Is COVID-19 a Force Majeure?
Do the COVID-19 outbreak and the measures against it constitute force majeure?
The COVID-19 pandemic has a number of negative economic consequences such as suspension or delay of production and supplies, quarantining of entire countries, closure of borders, cancellation of flights, etc.
All these factors affect the performance of obligations under multiple commercial transactions and raise the question of whether a party to a contract can rely on force majeure in order to excuse its failure to perform a contractual obligation without liability.
The answers to these questions require analysis of several factors:
Law governing the contract
The law governing a particular contract would determine how force majeure shall be interpreted and applied to it.
The parties to a contract often explicitly agree on the law governing it. If this is the case, the applicable law would be the one agreed between the parties, except in some cases when the law chosen to govern a contract cannot exclude the application of mandatory provisions of another law which is more closely related to the contract or its performance.
If the governing law is not explicitly agreed between the parties to the contract, it should be determined on the basis of the relevant provisions of the Private International Law.
Force majeure under Bulgarian law
According to Bulgarian law, “force majeure” is an unforeseen or unavoidable event of an extraordinary nature occurring after the conclusion of the contract, which renders the fulfillment of an obligation under it impossible.
In the event of force majeure, neither the debtor nor any other third party in its stead, objectively, using all reasonable means and resources, can fulfill its obligation under the contract.
Bulgarian courts uphold that a force major exists if they establish that:
- there is a causal link between the force majeure and the inability to perform the respective obligation;
- the debtor could not, even with a proper organisation of its business, fulfil its obligation; and
- the debtor was not in delay in performing his obligation at the time when the inability of performance occurred.
In this context, we generally believe that the emergency situation related to the spread of the coronavirus could be deemed force majeure. Still, its link to the performance of a specific contractual obligation should be carefully and individually examined.
The state of emergency announced in Bulgaria as of 13 March 2020, including closing shopping malls and other trade centers, as well as imposing home office work where possible, impacts the performance of obligations under many contracts.
What steps should you undertake if you or your counterparty is affected by the COVID-19 emergency?
If you believe that you are objectively unable to fulfill your contractual obligations due to the COVID-19 situation, you should seek professional legal advice to determine whether force majeure exists in your particular case because the mere fact that an emergency situation has been introduced is not sufficient to conclude that your obligation under a specific contract is affected by force majeure and therefore excused.
If force majeure is present in respect to your specific contract you should:
- immediately notify your counterparty of the force majeure, with as much detail as possible about how specifically it makes it impossible for you to fulfil your contractual obligation and to ensure that it has received the notice;
- discuss with your counterparty, whenever possible, reasonable ways to mitigate the potential damages of your non-performance;
- document the occurrence of the force majeure with as much evidence as possible;
- document in detail and specifically the measures taken by you to mitigate the damages to your counterparty from your default;
- keep a close eye on the duration of the force majeure and whether you can resume performance;
- consider whether the force majeure does not last so long that you or your counterparty has no interest in continuing the contract, in which case you may terminate it or suffer the consequences of termination by your counterparty.
The difference between business frustration and force majeure
In the event of business frustration, unlike force majeure, the fulfilment of the obligation is still possible, but extremely disadvantageous for the debtor. If the fulfilment of your contractual obligation has not become completely and objectively impossible for you, but only significantly less favourable to you, then you cannot invoke force majeure, but you could ask the court to amend or terminate the contract. However, this is a less practicable option due to the need to go through full litigation (which might take years) and also the tendency of courts in Bulgaria to determine that they can amend a contract due to business frustration only going forward after the court judgment is final and not retroactively.
Hence, business negotiations remain the best solution in such a case.
Quick advice in respect of rent agreements, in particular, follows below. Note, however, that this is not binding legal advice in respect of any particular contract.
If you are a tenant in a shopping mall
Shopping malls have been closed as of 13 March 2020 with an order of the Minister of Health (with very few exceptions for offices of pharmacies, food stores, banks, insurers, cash payment centers and restaurants, which can, however, only make food deliveries).
- You can rely on the landlord’s non-performance of its obligation to ensure access to the rented premises and on this basis suspend making rental payments (unless you are renting a bank or insurer’s office, pharmacy, food store or a restaurant that delivers food). In such a case, generally the landlord’s obligation is affected by force majeure, which allows you not to pay for the duration of the emergency measure affecting shopping malls.
- If you are one of the type of tenants above that are not affected by the closure of the shopping malls, you cannot rely on landlord’s force majeure, but can suspend paying rent till the emergency situation is in place due to Art. 6 of the Emergency Status Act (which suspends the consequences of non-payment). However, please note that Art. 6 has received strong (and justified) criticism and might be repealed or amended soon.
If you are a tenant in a separate and independent site
- You cannot rely on the emergency situation being force majeure for you or the landlord in order to suspend making rental payments.
- You can suspend paying rent until the emergency situation is in place due to Art. 6 of the Emergency Status Act – see above. However, please note that after the emergency situation is terminated you would owe payment of the rent also for the period of the emergency situation.
Irrespective of the type of your contract, you can suspend making payments under it till the emergency situation is in place due to Art. 6 of the Emergency Status Act – see above. However, please note that after the emergency situation is terminated you would owe payment of the rent also for the period of the emergency situation.
In all cases, the best option is to seek good faith negotiations with your counterparty and try to agree on a fair allocation of the negative economic effect with him.
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