Contracts and the coronavirus

Contracts are affected by the covid-19 pandemic

In brief:

  • Force majeure means a surprising and unpredictable circumstance that has occurred to a party of a contract that prevents the fulfillment of the contractual obligation.
  • A distinction must be made between the coronavirus pandemic and the subsequent actions of the authorities. Although a coronavirus pandemic may not in itself constitute a force majeure situation, an obstacle such as a force majeure may become actual due to official regulations.
  • Other conditions and possibilities that may be applicable should be explored. For example, a case where the Act on Commercial Leases allows the contract to be terminated if the apartment or part thereof has been ruled out of the tenant’s control.
  • The force majeure can be invoked either generally or by contract. Check what has been agreed in the contract for force majeure, requirements, time limits, and penalties. The appeal should also indicate how the coronavirus pandemic is affecting the fulfillment of contractual obligations.
  • The party relying on the Force Majeure should be able to demonstrate that the performance of the contract was prevented by such obstacle. 
  • In preparing the contract, consideration should be given to whether and in what form a force majeure clause should be recorded.

The pandemic caused by coronavirus (COVID-19) has prompted authorities to take measures to prevent the spread of the virus. Both the coronavirus pandemic and the measures designed to combat it have an impact on all sectors of society, and challenges can be identified in the business sector, particularly in the tourism sector, in the organization of events, and as challenges as well as disruptions in the industrial supply chains. One big question that arises is how the coronavirus and the resulting actions of the authorities, such as restrictions on fundamental rights as a result of the Emergency Powers Act, affect the contractual relationship between parties.

Contractual relationship and binding nature of contracts

In contract law, the fundamental principle and starting point is the binding nature of the contract; that is, the parties are bound to their performance obligations as defined in the contract. Breach of contract can result in liability for damages, contractual penalties, or other legal sanctions.

Although the starting point is the binding nature of the contract, there are exceptions to it, such as the unfairness of the contract, invalidity, nullity, and force majeure.

What is force majeure, and what is the purpose of it?

Force majeure refers to an exceptional, unforeseeable, and overwhelming adversity beyond the parties’ control that impedes the fulfillment of obligations under the contract. A force majeure situation is one that the parties cannot reasonably avoid or overcome. Such obstacles have traditionally been considered to include war, natural disasters, disruption of public transport, a general strike, and also epidemics.

The ultimate purpose of Force majeure is to relieve the affected party of its liability for damages, which would generally be due to the failure of fulfilling the contractual obligations. There is no general definition of force majeure, and evaluation is always case-specific.

Is the coronavirus pandemic comparable to force majeure?

A change of circumstances does not, in principle, justify failure to perform a contractual obligation. If the change of circumstances can be considered to have been caused by an obstacle classified as force majeure, withdrawal from the contract is in principle possible.

The coronavirus epidemic was declared a pandemic by the World Health Organization on March 11, 2020. Although the coronavirus pandemic has caused unpredictable changes in business and contractual relationships, it still may not in itself create an obstacle comparable to that of a force majeure. Instead, the force majeure may be formed from the combined effects of coronavirus pandemic and from the measures taken to control its spread.

Force majeure situation should be such that,

  1. which the party could not foresee or take into account when concluding the contract, and
  2. which cannot be prevented or reasonably counteracted by a party.

It is further required that such circumstance makes the fulfillment of contractual obligations excessively difficult or unreasonable.

The appealing party must be able to demonstrate, in a concrete way, how the corona pandemic has prevented the fulfillment of contractual obligations. For example, in certain situations, where cases of coronavirus have led to sick leaves, it could be an obstacle to fulfilling contractual obligations.

It is also essential to distinguish a situation in which the contract contains a force majeure clause and a situation in which there is no explicit contractual term in place. If an explicit force majeure clause is found, the situation must be interpreted primarily in the light of this condition and the intentions of the parties. The force majeure clause exhaustively lists the situations in which the condition may be applied.

According to the general principle of contract law, the terms of force majeure may also apply where there is no explicit force majeure clause in the contract.

The unfairness of the contract

The force majeure threshold has been set at a high level, yet there are other grounds that can be appealed. Such may be the unfairness of the contract. For example, it would be unreasonable to have an event spontaneously canceled due to an underlying governmental order and still have to pay subcontractors, as agreed.

Appealing to the unfairness of a contract is an exception, the application of which requires case-by-case consideration.