Non-compliance with contractual obligations in relation to COVID-19 in general
Delays / shortages of deliveries caused by the effects of quarantine measures may or may not be excusable by so-called force majeure, it all depends on the legal regime governing the contractual relationship, primarily the content of the contract with the supplier / customer as well as of the rules of the so-called applicable law (the law governing the contractual relationship).
If the contract contains a force majeure clause, it is necessary to assess whether the COVID-19 pandemic meets the contractually defined conditions and whether the affected party has complied with any other negotiated procedural obligations required to justify the breach of contract (most often a notification obligation to the other party).
If the contract does not contain a force majeure provision, excusability of non-fulfilment may or may not arise directly from the applicable law governing the relationship. This legal order is either agreed in the contract or determined by European regulations or international treaties (e.g. within the EU, the law applicable to a contract of sale is the law of the seller). If one of the laws of the countries which are signatories to the UN Convention on Contracts for the International Sale of Goods (CISG, UN Kaufrecht, Vienna Convention) is applied, this Convention, which contains a force majeure clause in Art. 79, according to which "A party shall not be liable for the non-fulfilment of any obligation if it proves that the non-fulfilment was caused by an obstacle which did not depend on its will and which could not reasonably have been expected to have been foreseen by the party at the time of the conclusion of the contract, or to have been avoided or overcome by that obstacle or its consequences." The COVID-19 pandemic is such an obstacle within the meaning of Article 79 of the Vienna Convention, provided, however, that the treaty was concluded at a time when it could not yet have been foreseen that it would affect the ability of the contracting party to fulfil its obligations under the treaty. If the treaty is concluded in the present situation, it must in principle be assumed that the COVID-19 pandemic is no longer an unforeseeable obstacle. However, force majeure circumstances under the Vienna Convention only relieve the contracting party from liability for damages, while other rights under the contract (liquidated damages, rescission, etc.) remain unaffected.
In addition to force majeure, contracts as well as individual laws may also contain so-called "hardship" clauses, the application of which arises in the case where, as a result of unforeseeable circumstances, the fulfilment of the contract would not become impossible for the obliged party, but would be associated with disproportionate difficulties, or where the party would be at a significant disadvantage in relation to the other party as a result of the given circumstances. In such a case, the parties may be obliged to negotiate a change in the terms of the contract or even the right of the affected party to unilaterally modify the terms of the contract.
In domestic relations, i.e. relations governed by Slovak law, in the absence of a contractual force majeure clause, an excusable reason in the form of 'an obstacle which has arisen independently of the will of the obliged party and prevents it from fulfilling its obligation, if it cannot reasonably be assumed that the obliged party would have averted or overcome the obstacle or its consequences and, furthermore, that the obliged party would have foreseen the obstacle at the time when the obligation arose' is excusable in law. This is a so-called circumstance excluding liability, which, however, as in the case of the Vienna Convention , exempts the affected party solely from the obligation to pay damages, i.e. it does not affect other contractual obligations , including e.g. the obligation to pay default interest/contractual penalty.
The Slovak legislation also provides for the so-called additional impossibility of fulfilment, when the obligation of the affected party to fulfil the contract automatically ceases. However, this must be the case where fulfilment cannot be provided even under difficult conditions, with greater costs, with the help of another person or only after an agreed time, i.e. the obligation is permanently unenforceable. An obligation is also rendered unenforceable where legislation enacted after the conclusion of the contract, which is not of limited duration, prohibits the debtor from the conduct to which he is bound or requires official authorisation which has not been granted to the debtor, although he has made due efforts to obtain it. If, for that reason, the obligation is extinguished, that does not exonerate the affected party from liability for damages, unless that impossibility of performance was also caused by circumstances excluding liability.
Another possibility to get rid of the obligation to fulfil according to the Slovak regulation is the institute of frustration of the purpose of the contract. It comes into play if the purpose of the contract was expressly expressed in the contract, which is subsequently frustrated as a result of a material change in the circumstances under which the contract was concluded. However, frustration of the purpose of the contract does not cause the obligation to be extinguished, but gives rise to a right of withdrawal on the part of the party concerned. However, a material change in circumstances does not include a change in the party's financial circumstances and a change in the economic or market situation. In any event, the party who has withdrawn from the contract in this way shall be liable to compensate the other party for the damage suffered as a result of the withdrawal.
As it follows from the above, answering the question whether the non-fulfilment of the contract by the supplier, the customer or the company itself caused by the quarantine measures will be excusable or will modify the contractual liability of the affected party in some other way is not possible on a blanket basis, without an analysis of the relevant contractual documents. In the absence of a legal analysis, it is prudent to assume that the COVID-19 pandemic (or the relevant quarantine measures) may excuse non-fulfilment on the part of suppliers/customers and, conversely, that it may not excuse non-fulfilment on the part of the company itself.
In general, in our view, it is to be expected that, in spite of established business practices, the economic crisis will result in contractual penalties, default interest and other claims arising from breaches of contractual obligations, including withdrawal from the contract, unless the breaches of contractual obligations are covered by force majeure provisions. It is also important to be prepared for the possibility that in a given situation the business partners may resort to judicial/arbitral enforcement of the above claims, despite the fact that this has not been done in the past on their part.
It is important to bear in mind the so-called general duty of prevention, i.e. the obligation to act in such a way as to avoid damage, otherwise there is a risk of joint liability for damage even if the damage itself was caused by another entity or circumstance, precisely because of the failure to prevent it where this was possible. This means, in your own interest, to communicate with suppliers and customers at all times and to take their interests into account as far as possible and not in conflict with the interests of your own company.
It is necessary to properly document all circumstances that may constitute a force majeure obstacle on the part of one's own company, all actions taken to overcome it, as well as all breaches of obligations on the part of business partners and all facts relevant to the possible judicial assertion of claims arising from such breaches, despite the fact that their assertion by one's own company has not been common in the past. It is to be expected that many operators will be unwilling/unable to bear the damage caused by quarantine measures and, on the contrary, in order to minimise the negative impact on their business, will seek to pass on this impact through contractual liability to their immediate partner in the supply chain. In this way, it is possible to find oneself against one's will on the defendant's side in a lawsuit, or it must be taken into account that a lawsuit by one's own company against a contractual partner will remain the only way to transfer the burden of damage at least partially to another entity, or even, in an extreme case, to avert the risk of insolvency.
It should also be taken into account that the consequences of quarantine measures, in addition to the impossibility/difficulty of performance, may also be reflected in an increase in input costs or costs associated with the delivery of the goods. As far as supplier-customer relations are concerned, such circumstances generally do not give rise to a right for the affected party (supplier) to unilaterally increase the price (in commercial relations, a certain amount of business risk is involved). However, these situations can be dealt with by a fairly common special contractual arrangement which allows, in the event of a certain change in circumstances (e.g. an increase in input costs), to unilaterally change the terms of the contract, including an increase in the already agreed price. In the absence of such an arrangement, however, a unilateral change of terms is in principle not possible.
Furthermore, it is necessary to prepare for a number of contractual obligations, whether on the part of customers or suppliers, to become unenforceable as a result of insolvency, bankruptcy, restructuring or other proceedings resulting in protection from creditors.
In any case, a legal analysis of the currently applicable terms and conditions of the supplier-customer relationship can be recommended, especially in terms of critical points, which are generally (1) the existence of an obligation to deliver and, conversely, to take delivery of the goods (2) the existence of the right to unilaterally adjust the price or other terms and conditions (3) the conditions of excusability of non-fulfilment of the contract (force majeure, hardship, etc.). Such an analysis, in a period where it will often not be possible to meet all contractual obligations, will improve the quality of management decisions which, in addition to the commercial aspect, will also take into account the legal implications of contractual liability.
An unenviable situation can arise in the case of unfavourably negotiated contracts, where sales contracts negotiated in favour of the customer in conjunction with purchase contracts negotiated in favour of the supplier can create a 'knife-edge' which, without a pro-active approach (assertion and possible legal enforcement of claims, commercial negotiation with a view to obtaining a change in the negotiated terms), will lead to a concentration of negative economic effects in the company's own business.