The Effects of COVID-19 on International Contracts

How to handle the case in which a supplier or customer within an international supply chain defaults on a contract? When can Force Majeure be invoked? What are the consequences on contracts? How to minimize risks to the company’s business?

To answer these questions, it is necessary to analyze the content of the contracts and understand what the law applicable to the individual agreements provides for.

Our experts explain how to manage the effects of the Covid-19 pandemic on industrial and commercial activities and share operational advice for managing international contracts during the emergency.

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Greece

How are Force Majeure and Hardship regulated under Greek Law?

The term “Force Majeure” is not foreseen in the Greek Civil Code (hereinafter: “GCC”), but has been developed by jurisprudence, as follows :

  • any unforeseeable event in a specific situation
  • any fortuitous event
  • any event which is unavoidable even when the highest measures of prudence and due diligence have been taken.

Examples of Force Majeure are:

  • natural disasters, such as earthquakes, landslides, floods and tempests
  • sudden and unforeseen illness
  • orders of authority
  • strikes
  • public order declarations of national emergency, state of siege or war

Hardship

The term “Hardship” does not occur in Greek Civil Law. Instead the doctrine of “altered circumstances”can be found. According to the doctrine of altered circumstances it is possible the exceptional release of a debtor from an obligation which, while in itself not wholly impossible to perform, as a result of an unforeseeable event, would involve exceptional financial or moral hardship.

Exceptional Hardship therefore may be treated as impossibility for which the debtor is not liable for damages.

How to prove that the Coronavirus can be considered as an event of Force Majeure?

Article 336 of the GCC rules that the debtor is exempted from any obligation due to the impossibility to perform, if he proves that the impossibility is due to an incident for which he is not responsible.

Impossibility of performance exists if the performance cannot be fulfilled for actual/natural or legal reasons.

Impossibility of performance for legal reasons can also apply where performance is actually possible, but its fulfilment would require incalculable or extremely high and disproportionate costs.

In the case of the Coronavirus outbreak a legal reason of impossibility to perform might occur in case of administrative orders severely limiting everyday life, transport and business. The applicability of article 336 GCC would however depend on the merits of each case.

Arguably, an epidemic or a pandemic could reasonably be considered a natural condition of impossibility to perform. But Greek jurisprudence, and in particular the Greek Supreme Court “Areopagos”, appear to have not decided such a case so far.

The regulation of impossibility of performance can be derogated by the parties to a contract, who  may specify in a clause of the agreement which cases fall into the category of impossibility of performance. Where no such clause in the contract exists, the courts have power to decide.

The prerequisites for the exemption of the obligation are the following:

Subjective or objective, actual/natural or legal impossibility of performance

  • Objective impossibility exists if the performance is impossible for everyone
  • Subjective impossibility exists if the performance is impossible for the debtor, but could be performed by someone else
  • Actual/natural impossibility exists if the performance is impossible due to natural reasons such as the object to be sold is destroyed
  • Legal impossibility applies if the performance cannot be executed due to legal reasons, such as binding administrative orders

Subsequent impossibility means that the impossibility takes place after the obligation arose, but not after the due date. The impossibility of performance shall be permanent.

Non-culpable impossibility (without fault)

The impossibility is due to an event for which the debtor or those who were assisting him to perform were not responsible.

The main consequence of non-culpable impossibility is that the debtor is exempted from the obligation to perform. The exemption of the obligation occurs automatically without any declaration of intention by the parties or judicial order.

According to Art. 336 para. 2 of the GCC the debtor is then obliged to inform the creditor without due delay and within a reasonable time justified by the circumstances of the situation.

The informing of the creditor by the debtor is a unilateral, formless and declaratory document.

The debtor is also obliged to return any consideration already received.

Omission or delay to inform the creditor does not nullify the exemption. In this case though, the debtor remains liable for damages to the creditor arising from the debtor’s failure to comply with his duty to timely inform the counterparty.

In case of “Altered circumstances” (Hardship) article 388 of GCC reads (in part) as follows:

If the circumstances under which the parties have agreed subsequently change, for extraordinary and unforeseeable reasons, and having regard to good faith and business usage and mainly in the case of a two-sided contract, and if, as a result of this change, fulfilment of the obligation, taking into account the counter-obligation / consideration, became unduly burdensome for the debtor, the debtor may request the court to reduce his obligation at its discretion to a reasonable extent, or to rescind the whole contract or the part not carried out.”

This means that the courts are entrusted with the power to not only terminate the contract but also to let the contractual relationship continue, while modifying the terms of the contract to address the changed circumstances.

This regulation is mandatory law, meaning it cannot be derogated or waived by the parties in their contract.

The doctrine of Altered circumstances applies if the changed scenario related to the main elements of the contract, it occurs after the conclusion of the contract and before its fulfilment, the change is  due to extraordinary and unforeseeable reasons, not attributable to the will of the parties and performance would be excessively onerous.

Extraordinary reasons are such which under the normal course of events do not usually occur, but arise from exceptional events such as natural disasters, wars, earthquakes, revolutions, strikes, major devaluation of currencies et al.

Unforeseeable are future events which at the time of concluding the contract nobody could foresee or calculate. The inability of prediction shall be considered on the basis of the principles of good faith and business usage.

The consequence of altered circumstances may be the adjustment of the contract by the court on the basis of the principles of good faith and business usage.

How to prove that the Coronavirus is an event of Force Majeure in Greece?

The general rule in Greek Civil Procedure Law is that each party has to prove the facts which give rise to their claim or objection.

Therefore, the claim of the creditor for fulfilment of the performance of the debtor will be dismissed by the court if the debtor proves the impossibility of performance based on legal reasons, for instance an administrative order of shutdown of business operations to face the outbreak of Coronavirus.

What to do in case of notice of COVID-19 Force Majeure in Greece?

First, the parties have to check if there is a Force Majeure clause in their contract and what it stipulates. Where an epidemic or pandemic is included in the list of events of Force Majeure, then it is important to check what procedure and consequences arise out of the contract and the situation for the parties.

In case no Force Majeure clause exists, the debtor should inform his counterparty as soon as he knows about the impossibility of performance as stipulated Article 336 GCC.

In all cases the parties are obliged to inform each other without delay of their inability to perform and on the possible alternatives to mitigate the damages. Article 300 GCC stipulates that failing to inform or otherwise to mitigate or prevent the damage excludes the claimant either in whole or in part to claim for damages.

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