The COVID-19 (Sars-Cov-2) Pandemic and its Effect on the Performance of Contractual Obligations
The COVID-19 (Sars-Cov-2) Pandemic and its Effect on the Performance of Contractual Obligations
Following the announcements made on 11 March and 13 March 2020 by the World Health Organization (WHO), according to which the outbreak of coronavirus (Sars-Cov-2) was recognised as a global pandemic and since Europe was declared as its current epicenter, more and more European Countries enter into ‘lockdown’ mode with a view to limit the transmission of the virus and lessen its consequences. In most countries, the private sector has also responded responsibly by adopting working from home policies. Due to the socioeconomic consequences of this pandemic, many questions have been raised regarding the potential effect of the coronavirus pandemic on the performance of contractual obligations and especially, whether it constitutes a ‘force majeure’ event. From the onset, it should be said that the question will eventually be interpreted by the courts, on the basis of the specific circumstances and events of each particular case. Therefore, at this point, only broad conclusions and assumptions can be drawn. No doubt legal advice can be rendered and a potential estimate of the position that a court may adopt varies depending on the specific circumstances of each separate case.
- What is a ‘Force Majeure event’?
The notion of ‘force majeure’ is not expressly defined under Greek Civil law. However, as per well-established case law, a ‘force majeure event’ refers to an unforeseeable event, which may not be avoided even if all reasonable measures are taken and which may not be attributed to the fault of the contracting parties. Typical examples recognised by Greek case law as being force majeure events are non-human induced events, such as earthquakes, floods, hurricanes, etc.
- Does a pandemic constitute a ‘Force Majeure event’?
It may be easily argued that a global pandemic meets the general conditions of force majeure, since it constitutes an unforeseeable non-human induced event, which cannot be avoided, even if all reasonable measures are taken and which may not be attributed to the fault of the contracting parties.
- The effect of a ‘Force Majeure event’ on contractual obligations
In order for a ‘force majeure event’ to affect the obligations undertaken by the parties under a contract, a party must be prevented from performing these obligations because of the force majeure event (which is a question of fact and must be established by the party relying on ‘force majeure’ for the nonperformance of its obligations). As a general rule of Greek Civil law, in this event the party which was prevented from performing its contractual obligation may not be held liable for this nonperformance. However, the parties may freely agree to allocate, and any party may undertake, the risk of a ‘force majeure event’ which may cause nonperformance of contractual obligations (‘force majeure clause’). Such an agreement “overrides” the unforeseeable nature of a ‘forced majeure event’ since the parties had already foreseen and accepted the possibility that such event might occur.
- The content of a ‘Force Majeure clause’
Allocation of risks via a ‘force majeure clause’ must be tacit. In case of doubt, it is reasonably assumed that the parties did not want liability for force majeure incidents. The parties do not have to enumerate any and all unforeseeable and unavoidable events; it might suffice if the parties have provided for any force majeure event or for force majeure events of a comparable scale to an epidemic/pandemic since that would be indicative of the parties’ intention to allocate the risk for such events. Even if these events are not provided for in the ‘force majeure clause’ the circumstances created by the protective measures introduced by an increasing number of European countries might be included (e.g. the suspension of operation of a certain business sector); Greek courts have repeatedly adjudicated that government or other administrative acts compelling individuals to act in a specific manner may constitute a ‘force majeure event’. On the other hand, even in the absence of an explicit ‘force majeure clause’, an allocation of risk may tacitly follow from the circumstances under which the contract was concluded. In this case, a tacit allocation of risk might follow if the contract was concluded after the appearance of the first coronavirus cases in Europe, in which case it could be implied that the parties had foreseen the eventuality of an epidemic or pandemic outbreak in Europe, and accepted it.
- Recommendations to mitigate risk for businesses
In light of the foregoing, due to the extreme circumstances created by the coronavirus global pandemic outbreak and the protective measures (especially the ‘lockdown’) introduced by an increasing number of countries, the following measures are recommended:
– Contracting parties should be very cautious before proceeding with unilateral actions regarding the status of a contract the performance of which is/was affected by the coronavirus outbreak.
– In particular, contracting parties should seek legal advice prior to terminating any contract solely (or mainly) on the grounds of nonperformance of contractual obligations by the counterparty, which (nonperformance) is or may be linked with the ongoing coronavirus outbreak by the other party. In the event that the court hearing the case in the future, adjudicates that this non-performance was not due to force majeure, the termination of the contract would be deemed as ‘invalid’ and the party terminating the contract might be held liable against its counterparty.
– At a first level, both contracting parties should comply with any other contractual obligation whose performance is not prevented by the coronavirus outbreak or linked with contractual obligations which may not be performed.
– Parties which may not perform their contractual obligations due to a ‘force majeure event’ should promptly notify their counterparties of their inability to perform their obligations, invoking the ‘force majeure event’, and take reasonable steps in order to mitigate the effects of the ‘force majeure event’ and the damage which may be caused to their counterparties (even if such obligation is not expressly foreseen in the contract). Non-prompt notification may hold the parties liable for any expenses made by their counterparties with a view to the performance of the contract.
– Parties are encouraged to seek amicable solutions for the continuance or termination of their contract, even in the event that the performance of contractual obligations is not completely prevented by the coronavirus outbreak (and therefore, may not be attributed to a ‘force majeure event’). If this performance is heavily impeded by the coronavirus outbreak, Greek Civil law provides for the possibility of a readjustment of contractual obligations on the basis of the principle of good faith (solely on the extreme condition of the contractual basis of the contract having been changed due to the coronavirus outbreak).
– The ‘force majeure event’ is only temporarily in effect and parties may agree to continue the performance of their obligations after the ‘force majeure event’ ceases to prevent this performance. Therefore, if the parties want to continue their business relationship, they should examine the possibility of agreeing to extend/suspend the performance of their contractual obligations for as long as the ‘force majeure event’ is in effect.
– Since an extra-judicial accord between the parties may not be feasible, documentation and correspondence which support the claim of the performance being (or not being) prevented by the coronavirus outbreak must be recorded, in order to be available for any potential litigation.
– The parties to any future contract concluded during or after the coronavirus pandemic outbreak should tacitly allocate the risks from a pandemic through a ‘force majeure clause’.
Following the announcements made on 11 March and 13 March 2020 by the World Health Organization (WHO), according to which the outbreak of coronavirus (Sars-Cov-2) was recognised as a global pandemic and since Europe was declared as its current epicenter, more and more European Countries enter into ‘lockdown’ mode with a view to limit the transmission of the virus and lessen its consequences. In most countries, the private sector has also responded responsibly by adopting working from home policies. Due to the socioeconomic consequences of this pandemic, many questions have been raised regarding the potential effect of the coronavirus pandemic on the performance of contractual obligations and especially, whether it constitutes a ‘force majeure’ event. From the onset, it should be said that the question will eventually be interpreted by the courts, on the basis of the specific circumstances and events of each particular case. Therefore, at this point, only broad conclusions and assumptions can be drawn. No doubt legal advice can be rendered and a potential estimate of the position that a court may adopt varies depending on the specific circumstances of each separate case.
- What is a ‘Force Majeure event’?
The notion of ‘force majeure’ is not expressly defined under Greek Civil law. However, as per well-established case law, a ‘force majeure event’ refers to an unforeseeable event, which may not be avoided even if all reasonable measures are taken and which may not be attributed to the fault of the contracting parties. Typical examples recognised by Greek case law as being force majeure events are non-human induced events, such as earthquakes, floods, hurricanes, etc.
- Does a pandemic constitute a ‘Force Majeure event’?
It may be easily argued that a global pandemic meets the general conditions of force majeure, since it constitutes an unforeseeable non-human induced event, which cannot be avoided, even if all reasonable measures are taken and which may not be attributed to the fault of the contracting parties.
- The effect of a ‘Force Majeure event’ on contractual obligations
In order for a ‘force majeure event’ to affect the obligations undertaken by the parties under a contract, a party must be prevented from performing these obligations because of the force majeure event (which is a question of fact and must be established by the party relying on ‘force majeure’ for the nonperformance of its obligations). As a general rule of Greek Civil law, in this event the party which was prevented from performing its contractual obligation may not be held liable for this nonperformance. However, the parties may freely agree to allocate, and any party may undertake, the risk of a ‘force majeure event’ which may cause nonperformance of contractual obligations (‘force majeure clause’). Such an agreement “overrides” the unforeseeable nature of a ‘forced majeure event’ since the parties had already foreseen and accepted the possibility that such event might occur.
- The content of a ‘Force Majeure clause’
Allocation of risks via a ‘force majeure clause’ must be tacit. In case of doubt, it is reasonably assumed that the parties did not want liability for force majeure incidents. The parties do not have to enumerate any and all unforeseeable and unavoidable events; it might suffice if the parties have provided for any force majeure event or for force majeure events of a comparable scale to an epidemic/pandemic since that would be indicative of the parties’ intention to allocate the risk for such events. Even if these events are not provided for in the ‘force majeure clause’ the circumstances created by the protective measures introduced by an increasing number of European countries might be included (e.g. the suspension of operation of a certain business sector); Greek courts have repeatedly adjudicated that government or other administrative acts compelling individuals to act in a specific manner may constitute a ‘force majeure event’. On the other hand, even in the absence of an explicit ‘force majeure clause’, an allocation of risk may tacitly follow from the circumstances under which the contract was concluded. In this case, a tacit allocation of risk might follow if the contract was concluded after the appearance of the first coronavirus cases in Europe, in which case it could be implied that the parties had foreseen the eventuality of an epidemic or pandemic outbreak in Europe, and accepted it.
- Recommendations to mitigate risk for businesses
In light of the foregoing, due to the extreme circumstances created by the coronavirus global pandemic outbreak and the protective measures (especially the ‘lockdown’) introduced by an increasing number of countries, the following measures are recommended:
– Contracting parties should be very cautious before proceeding with unilateral actions regarding the status of a contract the performance of which is/was affected by the coronavirus outbreak.
– In particular, contracting parties should seek legal advice prior to terminating any contract solely (or mainly) on the grounds of nonperformance of contractual obligations by the counterparty, which (nonperformance) is or may be linked with the ongoing coronavirus outbreak by the other party. In the event that the court hearing the case in the future, adjudicates that this non-performance was not due to force majeure, the termination of the contract would be deemed as ‘invalid’ and the party terminating the contract might be held liable against its counterparty.
– At a first level, both contracting parties should comply with any other contractual obligation whose performance is not prevented by the coronavirus outbreak or linked with contractual obligations which may not be performed.
– Parties which may not perform their contractual obligations due to a ‘force majeure event’ should promptly notify their counterparties of their inability to perform their obligations, invoking the ‘force majeure event’, and take reasonable steps in order to mitigate the effects of the ‘force majeure event’ and the damage which may be caused to their counterparties (even if such obligation is not expressly foreseen in the contract). Non-prompt notification may hold the parties liable for any expenses made by their counterparties with a view to the performance of the contract.
– Parties are encouraged to seek amicable solutions for the continuance or termination of their contract, even in the event that the performance of contractual obligations is not completely prevented by the coronavirus outbreak (and therefore, may not be attributed to a ‘force majeure event’). If this performance is heavily impeded by the coronavirus outbreak, Greek Civil law provides for the possibility of a readjustment of contractual obligations on the basis of the principle of good faith (solely on the extreme condition of the contractual basis of the contract having been changed due to the coronavirus outbreak).
– The ‘force majeure event’ is only temporarily in effect and parties may agree to continue the performance of their obligations after the ‘force majeure event’ ceases to prevent this performance. Therefore, if the parties want to continue their business relationship, they should examine the possibility of agreeing to extend/suspend the performance of their contractual obligations for as long as the ‘force majeure event’ is in effect.
– Since an extra-judicial accord between the parties may not be feasible, documentation and correspondence which support the claim of the performance being (or not being) prevented by the coronavirus outbreak must be recorded, in order to be available for any potential litigation.
– The parties to any future contract concluded during or after the coronavirus pandemic outbreak should tacitly allocate the risks from a pandemic through a ‘force majeure clause’.
