Last Updated on March 19, 12:00 CET
The current COVID-19 outbreak and severe and numerous preventive and restrictive measures governments are continually introducing are first and foremost a global health concern. However, this situation has already caused significant distortions to businesses and their ability to perform their contractual obligations.
The question of all questions seems to be if COVID-19 pandemic is a force majeure or not. From the Serbian law perspective, even if the COVID-19 pandemic, colloquially speaking, represents a force majeure event, the question is if and to what extent it would affect a particular contract and the rights and obligations of the parties do not always have a straightforward answer.
First – a word of caution. There is no general assessment of the effects of the pandemic on all contracts. It is essential to remember that each agreement and each relation should be assessed individually, both from the perspective of 1) circumstances of each particular case and 2) any contractual clauses that may be relevant for the situation at hand. If the contract contains a force majeure or similar provisions dealing with events out of parties’ control, any such provisions and their interplay with imperative provisions of the applicable law should be carefully considered.
Assuming the Serbian law governs a contract, and assuming such contract contains no specific clauses on force majeure or similar matters, generally, the following legal concepts should be taken into consideration when assessing the COVID-19 pandemic implications to contractual relations and the remedies available:
1. Impossibility of performance – Article 137 of the Serbian Law on Obligations;
2. Exoneration of liability for failure to perform a contract – Article 263 of the Serbian Law on Obligations and
3. Rescission or amendment of contract due to changed circumstances – Articles 133 to 136 of the Serbian Law of Obligations.
In more detail:
1. If for the party affected by COVID-19 pandemic and related administrative measures (“Pandemic Implications”) performance of a contractual obligation is impossible, such obligation of the affected party terminates. In turn, the obligation of the other party also terminates. The affected party is obliged to return what it received from the other party for the performance of the contract. No damage compensation would be owed by any party involved. For example, if a restaurant was booked for the purposes of a wedding ceremony, and the administrative measure of prohibition of operation of restaurants and public gathering is introduced, the restaurant operator has no liability to their clients for cancelling the ceremony. If an advance payment was made, it would have to be returned, but no related damage compensation would be due.
2. If the party affected by Pandemic Implications was unable to perform its contractual obligation or was unable to perform it in a timely manner for reasons arising after the contract was signed, that party could not have anticipated, prevented or overcome, such party is not liable for damages the other party suffered as a result of such non-performance. Although the Serbian court practice is not abundant on this issue, the other party would most likely have the right to rescind the agreement or prolong the term for performing of the obligation of the affected party. In practice, it will most likely be the challenge to distinguish whether a particular case falls within the Article 137 (impossibility of performance with the effect of termination of the obligation) or Article 263 (inability to perform as agreed, with no automatic termination of the obligation, but simply no liability for non-performance) of the Serbian Law on Obligations. We believe that Article 263 will most likely apply in cases where the affected party was unable to duly fulfil the contract due to interruptions in the supply chain.
3. The Pandemic Implications can also serve as grounds for the affected party to request the court to rescind the contract:
- when the performance of the contract by the affected party was rendered more difficult or
- the purpose of the agreement cannot be fulfilled for the affected party.
Both reasons need to be of such severity that it is obvious that retaining of status quo is unfair.
In order for this remedy to be used by the affected party, the Pandemic Implications must occur after the contract was signed, and before the party entered into default, and must be of such nature that the affected party could not have anticipated, overcome or avoided the particular Pandemic Implications.
The other party can offer an amendment of the contract, in lieu of rescission; however, the affected party is only entitled to request the court to rescind the contract. Additionally, what makes this remedy specific is that the court, once it rescinds the agreement, can order the affected party to pay the equitable portion of the damage the non-affected party suffered by rescission.
Before invoking any of the above remedies as the affected party or responding to the remedies invoked by the allegedly affected party, the legal position should be carefully analysed taking into consideration the specifics of each particular case. The strong-sounding statement that COVID-19 is a force majeure does not provide for simple answers as to how that affects the rights and obligations of the parties to the contract.