Force Majeure and Hardship under COVID-19 Pandemic
19 March 2020
The pandemic situation and the related control measures introduced by the local governments have led to delay and non-performance under commercial contracts. We have outlined below some considerations regarding force majeure and hardship under the Bulgarian legislation in the context of the current circumstances.
Force majeure is an unforeseeable and unavoidable event of an extraordinary nature which occurred after the conclusion of a contract making its performance objectively impossible for the duration of such event. The acts issued by government authorities, such as orders by the Ministry of Health, may be considered an “unavoidable event” since their observance is mandatory. The question, however, whether such acts have led to non-performance of a particular contract, is to be considered and assessed on a case-by-case basis. This assessment is made on the basis of the content of the obligations of the contracting parties, as well as the impact of the measures imposed on the ability to fulfill those obligations.
According to the Bulgarian legislation, force majeure is ground for suspension of a contract (temporary cessation of its performance) in case the contract provides for a continuous or periodic performance. Examples of such contracts include the lease agreements for premises which have been closed as a result of emergency measures; supply contracts with periodic commitment the performance of which has become impossible due to measures imposed, etc.
Should the nature of the contract allow it, and if due to force majeure the creditor is no longer interested in its performance, the contract may be terminated. Classic examples of such contracts are those where performance is required on a specific day, hour or time (such as obligations relating to pre-planned and pre-arranged events). Failure to fulfill obligation under such contracts at the exact time specified therein is equivalent to a complete failure to fulfill obligations. In general, this type of contracts is terminated ex lege (by virtue of law) upon the occurrence of a force majeure event. However, due to the duration of the force majeure event, it is possible that the creditor may no longer be interested in the performance under other types of contracts as well. For instance, if the creditor needs to be supplied with raw materials in order to fulfill its obligation to a third party within an agreed period, the creditor may not be interested in receiving the raw materials later as it would result in his/her delay towards the third party. Should the creditor be no longer interested, either party may terminate the contract by notifying the other party.
Requirements for invoking force majeure
In order to assess whether force majeure is applicable to a particular contractual obligation under the Bulgarian legislation, the first step would be to establish and confirm the following:
- the performance has indeed been objectively impossible (whether permanently or for a certain period of time) due to force majeure. If, for example, a party had the obligation to organise a concert under a contract, and there is a ban on mass cultural events, fulfilling this obligation would be impossible for the duration of such an emergency measure;
- the contract has been concluded prior to the occurrence of the event making its performance impossible. With regard to the COVID-19 pandemic, the most common hypothesis is that a force majeure event would occur once government authorities impose certain measures prohibiting the performance of a particular activity without which the party cannot fulfill its contractual obligations;
- the debtor has not been in delay at the time the force majeure event occurred. In case the term for fulfilling an obligation expired prior to the occurrence of the force majeure event, the debtor may not invoke force majeure.
It is worth noting that while the COVID-19 situation might be defined as force majeure, there is a legal provision under which the fact that the debtor does not have the financial resources to fulfill the obligation does NOT exempt the latter from liability. Debtors, therefore, may not rely on emergency measures and refuse to pay for the time of the state of emergency, despite the fact that the ban on certain activities would inevitably affect the cash flows forecasts each trader have made upon the conclusion of their contracts.
Each case needs to be assessed as to which particular event has affected the performance, when it occurred and whether it has actually led to an objective impossibility to perform, as well as whether the event conforms to the definition of force majeure as a whole. For example, if during a pandemic a factory cannot fulfill its obligation to supply a certain amount of products, this may be due to the measures introduced by the Minister of Health on March 13, 2020, but it may also be due to a workers’ strike provoked by concerns about health as of March 20, 2020. It would therefore be a matter of a factual case-based assessment of whether a contract concluded on March 15, 2020 is covered by the doctrine of force majeure, what is the reason for its non-performance and when it occurred.
In addition to the above, the debtor is obliged by law to notify the other party in writing within a reasonable time of the force majeure and its potential consequences regarding the performance of the contract. There is no specific statutory definition of what reasonable time is, it is nevertheless recommended that such notification is given once all relevant facts have been established. Failure to notify the creditor may lead to owing compensation for damages which could have been avoided in the case of a timely notification.
It should be mentioned that most contracts do contain a force majeure clause. Such clauses however need to be carefully analysed when assessing whether a party may invoke force majeure under the specific contract and what the impact of the pandemic situation on the contract would be. Special contractual provisions may provide wider opportunities for invoking force majeure in addition to what is prescribed by law. At the same time, these clauses may also provide for specific conditions for a party to be able to invoke force majeure (e.g, a specific time frame within which the party affected by the force majeure shall notify the other party of the occurrence of the force majeure; proving force majeure by providing explicitly specified documents – for example, a certificate issued by a particular chamber of commerce, etc.).
Consequences of Force Majeure
The main consequences of invoking force majeure are as follows:
- the party which have promptly invoked force majeure is not liable for non-performance for the time of the force majeure (i.e. the latter shall not owe compensation for damages and penalties under the contract);
- in case the contract is terminated due to force majeure, the obligations under the contract are no longer binding and the parties are released from them.
According to the prevailing case-law, termination of a contract due to force majeure has effect for the future. This means that if one of the parties has incurred expenses under the contract (e.g. payments to subcontractors; expenses for raw materials and materials, etc.), these expenses remain on this party’s account and the latter may not claim compensation from the other party. Again, the specifics of the contractual relationships need to be assessed as there will be exceptions to this rule as well. Thus, if one of the parties to a bilateral contract has paid in advance to the other party and at the same time has not received the counter performance due to force majeure, there will be grounds for receiving back the amounts paid under the most common hypothesis.
Hardship is a ground for a court to amend or terminate a contract. Unlike force majeure, in the case of hardship, the performance of the contract is objectively possible, but due to a substantial change in the socio-economic circumstances that occurred after its conclusion, the maintenance and performance of the contract under the originally agreed conditions would significantly harm the economic interests of one of the parties.
For example, if a commercial site is rented for a certain rental price and subsequently due to an economic crisis, the sales revenue of the premises drops to an amount that cannot cover even the rental price, then hardship is to be assumed. In such case, the affected party could bring a claim before the court seeking either a change in the rental price or termination of the rental agreement.
Prerequisites for such a claim to be upheld are:
- circumstances which the parties could not and were not obliged to foresee when the contract was concluded have arisen. In this case, it is to be assumed that the situation with COVID-19 and the emergency measures imposed by the authorities could not be reasonably foreseen before the information was publicly announced that Bulgaria would also be affected by the pandemic;
- maintaining the effectiveness of the contract contradicts to the good morals. This prerequisite would be fulfilled if, due to circumstances arising after the conclusion of the contract, the equivalence of the considerations has been adversely affected, i.e., the contract has become extremely economically disadvantageous to one of the parties due to the changed situation.
- The term of the contract has not expired
It is worth noting that the amendment or termination of the contract on the grounds of “hardship” is to be done only by the court or by arbitration court (in case the parties have included an arbitration clause covering hardship disputes in the contract). Such a proceeding could be both time-and cost-consuming. It should also be noted that as part of the emergency response to the pandemic, commercial litigation by the courts was severely restricted during the state of emergency. This means that even if a claim for hardship is brought before court, it is highly likely that the claim will be considered after the cancellation of the emergency measures.
Furthermore, it should be noted that the amendment or termination of the contract due to hardship is effective for the future; i.e. even if the claim is upheld, the party affected by the hardship would not be able to claim compensation or reimbursement of the payments it made under the contract prior to its amendment or termination by the court.
Therefore, the most appropriate approach in this situation is to resolve the issue through negotiations between the parties and to amend or terminate the relevant contract by mutual agreement.
In conclusion, it should be emphasised that the COVID-19 pandemic and the extraordinary measures imposed by the authorities in this regard are circumstances for which a lasting case-law is yet to be established. Time will tell how the courts will interpret the current situation in the context of classic legal notions such as force majeure and hardship.