202003.29
0

IMPACT OF CORONAVIRUS ON THE PERFORMANCE OF CONTRACTS

The outbreak of the coronavirus epidemic – among others – raises several questions regarding the civil law contracts, so we consider it essential to clarify what kind of impact the epidemic may have on the performance of contracts concluded by members of the private sector and what aspects shall be taken into account regarding the extraordinary economic situation that is likely to be long-lasting.

As all are surely aware, the Hungarian Government declared the state of emergency on 11 March 2020  throughout its entire territory by Government Decree no. 40/2020 (III.11.) and introduced several restrictions which affects the private persons’ right to freedom of movement or the opening hours of some business units to name just the most important few.

In such case, the obvious question arises for economic operators, to what extent are they required to perform contracts concluded by them, or, from the other side, to what extent may they claim the performance of the contract from their contractual partners especially when parties entered into their contractual commitment before the signs of the outbreak of the epidemic would have been visible.

As a starting point, we should record one of the fundamental principles of contract law, the binding force of the contracts (pacta sunt servanda). This principle means that a valid and effective contract shall be performed pursuant to their content. Taking risk is a necessary inherent of a contract in economic relations, thus, it is a fundamental requirement that the contracting party shall be exempt from its contractual obligation due to unexpected economic event only in exceptional cases. We have seen this phenomenon for example in the so called “foreign exchange lawsuits” which gained greater publicity in the recent years, in respect of which the Hungarian Supreme Court stated several times that the outbreak of an economic crisis and the change of foreign exchange by such an extent may not result in a force majeure event in the parties’ contractual relationship.

It shall be noted also, that in the event of unforeseen external circumstances, it is always necessary to examine whether the contract concluded between parties contains provisions on what to do in such case. If so, these provisions shall be applicable in the parties’ relation, as Hungarian law in principle allows the parties to derogate from the legislation in the civil law contracts and in case of such discrepancy, the provisions of the contract shall prevail always unless there is an expressed provision in the laws prohibiting the deviation.

However, in the case when the contract does not contain any provision on this matter or does not regulate fully the parties’ rights and obligations (and given a state of emergency similar to present epidemic, this is probably true for most of the contracts), the provisions of the legislation in force shall be examined.

The Act V of 2013 on Civil Code does not define the term of unavoidable external circumstance (force majeure) arising in the parties’ contractual relation, therefore we can only rely on judicial practice by assessing this situation. The Supreme Court recorded the following in one of its individual decisions (Pfv. I. 20.422/2013.) in connection with the force majeure:

„Meaning of force majeure: an irresistible force means force or event in such extent that no one can resist or avert. These are certain natural disasters but also human movements which work inevitably and with overwhelming force (for example war, revolution, termination of currency without replacing with a new one, are considered as force majeure of human origin). Events considered as force majeure are absolute in nature, so it does not matter whether an exact person is able to defend against them, but the only thing that matters is if there is anyone who can avert the event. Events considered as force majeure do not only make the performance of a valid contract just complicated, but they make it impossible in a way so that human force may not avert it.”

After defining the term of force majeure, the other important question is to determine in which cases shall be the contracting party released from the consequences of non-performance. The party who fails to fulfil its contractual obligations shall be liable for such damage. The party shall be released from liability if he is able to prove that the breach of contract was caused by a circumstance

  • occurred beyond the party’s control,
  • which was unforeseeable at the time of the conclusion of the contract, and
  • the party could not expectedly have avoided the circumstance or averted the damage.

The fulfilment of these cumulative conditions practically means that the opportunity of release from the liability is given solely in cases if the outbreak of the coronavirus epidemic was unforeseeable at the time of the conclusion of the contract and the breach of contract is directly linked to the epidemic.

It shall be noted that another interesting issue arises when examining whether the outbreak of the epidemic by such extent was foreseeable at a specific time or for example if the objective conditions of the performance of contract are met (no travel ban or the air traffic is not entirely closed), to what extent the subjective conditions – for example, the accommodation reservation and travelling to that destination is likely to carry the risk of infection based on the number of infected persons in the destination country – are relevant in the examination of release from consequences of breach of contract.

Furthermore, it is also important to mention another specific case of non-performance, when the performance of the contract becomes impossible from the side of one contracting party. In such a case, parties shall settle accounts for performed services and repay their consideration and deposit to each other. Along with this, an issue affecting many people arises, namely that what to do with the accommodation or flight ticket reservation the performance of which becomes impossible due to the quarantine in the destination country or other travel restrictions. In this case, we are talking about the impossibility of the contract in respect of which the hotel/airline is obliged to refund the price of the reservation to the client without any sanctions.

It can be seen that the elaboration of precise conditions of force majeure and the assessment of specific situation are not easy and there are extremely many life situations in which it is not clear whether the outbreak of the virus was expectable at a specific time or the prevention of the consequence of the virus was expectable from the given party. It is not making the things any easier that there is no previous example for this situation and most legislations are facing now the necessity of a detailed regulation regarding the force majeure events caused due to a worldwide epidemic.
For the sake of completeness, it shall be recorded that civil law provides for the possibility of amendment of the contract by the court in exceptional cases. This may happen when in the long-term contractual relationship of the parties, performing the contract under the same terms is likely to harm on of the parties’ relevant lawful interests in consequence of a circumstance that has occurred after the conclusion of the contract, and:

  1. a)the possibility of that change of circumstances could not have been foreseen at the time of conclusion of the contract;
  2. b)the party did not cause that change of circumstances; and
  3. c)such change in circumstances cannot be regarded as a normal business risk.

Although, at first reading, this provision may seem to be appropriate to deal with the situation caused by the coronavirus epidemic, it shall be emphasized that the practice also indicates that the court might intervene in the relationship between economic operators only in exceptional cases. This is particularly true for present situation, as it is easy to see that even one such court decision may result series of litigation and would violate the principles of the market economy significantly and undermine the confidence in contracts.

In our view, the judicial practice shall elaborate on what basis can the above conditions be determined. This circumstance – under these quite chaotic market conditions – makes it more difficult for the economic operators to orientate in the issue of release from the breach of contract. At the same time, the current situation may also help the economic operators regulate these situations such as present in their contractual relationships for the future.

Unauthorized use and/or duplication of this material without express and written permission is strictly prohibited. Excerpts and links may be used with appropriate and specific direction to the original content.