The current COVID-19 situation is affecting all walks of life. Many companies, no matter how hard they try to keep their business afloat, find themselves in a mission-impossible situation as their cash flows and resources deplete by the hour. You might want to consider the following options.
Financial impact and price adjustments
The measures adopted nowadays have far-reaching consequences. One of them affects the obligation to pay the price agreed upon when the parties had no way of foreseeing the current epidemiological situation and its consequences. By way of example, this may be the case of a rent due for non-residential premises which a lessee cannot use for the intended purpose due to the current epidemiological restrictions.
These situations will vary in practice depending on the circumstances. This article outlines the general approach to handling them.
The contract is what counts in the first place. If a contract covers such extraordinary situations (including, but not limited to force majeure) and, at the same time, defines the impact of such situations on the contract price, the parties will be bound by such provisions. If, however, the contract is silent about the possibility of price adjustments due to exceptional circumstances, the parties will be bound by the statutory provisions of law.
At present, the law does not provide for a ‘general’ relief from the obligation to pay or a possibility to reduce the contract price unilaterally due to a significant change in circumstances. The situation is different when it comes to lease agreements (for example) under which lessees are relieved from their obligation to pay rent if certain defects occurring through no fault of their own foil the lessee’s use of the premises. You will find more information about the possibilities available under lease agreements below.
However, the legal order does cover in general terms (i) the concept of good morals – the exercise of rights and duties in civil-law relationships may not unjustly interfere with the rights and legitimate interests of the others and may not be in conflict with good morals, and (ii) the concept of fair business – the exercise of a right at variance with the principle of fair business does not enjoy legal protection.
In view of this, one of the possibilities to seek a price reduction or remission of a payment due under your contract is to initiate an agreement to that effect with the counter-party, with reference to the concepts of good morals and fair business.
We have described this pandemic viral infection as a force majeure situation in our previous article CORONAVIRUS AND THE MEASURES TAKEN BY EMPLOYERS IN RELATION TO THEIR EMPLOYEES.
Under the Commercial Code, force majeure, or superior force, is a circumstance excluding liability for damages, i.e., it shouldn’t be viewed as a preventive measure, but rather as the grounds for liberation invoked when a party breaches its contractual obligation.
Since it is a non-mandatory provision and parties may rule it out in their contract, the contract must be read first. If the contract contains no such provisions, the parties may refer to the provisions of the Commercial Code.
The Commercial Code lays down the grounds for liberation based on which (if evidenced) the obligor may be relieved from liability for damage. The circumstances excluding liability include the impediments occurring beyond the control of the obligor which prevent the obligor from discharging his contractual obligations unless it is reasonable to assume that the obligor can prevent or overcome such impediments or their consequences or that the obligor could have foreseen such impediments at the time of assuming the obligation.
Coronavirus and the related measures that restrict or impede the ability of companies to fulfil their obligations can be classified as circumstances occurring independently of the will of the entity (company) which is in breach of its obligations. At the same time, a company cannot be reasonable expected to prevent or overcome such circumstances or expected that it could or should have foreseen them at the time when it assumed the contractual obligation. However, it is for the breaching party to prove the existence of the specific circumstances which objectively prevented it from discharging its obligations. Thus, the burden of proof is with the breaching party.
COVID-19 as a reason for contract termination
Contractual obligations may be terminated in various ways. Also, in this case, the options are based, in the first place, on what is stipulated by the parties.
If, due to the measures taken in response to the coronavirus situation, your company is unable to perform its contractual obligation(s), such obligation(s) may be terminated with reference to the ‘impossibility to discharge’.
In such a case, the impossibility to discharge must be objective. The ‘impossibility to discharge’ cannot be invoked if a party is still able to perform its obligations, albeit under less favourable terms or under terms different from the originally agreed ones (under aggravated conditions, at a higher cost, past the agreed deadline or if the obligation can be performed through another person).
The situation is different when it comes to past-due performance if, according to the contract, the obligee is not interested in having a particular obligation discharged after the agreed deadline. Also, in this case, the obligee is entitled to insist that the obligation be discharged.
The impossibility to discharge must be notified to the obligee without undue delay after your company has become aware of the circumstances which make the discharge of its obligations impossible. Failure to do so would make you liable for the damage sustained by the obligee on account of not having been duly notified of the impossibility to discharge your obligations.
If, however, your company proves that the impossibility to discharge was due to the existence of liability-excluding circumstances, it will not liable to pay damages to the obligee.
Due of the measures adopted these days, many end up in a situation where they cannot use the premises they have leased (e.g., premises used as a private kindergarten), but they are still under obligation to pay rent to the lessor.
Unless the lease contract covers force majeure situations as such, or a provision that relieves the lessee from the payment of rent for the duration of the period for which the lessee is unable to use the premises for whatever reason, then only the statutory provisions apply, namely the Lease of Non-residential Premises Act and the underlying provisions of the Civil and Commercial Codes.
The Lease of Non-residential Premises Act provides for the termination of a lease agreement by the lessee if the premises become unfit, through no fault of the lessee, for the agreed purpose of use. However, this possibility is not directly applicable, simply because the premises as such continue to be fit for the agreed purpose of lease, but the measures adopted by the government (e.g. in the above example of a private kindergarten) render their use impossible. Another issue is whether the lessee’s objective is to terminate the lease agreement as a whole, or just suspend the payment of rent.
The Civil Code says the following about the relief from the obligation to pay rent: “The lessee shall not be under obligation to pay rent insofar as the defects affecting the premises through no fault of his own prevent him from using the premises in the agreed manner or if the mode of their use has not been agreed adequately with regard to the nature and purpose of the premises.
Hence the defects affecting the premises through no fault of the lessee relieve the lessee from the obligation to pay rent. The reason why the premises are defective or affected by defects does not really matter. A defect giving grounds for relief from the obligation to pay rent may as well be caused by extraordinary circumstances, i.e., circumstances objective in their nature. The lessee must claim his right for rent relief with the lessor without undue delay. The time limit for claiming the right to rent relief is six months from when the fact(s) giving rise to the right occurred.
However, against the backdrop of the restrictions imposed in connection with COVID-19 (and their impact, for example, on private kindergartens), the applicability of this particular provision is questionable and unclear. We believe that what the lawmakers had in mind here were the situations in which extraordinary events – fire, flooding, etc. – inflict damage on the leased premises. However, the measures adopted in the face of coronavirus affect the agreed purpose of lease, and not the premises as such. Also, in this situation, consideration should first be given to agreeing with the lessor, with reference to the concepts of good morals and fair business.