The economic and legal risks brought on by the coronavirus are manageable. The possible solutions are described in the following detailed article by our member, Szabó Gergely Gábor Law Office.
The WHO declared a global health emergency on 30 January 2020. On 28 February 2020 the risk of impact was raised from high to very high. The virus has been identified in many countries now, including Hungary. The spreading of the virus and the actions and measures taken in response have major implications for international trade and, in several countries, on day-to-day life as well. Contracts are becoming increasingly difficult or even impossible to perform.
Contracts may be affected by Force Majeure or they may have become impossible to perform. Furthermore, in cases where one of the parties is not willing to agree on amendments to the contract the other party may take the case to the court to have the desired amendments ordered.
In the Hungarian law (and, in other European continental legal systems) Force Majeure is defined as a circumstance or circumstances, beyond the control of the person in default, not foreseeable at the time of the conclusion of the contract, the avoidance or averting of which cannot be expected of such party. Invoking Force Majeure, if justified, rules out liability for breach of contract (e.g. delay in performance). In the Hungarian and the continental legal practice epidemics and the blocking of transport routes are definitely regarded as Force Majeure events.
In case of a legal dispute however, the party invoking Force Majeure must put forth sufficient evidence. All circumstances of relevance to the case need to be examined to determine whether the criteria of Force Majeure are actually met and whether the obstacle preventing contractual performance came about as a circumstance beyond the control of the party concerned. Liability also prevails where the obstacle concerned (e.g. actions or measures taken by the state) should have been objectively expected at the time of the conclusion of the contract (e.g. in the case of a delivery contract concluded in awareness of an existing epidemic) or actions to avert the circumstance should be rightly expected (e.g. procurement from another source).
Common law does not – in contrast to continental legal systems – apply a written legal concept matching that of Force Majeure. Instead, the provisions of the contract concerned need to be analysed in each case and other supplementary legal principles (such as “frustration”, “impossibility” and “impracticability”, that have to be analysed in relation to a contract that is no longer possible to perform) can be taken into account only in the absence of relevant contractual provisions. Moreover, Common law courts do not normally apply a broad interpretation of contractual provisions and the mere fact that performance has become significantly more difficult or no longer economically effective, does not, in itself qualify as a case of Force Majeure. Accordingly, the applicable law to a given contract and the actual content of the contract play a major role. Consequently, the practice – adopted in China most recently – whereby the party concerned obtains an official certificate from an authority concerning the Force Majeure may not be sufficient.
International contracts usually contain provisions whereby the parties identify what they consider as Force Majeure and what legal consequences are to be applied. The most frequently applied legal consequences stipulated in Force Majeure clauses include (i) opening of termination right, (ii) automatic extension of the completion deadline, (iii) possibility to suspend performance and/or amend the contract, and (iv) that the parties bear their own loss and damage entailed by Force Majeure events.
Accordingly, parties should proceed with due care, resort to qualified legal support and choose the right type of law, already during the negotiations preceding the conclusion of contracts and in drafting their text. Moreover, upon the occurrence of a case that may or may not qualify as Force Majeure, parties are advised to involve legal advice to solve the situation.
Some contracts may not only be breached (e.g. in the form of late performance) as a consequence of the coronavirus epidemic and the actions and measures taken in response by authorities but even become completely impossible to perform, and the parties may wish to be relieved of the contractual obligations.
In the Hungarian law (and, in general, in other continental legal systems) a contract lapses when it can no longer be performed. The party learning of the impossibility of performance (in Hungarian: lehetetlenülés) must immediately notify this to the other party.
According to established legal practice a contract can become impossible to perform for physical or legal reasons or for reasons relating to the parties (economic) interests. Physical impossibility may occur in relation to the coronavirus if the subject of the contract is no longer available on the market (e.g. wine produced in an area brought under quarantine). Legal impossibility may stem from a newly introduced ban on imports or exports. Impossibility as a consequence of interest in performing the contract being lost (in the Common law this is referred to as frustration of purpose) is when as a consequence of changes taking place after its conclusion the contract could only be performed through unforeseen complications or some disproportionate sacrifice, which cannot be expected of the party under obligation. One example for this may be where, owing to airport closure, certain quickly perishable goods could only be shipped in some other way but that would be significantly more costly and the goods would certainly deteriorate.
Under the Hungarian (and the continental) law if neither party is responsible for the performance of the contract becoming impossible, the parties have to settle accounts for the services already performed under the relevant contract. If responsibility lies with one party, the other is released from its obligation to perform and the responsible one must pay compensation. Under specific circumstances release from liability to pay compensation may be possible by successfully invoking Force Majeure (see above).If however, both parties are responsible, i.e. each has contributed to the contract becoming impossible to perform and can offer no excuse for this (i.e. no Force Majeure event occurred), the parties can claim compensation from each other for their losses/damage stemming from the failure of the contract. In such a case however, only a part of the loss or damage that is proportionate to the other party’s contribution to the failure can be claimed.
Under Hungarian (and the continental) law, in the case of a service contract, if the contract’s impossibility to perform cannot be attributed to either party, then in addition to the above, another relevant consideration is whose sphere of interests or activities it was in which the reason for the contract’s failure occurred. Determination of the relevant sphere of interests or activities cannot be separated from the identification of the relevant cause of the contract becoming impossible to perform and it requires a detailed analysis. If the cause occurred in the sphere of interests or activities of the contractor, it cannot claim payment of the contractor’s fee. In case it occurred in the client’s sphere of interests or activities the contractor is entitled to the contractor’s fee but the amount which the contractor saved in terms of costs as a consequence of the contract’s failure can be subtracted from the amount of the fee, along with any amount it could earn, or could have earned elsewhere, during the time so gained, without any considerable additional difficulty. In case the cause of the contract’s being impossible to perform occurred in or outside the sphere of interests or activities of both parties, the contractor would be entitled to the part of the fee that is proportional to the work carried out and its costs.
Common law legal systems have adopted legal principles similar to a contract becoming impossible to perform, such as “frustration”, “impossibility” and “impracticability”. These are invoked when a contract can no longer remain in effect or it is no longer desirable and the contract contains no Force Majeure clause and does not resolve the situation concerned in any other way. “Frustration” and the automatic termination of the contract can be applied in a limited variety of cases, only if as a consequence of the event occurring after the conclusion of the contract the performance of any material obligation prescribed in the contract becomes physically or economically impossible or if a material obligation changes significantly relative to what it was at the time of the conclusion of the contract. “Impossibility” may apply when the contract cannot be performed for any unforeseeable event (against which no provision could be included in the contract). “Impracticability” may apply in extreme cases where the performance of the contract (though physically feasible) becomes extremely difficult or complicated, or excessively costly for the party under obligation, for any unforeseeable cause or reason. The effective application of each of the above three legal principles will relieve the party or parties concerned from continued performance and any liability for breach of contract. However, Common law courts apply these in an extremely limited range of very substantially justified cases therefore it takes some serious contemplation to determine whether the current situation with the coronavirus epidemic can be a suitable excuse.
The rules on contracts becoming impossible to perform and those applying to the above Common law legal principles are highly complex therefore any decision concerning a given case takes careful analysis. Moreover, invoking impossibility to perform without sound reason entails serious legal consequences. Therefore, one should definitely consult a qualified attorney-at-law concerning any specific legal steps to be taken or any legal declarations to be made.
Contract amendment by the court
Besides invoking Force Majeure or impossibility of performance, it is also possible to request judicial contract amendment in certain circumstances, if the other party will not consent to an amendment to the contract concerned, on its own accord.
Amendment to a contract may only be requested in the case of a permanent legal relationship, if some new circumstance comes up after the conclusion of the contract (linked directly to the terms and conditions of the given contract) and it is in a causal relationship with this that a situation develops in which the performance of the contract with unchanged terms and conditions is contrary to material legal interests of a party. Nonetheless, even in such circumstances it is not possible to ask for judicial contract amendment by a party that would have had to expect, at the time of the conclusion of the contract, the possibility of changes in the circumstances concerned, because they were foreseeable or the changes were caused by the party itself. Judicial contract amendment is also ruled out when changes in the circumstances concerned are regarded as involved in the normal business risks of the party concerned.
It is extremely important that under the relevant legal practice no judicial contract amendment is possible on grounds of any change affecting the whole of the economy or the subjects of all contracts of a given type (e.g. forwarding). In other words, if the entire economy or complete industries are affected by the consequences of the epidemic, it is nearly impossible to request judicial contract amendment.
Similarly to the other possible arrangements the success of a request for judicial contract amendment hinges on the careful analysis of all relevant circumstances of the case and adequate preparations. The fundamental difference is that a legal dispute needs to be instituted for a contract amendment, which may be extremely costly and time consuming.
The situation resulting from the coronavirus epidemic needs to be responded to from a legal perspective as well, for which there are various possibilities depending on the contract concerned and the governing law. Force Majeure or impossibility of performance may be invoked, or the Common law doctrines, i.e. “frustration”, “impossibility” or “impracticability” may be resorted to. Moreover, in certain circumstances, contract amendment by the court may also be requested.
Most complications can be prevented by proceeding with due care in concluding contracts and by applying suitable contractual terms and conditions. In unexpected cases however, the given situation must be carefully analysed before any specific step is taken and parties are definitely advised to seek assistance from a qualified attorney-at-law.