the terms of the contract itself, primarily to its essential elements.

The situation is, to a certain extent, flexible if a deadline for fulfillment of obligation is not an essential element of the contract, since in this case the debtor reserves the right to fulfill his obligation after the expiry of the deadline, and the creditor to demand its fulfillment. But, if the creditor wishes to terminate the contract after the deadline, it must leave the debtor an adequate subsequent deadline for fulfillment.

In the case of a contract whose subject matter are successive obligations, which are executed at certain intervals, and one party fails to fulfill one obligation, the other party may, within a reasonable time, terminate the contract with respect to all future obligations, but only if, given the circumstances, it is obvious that the future obligations shall not be fulfilled either.

In any case, the debtor is “safe” if the major part of his contractual obligation has already been fulfilled, since the contract cannot be terminated due to the non-fulfillment of an insignificant part of the obligation.

However, for fixed (time is of the essence) contracts, where fulfillment of an obligation within a specified timeframe is an essential component of the contract, either by the nature of the transaction or the contractual parties have so provided in the contract, the situation can become “dramatic” – if the debtor fails to fulfill the obligation within the agreed period, the contract is terminated by operation 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. So the creditor can give another chance to the defaulting party. In such a case, when the creditor has requested fulfillment and has not received it within a reasonable, new deadline, he may declare that he is terminating the contract.

It follows from the foregoing that the fate of fixed contracts is most vulnerable in times of emergency, because the contract is terminated ex lege, regardless of the reasons for non-performance of the contract that appear in this case. In this situation, the only person who can save the contract is the creditor.

The situation becomes, even more so, particularly complicated if even a mere modification of the contract requires a certain procedure, such as with awarded contracts as a result of public procurements, where, first, the reason for the modification of the contract needs to be provided for by the contract itself, the tender documentation or a special regulation. Secondly, modification of public procurement contracts is time consuming, as it involves following the prescribed process which completion may be significantly impeded or paralyzed due to extraordinary circumstances.

The inability to execute the contract (in general and henceforward) should be distinguished from the “suspension” of performance in question, i.e. temporary postponement of execution until normalization of the situation, since the contract will be possible to execute upon termination of the state of emergency. Impossibility does not exist if fulfillment, due to changed circumstances, is only significantly impeded, but it is still possible, or will be possible in the future. However, if the creditor has no interest in the debtor later fulfilling his obligation, then this temporary impossibility becomes permanent, since in that case the creditor may terminate the contract, thus terminating the debtor’s obligation. The same principle applies to partial and complete impossibility of fulfillment – if partial fulfillment does not meet the creditor’s needs, complete impossibility is considered to exist.

Since force majeure has no automatic effect on extending the deadline for performance of a contractual obligation, this means that the creditor may nevertheless terminate the contract due to untimely performance, regardless of the state of emergency, although that is not in the spirit of good business practices to which each party in contractual relationship is obliged to abide by.

But the fact that, upon conclusion of the contract, circumstances that the debtor could not prevent, eliminate nor avoid have arisen (vis major or force majeure), affects the debtor’s exemption from liability for damage suffered by the creditor due to delay in performing the contractual obligation, and in this situation the debtor should be exempted from damages compensation under general contract and tort rules , regardless of whether the contract is terminated or is still in force.

Force majeure has the same effects on the contractual penalty payment – the debtor will not owe the contractual penalty if the non-performance or delay happened due to a cause for which the debtor is not responsible.

Therefore, termination of fixed contracts whose object is delivery of goods or provision of services to a creditor during a state of emergency is not prohibited, but depends on the will, interests and needs of the creditor himself, so the power to keep the contract in force is in creditor’s hands. However, a state of emergency constitutes an excusable circumstance for the debtor in respect of the contractual penalty (the debtor would not pay the contractual penalty if it proves that the delay in the performance of the contract / current inability to execute is justified and caused by objective circumstances for which the debtor is not responsible) and excludes the debtor’s liability for damages which the creditor could otherwise claim as a result of this course of events, but only to the extent that the actual damage was actually caused by force majeure.

However, there are no binding mechanisms that, in the case described above, would force either party to remain in a contractual relationship merely because of a state of emergency, nor the general contract rules require or justify delaying the contractual obligation performance due to the latter –  so keeping fixed term contracts in force is only possible if the contracting parties so agree.

By  Stojkovic Attorneys

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