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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Croatia

How is Force Majeure defined under Croatian law?

Under the Croatian Civil Obligations Act Force Majeure relates to unforeseeable and extraordinary external events that are unavoidable. Acts of God such as earthquakes or floods, wars and riots or certain political and social events are typical examples of force majeure. In case an agreement contains a Force Majeure clause, contracting parties will often include examples of Force Majeure events in their agreements.

Can the Coronavirus be considered as Force Majeure?

Whether or not a Force Majeure can be invoked primarily depends on the wording of the Force Majeure clause or, in the absence thereof, on the Croatian Civil Obligations Act and respectively its interpretation by the Croatian courts.

In principle, contracting parties may freely decide what kind of events shall qualify as Force Majeure. As mentioned above, earthquakes, floods, wars and riots are typical examples of Force Majeure events that are often explicitly listed in Force Majeure clauses.

Unless there are indications in a Force Majeure clause that a list of specific Force Majeure events shall be considered as exhaustive, it seems fair to assume that lists of Force Majeure events shall not be exhaustive, meaning that events not explicitly mentioned in the clause may qualify as Force Majeure as well. This holds true, e.g., for epidemics such as the one caused by the COVID-19. It seems rather unlikely that the parties to an agreement intend to exclude global epidemics from the scope of application of Force Majeure clauses.

In the absence of a Force Majeure clause, it seems quite likely that the circumstances caused by the coronavirus qualify as Force Majeure events for the purpose of the Civil Obligations Act.

Consequences in case Coronavirus is Force Majeure

If performance of an obligation becomes permanently impossible due to a Force Majeure event, the obligation is deemed extinguished and the debtor is exonerated. The debtor must return any consideration already received from the creditor on the basis of the statutory provisions on unjust enrichment and loses its counterclaim against the creditor to the extent it has not yet been satisfied (Article 373, paragraph 1 Civil Obligations Act).

Note that a temporary inability to fulfil an obligation does not, as a rule, abrogate the obligation to fulfil, but it may lead to an expiration of that obligation depending on its duration and the interest and expectations of the contractual parties.

The debtor will be relieved of liability for damage if he proves that he was unable to fulfil his obligation or that he was late in fulfilling his obligation due to such circumstances (Article 343 Civil Obligations Act).

Besides that, debtor should notify the other party timely on the inability to fulfil its obligation, otherwise it could be liable for damages occurred due to missed or late notification (Article 348 Civil Obligations Act).

On the other hand, if the circumstances did not disable fulfilment but made fulfilment of the obligation significantly more difficult or would cause loss to one contracting party, that contracting party may require modification of the contract or even termination (Article 369 Civil Obligations Act).

Having said that, it is important to clarify that the COVID-19 itself does necessarily qualify as a Force Majeure. In the context of trade agreements, rather the circumstances caused by the COVID-19 may qualify as Force Majeure. By way of example, such circumstances may be:

  1. an involuntary temporary closure of manufacturing facilities;
  2. temporary export restrictions; or
  3. transport interruptions
How to Prove an event of Force Majeure

In the absence of Force Majeure clause, it is necessary to show that:

  1. the event is of extraordinary character, and not something that could be expected as a regular occurrence of an event;
  2. outside circumstances are at hand, that is, circumstances beyond the control of the contracting parties (ie caused by third parties or without human influence);
  3. The event occurred after the conclusion of the contract and before the due date of the obligation you are considering;
  4. the event is unpredictable, and objectively unpredictable in the context of the business relationship you are in, or one that could not even have been foreseen by a conscientious contractual party – special emphasis is placed here on the fact that the event that occurred was unpredictable at the time of the conclusion of the contract; and
  5. failure could not be prevented, avoided or remedied by other measures, available means and methods.

Hence, it is not sufficient to establish that the debtor was not able to fulfil the obligation due to the current situation with the COVID-19, but also to establish when our obligation occurred (that is, whether we should already have been aware of the situation at that moment) and whether we could have prevented the failure to fulfil.

What is the respective burden of proof on the parties to prove the coronavirus outbreak can be/cannot be deemed as an event of Force Majeure?

In the absence of a Force Majeure clause that allocates the burden of proof to one of the parties, the burden of proof lies with the party who wishes to exonerate itself, i.e., which is affected by Force Majeure.

What is recommended in case of notice of Force Majeure in Croatia?

Companies should screen their agreements and assess whether they are able to perform in accordance with the agreement despite of the COVID-19.

If it is foreseeable (or at least likely) that a company will be prevented from fully performing its obligations in a timely manner due to the coronavirus epidemic, the company should do whatever is feasible to mitigate the consequences of the epidemic on the performance of its own obligations.

Such efforts should be documented in an appropriate manner, since such documentation might be necessary as evidence if disputes should arise later on.

In addition, the company should notify affected counterparties as soon as possible in writing about the circumstances which prevent the company from fully performing in accordance with the contract, including a description of measures taken to mitigate the effects of the epidemic and, if possible, a forecast regarding the length of the delay caused by the epidemic. Further notification requirements might be stipulated in agreements, general terms and conditions etc.; if such requirements exist, they should be fully complied with.

Notifications to counterparties should be updated whenever circumstances change, e.g., as soon as it is foreseeable that information in earlier notifications might be outdated.

If a company receives a notification of Force Majeure from the other party, but does not agree with the qualification as Force Majeure, such company should inform the counterparty without delay in writing that reliance on Force Majeure is unjustified and insist on performance in accordance with the contractual obligations.

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