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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Lithuania

How are Force Majeure and Hardship defined in the Lithuanian Civil Code?

Force Majeure is defined as the circumstances which are beyond the control of a party and which could not have been reasonably expected by the party at the time of the conclusion of the contract, and the occurrence of such circumstances or consequences could not have been prevented by the party.

The law explicably states that Force Majeure shall not include such circumstances as absence in the market of goods needed for the performance of the obligation, or lack of the necessary financial resources, or the circumstance that the contrahents of the party violates their obligations.

Hardship under Lithuanian Civil Code is defined as a fundamental change in circumstances when the performance of a contract becomes more onerous for one of the parties. The performance of a contract shall be considered obstructed under such circumstances which fundamentally alter the balance of the contractual obligations, i.e. either the cost of performance has essentially increased, or the value thereof has essentially diminished, if:

  • these circumstances occur or become known to the aggrieved party after the conclusion of the contract;-
  • these circumstances could not reasonably have been foreseen by the aggrieved party at the time of the conclusion of the contract;
  • these circumstances are beyond the control of the aggrieved party;
  • the risk of occurrence of these circumstances was not assumed by the aggrieved party.
What are the criteria to invoke circumstances related to Coronavirus as Force Majeure?

Each situation should be investigated individually, the first step for the party wishing to establish whether Force Majeure applies in regard to its or its partner’s obligations is to examine Force Majeure clauses stipulated in the contract.

The principle of freedom of contract allows the parties to agree on what they specifically consider (or do not consider) to be Force Majeure circumstances, also the contract could provide rules of conduct of the party wishing to invoke Force Majeure must follow (i.e. a specific term to provide notification, etc.). It should also be verified whether the party has not assumed the risk of such circumstance or its consequences in the contract.

If there are no Force Majeure clauses present in the contract, the party can rely on the Force Majeure provision stipulated in the Civil Code of Lithuania.

According to the case law of the Supreme Court of Lithuania, in order to rely on Force Majeure, the following conditions must be established:

– the event did not happen before  the time of conclusion of the contract and its occurrence could not be reasonably foreseen;

  • due to the event, the contract cannot be performed objectively (i.e. State restrictions related to COVID-19 directly resulted in non-performance of the contract);
  • the party who has not performed the contract could not control those circumstances or could not prevent them;
  • the party has not assumed the risk of the occurrence of the event or its consequences.

The party wishing to invoke Force Majeure must immediately (or within the time period stipulated in the contract) inform the other party about Force Majeure event  and its impact on the performance of the contract. In the event of failure to report in time, the defaulting party shall be liable for damages that occur due failure to inform.

When is debtor not liable for failure to perform due to Force Majeure?

The basis to be exempt from liability arises from the moment of the occurrence of the Force Majeure event (or from the moment of notification – if not reported in a timely manner) and lasts until the circumstances of Force Majeure disappear.

Force Majeure means that there is no civil liability, i. e. default interest and penalties are not paid, the party shall be exempt from damages and other penalties provided for in the contract (except for the obligation to pay interest).

Can the Coronavirus constitute a situation of Hardship in Lithuania?

Under the Civil Code of Lithuania, if the cost of performance has essentially increased or the value thereof has essentially diminished, for a reason which could not be foreseen before the conclusion of the contract and is beyond the control of the aggrieved party (who had not assumed the risk of occurrence of these circumstances), then the aggrieved party shall have the right to make a request to the other party for the modification of the contract.

Such circumstances shall be deemed to be a constraint on the performance of the contract and shall be notified as soon as they occur by submitting a reasoned and well-grounded request for the modification of the contract.

Quarantine in the country due to Coronavirus and related restrictions are a valid reason to request for the modification of the contract if they cause a Hardship situation. Of course, such a referral itself does not give a party the right to unilaterally modify the contract – the other party must accept the proposed changes. In the absence of a consensus, the dispute may be submitted to a court which will decide either to terminate the contract or to modify the terms of the contract in order to restore the balance of the parties’ contractual obligations.

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

As mentioned before, the party wishing to invoke Force Majeure due to Coronavirus outbreak must prove that such circumstances (i.e. quarantine in the country, specific restrictions imposed by the state) are the direct reason why the certain obligation cannot be performed and all the elements of a Force Majeure event are present in the specific case.

As an additional measure, the party can apply for a certificate on Force Majeure to the Lithuanian Chamber of Commerce, Industry and Crafts.

Given the consequences of the Coronavirus for many business sectors, the Lithuanian Chamber of Commerce, Industry and Crafts has officially identified COVID-19 as one of the circumstances that could be considered as Force Majeure. However, in order to obtain certificates of Force Majeure, the Chamber will need to be convinced not only that there are circumstances related to the Coronavirus that have made it impossible for the company to fulfil its contractual obligations, but also it has to be argued that such circumstances have caused the failure of performing the contract. This means that in each case the existence of Force Majeure is determined on a case-by-case basis, taking into account the facts.

What is the best course of actions recommended in case of notice of force Majeure?

The party wishing to invoke Force Majeure should first of all examine the contract and its individual situation and make sure that Force Majeure actually applies. I case of doubts – legal advisor’s consultation is recommended.

The party wishing to invoke Force Majeure should provide the notification thereof (as well its influence on the performance of the contract) to the other party as soon as reasonably possible.

It should also gather evidence proving that certain circumstances make it impossible to perform the party’s obligations. Applying for a certificate on Force Majeure to the Lithuanian Chamber of Commerce, Industry and Crafts is advisable.

If the party intends to invoke Force Majeure, at least for temporary defaults, it should first consider to perform the contract by alternative means, i.e. modify the terms of the contract (on the basis of hardship, negotiate different terms, change the price, suppliers, etc.), and, if there is such a possibility, try to perform the obligations arising out of the agreement under the updated terms.

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