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.

Check out the FAQ of the country of your interest below and get in touch with our Coronavirus Helpdesk and to set up a free call if you need assistance.

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Hungary

Update on March 31, 2020

On March 11, 2020 WHO declared COVID-19 as a pandemic and the Hungarian Government declared a constitutional state of emergency related to the Coronavirus situation during which governance will mainly be made through Government decrees.

On March 30, 2020 the Hungarian Parliament passed a new law (Act XII of 2020 on the Protection against the Coronavirus) approving the protective and restrictive measures of the Government (public events have been prohibited, institutions have been closed, the entering of foreign citizens to Hungary has been limited, a payment moratorium has been put in place, the Labor Code can be derogated from, etc.).

Under the new law, in a state of emergency the Government – in addition to the measures and rules passed under the Act on Disaster Management – may, by decree, suspend the application of certain laws passed by the Parliament, derogate from statutory provisions of such laws, and take other emergency measures. Additional measures are expected, and Government decrees may overwrite the rules of the Civil Code, including the provisions relating to Force Majeure and hardship clauses as well.

How is Force Majeure regulated under Hungarian Law?

Under Hungarian law, there is no straightforward statutory definition of “Force Majeure” (in Hungarian the term “Vis maior” is used), however, Hungarian judicial practice has developed its own concept which describes Force Majeure as:

an irresistible force, an event that no human and no one can resist. There are certain natural disasters, but this also includes human movements that are of human origin and also have irresistible, elemental power (i.e. war, revolution, or the disappearance of currency without replacement). Events of “force majeure” do not only make the performance of a valid contract difficult but they make it absolutely impossible for the human force.”

Natural disasters (i.e. pandemics, earthquakes etc.), certain political and social events (i.e. war, riots, sabotage, the closing of airports, drastic economic changes etc.) can be considered as basic cases of Force Majeure. State measures for example (i.e. boycotts, bans, export and travel restrictions etc.) can be considered as such circumstances that fall outside of the control of the parties and can be considered as a Force Majeure in certain cases, if other criteria such as foreseeability, preventability and the exhaustion of other alternatives are met. It is also clear from the jurisprudence that there is no general Force Majeure, but in each case it has to be verified individually whether the conditions of Force Majeure are met.

The fact alone that there is a pandemic does not alter contracts in place between parties. In such a case, if the performance of the contract is still possible, neither party is freed of their obligations. However, governmental measures adopted during the fight against the epidemic could result in making the performance of many contracts legally impossible.

The parties can define Force Majeure in their contract, i.e. what should or should not be considered as a circumstance where exemption from liability is possible. In addition, any liability limitation or exclusion clauses in the contract must be carefully considered. Thus, the first step is always a thorough examination of the individual agreement of the parties. If there is no written contract, or it does not mention anything about Force Majeure, the parties will have to rely on the judicial practice of the Hungarian courts regarding cases with Force Majeure.

How is “Hardship” regulated under Hungarian Law?

Hardship” is not recognized as such in Hungarian law, although the amendment of the contract by the court is a similar mechanism. It means that any of the parties may request the court to amend the contract if, in the permanent legal relationship between the parties, and due to a circumstance that occurred after the conclusion of the contract, the performance of the contract with unchanged conditions would harm the substantial legal interest of the party. In addition to the above, the following criteria must be met as well in order to amend the contract:

  • the possibility of a change in the circumstances was not foreseeable at the time when the contract was concluded;
  • the change in circumstances was not caused by the party; and
  • the change in circumstances falls outside the normal business risk of the party.

Professional economic operators will likely not be exempt from performing their obligations or their liabilities in the case of non-performance, as according to certain court cases they must bear the risk of changes in the economy.

Hungary is a contracting state to the Vienna Convention on Contracts for the International Sale of Goods (CISG) and if Hungarian law applies to the contract the text of the treaty also applies, unless it is explicitly excluded. Thus, through this treaty the concept of hardship will be applicable to international sale of goods contracts. The Vienna Convention considers market changes as an obstacle to performance and not as an economic impossibility. The related case law has never considered market changes as being out of control in the event of market price changes below 100%.

It is rather unlikely that the courts would amend the contract and therefore free the parties of their obligations based on the economic hardships and market changes caused by the pandemic, as the whole economy is affected now, not only a few sectors. However, it is hard to correctly guess what is going to happen in the courtrooms of Hungary in litigation connected to the Coronavirus situation.

In addition to Force Majeure and modification by the courts, according to the Hungarian Civil Code, if the performance of a contract becomes impossible, the contract terminates and if the reason for that is not attributable to any of the parties, each party shall bear its own costs and already occurred services  are to be compensated by the other party.

Are there any other possibilities in addition to Force Majeure and Hardship clauses for avoiding liability?

According to Section 6:179-182 of the Hungarian Civil Code, if the performance of a contract becomes impossible, the contract terminates and if the reason for that is not attributable to any of the parties, the monetary value of the services already provided shall be compensated. The already paid monetary compensation shall be returned by the party if no services were provided in exchange.

We note that, in this case, according to the text of the law the contract terminates, which may not be the result the parties would like to reach in the event that they have a longstanding, permanent legal relationship. This provision works fine for contracts providing services on one occasion, but Hungarian legislation does not settle situations where the parties do not intend to end their relationship upon the impossibility of performance or when they do not want to renegotiate the contract. In such a case, it is up to the courts to resolve this issue.

What shall the debtor prove in order to avoid liability for a failure to perform?

According to Hungarian law, a party causing damage to the other party by breaching the contract will be required to compensate the latter for it. In order to be exempted from liability, the party is required to prove that the circumstance that gave rise to the breach of contract:

  • was outside of the control of the breaching party (i.e. the party had no control over it whatsoever due to its irresistible, elemental or legally binding power);
  • it was unforeseeable when concluding the contract (the party should not have foreseen such circumstance – standard of care is that of the bonus et diligens pater familias); and
  • the party could not be expected to have avoided this circumstance or to have averted the damage (one must evaluate alternative methods to avoid such a circumstance or at least mitigate the damage).

If all three of these criteria are met, the party shall not be liable for breaching and not performing the contract pursuant to Section 6:142 of the Hungarian Civil Code.

In the current situation, if someone recently concluded or will conclude a new contract and the epidemiological measures (i.e. prohibitions, restrictions) prevent them from complying with the contractual obligations, we do not think that they will have a good chance of excusing themselves by claiming that they had not foreseen the circumstances beyond their control.

How can it be proved that the Coronavirus is an event of Force Majeure in Hungary?

It is not the Coronavirus alone that prevents millions of contracts from being performed, but rather the consequences of the virus and the reactions of governments during the fight against the virus which could possibly qualify as unforeseeable, irresistible, binding, Force Majeure-like circumstances that fall outside of the control of the contracting parties.

Therefore, in the case of non-performance, one should prove that a circumstance caused by or connected to the Coronavirus was in fact an unforeseeable, irresistible, out-of-control circumstance which could not be avoided, and that it prevented the party from performing its contractual obligations.

What steps should be taken in the event that you experience a COVID-19 Force Majeure event in Hungary?
  • Check the contracts immediately for the existence of a Force Majeure clause and its content. The parties can define Force Majeure in their contract, e. what should or should not be considered as a circumstance where exemption from liability is possible. In addition, any liability limitation or exclusion clauses in the contract should be carefully considered. Thus, the first step is always a thorough examination of the individual agreement of the parties. If there is no written contract, or it does not mention anything about Force Majeure, the parties must rely on the judicial practice of the Hungarian courts regarding cases with Force Majeure.
  • Notify or contact your business partners as early as possible to discuss the situation and possible solutions or contract modifications. Even if any circumstances are likely to prevent the parties from performing their contractual obligations, the parties should notify one another of them, unless the other party should have been aware of such impediment even without notification. In the event of a failure to communicate an impediment, the negligent party will be held liable for damages caused by not notifying the contracting party in accordance with the provisions on liability for non-performance of an obligation.
  • Take all possible measures to minimize damage (seek alternative sources of supply, look for second best solutions, ).
  • Safeguard all elements of proof that may be needed later.
  • Check whether there are any extraordinary governmental remedies in place that can be relied upon.
  • Check your insurance policies to see if damages would be covered.
  • When concluding new contracts, carefully draft force majeure clauses to explicitly deal with the consequences of the pandemic.
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