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27 April 2020
COVID-19 is seriously affecting the world's economy and people's social lives. The closure of factories and ports, restrictions on the transport of goods and workers, a declining demand for energy and a reduction in public expenditure are adversely influencing intercontinental supply chains and impacting various sectors, including the manufacturing, transport, tourism and retail industries.
On 30 January 2020 the World Health Organisation declared the COVID-19 outbreak a global health emergency. At the time of writing, there were approximately 835 confirmed cases of the virus in Slovakia.
Within the framework of commercial relationships, the question has arisen as to whether the COVID-19 pandemic may be considered a force majeure event and, if so, what impact this could have on contractual obligations.
For example, if a Slovak manufacturer purchases components from a third party in another country or continent, assembles them in Slovakia and resells the finished product and the governments subsequently close borders or restrict access to certain regions due to COVID-19, can the Slovak manufacturer claim that it could not deliver the contracted product to its customers in time due to the COVID-19 pandemic?
In general, debtors must fulfil their contractual obligations duly and on time. If they fail to fulfil their obligations in this way, they will be in default until the obligations are duly performed or discharged in another manner (Section 365(1) of the Commercial Code). The debtor's default entitles the creditor to damages under Section 373 of the Commercial Code and eventually, if so agreed, to a contractual penalty.
In commercial relationships, a claim for damages is based on the principle of strict liability. This means that no fault is required. Liability can be relieved only in circumstances that exclude liability, as referred to in Section 374 of the Commercial Code. To consider an event as a circumstance excluding liability, the conditions that must be satisfied are:
In the case of international trade, it should be noted that under Section 736 of the Commercial Code, circumstances excluding liability (or responsibility) do not include the non-granting of an official licence required to fulfil the obligation (eg, an export licence).
The occurrence of force majeure does not automatically relieve the liability to fulfil an obligation. The liability exclusion effects are in place as long as the obstacle connected to these effects persists. If an obstacle ceases to exist, the party concerned must fulfil its obligations. If such an obstacle is permanent, the impossibility to perform obligations and frustration would become an issue. In such a case, the liable party's obligation would cease to exist and no liability for damage would arise (Section 352 et seq of the Commercial Code).
Circumstances excluding liability do not affect the obligation to pay a contractual penalty (Section 300 of the Commercial Code). This means that if the parties have agreed to a contractual penalty, the liable party must pay the penalty even upon the occurrence of a force majeure event.
COVID-19 can be considered an obstacle that occurred independently of the will of the obligated party and which, at the time of undertaking the obligation, was not foreseen by the obligated party (at least before December 2019). However, do COVID-19 or the measures taken in relation to it prevent contractual obligations from being fulfilled?
Fortunately, there have not been many natural disasters in Slovakia that could be considered force majeure events that would prevent contractual obligations from being fulfilled. Nevertheless, a few examples can be found to demonstrate the approach of the Slovak courts.
Adverse climate conditions and poor harvest
In this case, the defendant, an agricultural company, failed to fulfil its obligation to deliver the agreed quantity of crops due to adverse climate conditions and an extremely poor harvest. The court did not consider this a force majeure event excluding liability because, in the court's opinion, it was predictable and surmountable. According to the court, it can reasonably be assumed in agricultural production that a poor harvest may occur. In addition, the court concluded that the defendant had been obliged only to deliver the crop and not to produce it. Therefore, the defendant had been obliged to secure the supply by other means – for example, by purchasing from another grower.(1)
In this case, the defendant did not deliver lumber under the contract with the plaintiff, justifying this failure by a 100% increase in the transport rates on German transport flows. The court described the event as foreseeable because the increase in transport rates could be expected due to the devaluation of the German mark at that time. The fact that it was difficult to predict when and to what extent this would happen was not decisive. The defendant should have considered the possibility of this happening when concluding the purchase price. In addition, according to the court, the defendant could have fulfilled its obligation if it had sent the consignment through Austria or Switzerland, which were not affected by the increase in transport rates.(2)
Theft of goods
In this case, Samsung ordered from the plaintiff the transport of electronics from Slovakia to Bulgaria. The plaintiff secured the transport with the defendant. The vehicle, including the goods, was stolen during transportation. The defendant claimed damages from the plaintiff. The plaintiff counterclaimed damages from the defendant. The contractual relationship was governed by the Convention on the Contract for the International Carriage of Goods by Road (CMR). According to Article 17(2) of the CMR, similarly to under the Commercial Code, the carrier was to be relieved of liability as it could not have foreseen the circumstance or prevented the consequences. According to the court, the theft of the vehicle and the goods in this circumstance constituted a liberating reason and relieved the carrier of liability for damages.(3)
In connection with force majeure events, it is also necessary to mention certificates of facts regarding legal relationships arising in international trade which are issued by the Slovak Chamber of Commerce and Industry (Section 5(2)(g) of the Chamber of Commerce and Industry Act). The Chamber of Commerce and Industry will issue a certificate of the occurrence or circumstances of a force majeure event and the consequences in relation to the impossibility to fulfil contractual obligations to a Slovak entrepreneur which is exposed to penalties from its contractual partner. The Chamber of Commerce and Industry does not assess whether the event is a force majeure event under the law or the contract. However, it certifies that such an event has occurred and that there is a causal link between its occurrence and the impossibility of fulfilling the obligation under the contract in question. This certificate may be considered an authentic instrument. This means that the court will consider these facts proven and that the burden of proof will shift to the other party to prove the opposite (Section 205 of the Civil Procedure Code).
Each situation will always depend on the specific circumstances and whether and how the parties have regulated the issue of force majeure in their contract. Force majeure does not necessarily have to be a natural phenomenon but can also entail human action (eg, theft). However, the abovementioned court decisions indicate that the courts will strictly consider the issue of insurmountability. The burden of proof will therefore lie with the party invoking force majeure to prove that those circumstances actually prevented it from fulfilling its obligations and that this obstacle could not have been overcome – for example, by engaging a substitute subcontractor.
For further information on this topic please contact Matej Kosalko or Martin Magal at Allen & Overy Bratislava sro by telephone (+421 2 5920 2400) or email (email@example.com or firstname.lastname@example.org). The Allen & Overy LLP Bratislava sro website can be accessed at www.allenovery.com.
(1) Decision of the Czech Supreme Court of 25 January 2012 (File 23 Cdo/3066/2010). Due to having the same laws at the time, the Slovak courts also rely on the decisions of Czech courts when interpreting Slovak laws.
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