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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Romania

How are Force Majeure and Hardship defined in the Romanian Civil Code (RCC)?

In articles 1351 and the following, the RCC foresees several cases in which a party to a contract is no longer held liable for the non-observance of its obligations, out of which of particular interest are Force Majeure and Fortuitous case (“exoneration cases”).

While “Force Majeure” is defined as any external event, unpredictable, absolutely invincible and inevitable, the “Fortuitous Case” is an event that cannot be predicted nor prevented by the one held liable if the event did not occur.

Although the two exoneration causes seem to overlap, there are some significant distinctions between the two, namely, while Force Majeure always implies the occurrence of an external event, the Fortuitous Case can also apply in situations related to the party or to the good that is sold through the contract. Also, the Fortuitous Case does not need to be “absolutely invincible and inevitable”, the requirement for the party invoking it is being to be able to demonstrate that it could not have prevented it or predicted it, the standard for this latter exoneration case being lower than in the case of the Force majeure.

In practice, the courts have held that:

  • natural phenomena such as: floods, landslides, earthquakes, lightning and so on, due to the fact that such events cannot be imputed to anyone, they are exonerating causes of liability (High Court of Cassation and Justice (HCCJ) decision no. 358/1965);
  • The Fortuitous Case is a simple internal causal obstacle arising from the conditions of exercising the prerogatives over of goods and which is only relatively possible to remove. For example, breaking the steering bar of a vehicle, tire explosion and so on, they are fortuitous cases, not cases of force majeure (HCCJ decision 766/1981);

What is important to underline is that the existence of a situation that could amount to an exoneration case does not excuse from its obligations a debtor who has not been directly affected by such case, so there must be a nexus between the exoneration case and activity of the latter and the burden of proof lies on the party invoking the exoneration event.

In the case of the Force Majeure, the assessment whether an event is unpredictable, absolutely invincible and inevitable, is done in abstract, according to the objective type of a sufficiently diligent man and not for the particular case, that is to say as a certain person who has a certain training in one area, preparation that would, in a given case, allow him to foresee, to avoid or defeat the effects of Force Majeure.

With respect to the modality the exoneration cases shall become applicable and if there are any preconditions, if the contract is silent, the provisions of RCC shall be applicable, which in art. 1634 foresee that the steps to be followed are:

  • Notify the other party with respect to the occurrence of the event as soon as reasonably possible (otherwise the party shall be held liable to the damages caused to the other party);
  • Consequently, the contract shall be suspended either up until the situation leading to the exoneration case has ended, either up to the date the contract is terminated through the parties’ will – should they decide so through an addendum to the contract;
  • Conversely, if the event is one whose effects cannot disappear/be remedied in time (eg. the total destruction of an office building in which the party invoking the Force Majeure had its office) the parties shall immediately be released from their obligations;

Notably is the fact that for the obligations that were already outstanding when the exoneration case occurred (for example payments that were overdue) the party can’t invoke Force Majeure/Fortuitous Case to avoid being obliged to perform the payments or the applicability of penalties.

Also, in the case of occurrence of an event that does not amount to an exoneration cause but unbalances the contract, the RCC has regulated the situation of Hardship (Impreviziune): according to the definition from art. 1271 RCC, Hardship is the situation in which the execution of the contract became excessively onerous to one of the parties due to an exceptional change of circumstances, which would make it manifestly unfair for the party who is obliged to perform the obligation. Should Hardship occur the parties, or in the absence of their agreement the court of law may: adapt the contact distributing equitably between the parties the losses and benefits resulting from changing circumstances or terminate the contract.

As the definition provides, there are 3 conditions that need to be met in order for a party to be able to rely on Hardship in order to request the rearrangement of the contract, namely:

  • the contract became excessively onerous in the sense that although the parties may still continue to execute their obligations, continuing to do so would place one party in a very difficult economical position
  • exceptional change of circumstances: in order for an event to qualify as exceptional it must surpass the inherent risk that either party undertakes, under the contract. For example, a tenant of a shopping mall undertakes the risk for its activity to be stopped a couple of times per year (eg. In case of works to be performed or in case of shortages of utilities) but it will be exceptional for him to foresee that its entire activity will be shut down for months in a row. Also, it is implicit that the change should occur after the signing of the contract. In the case of COVID – 19 pandemy, from our perspective, the parties shall have difficulties invoking Hardship for the contracts signed after January 2020 when the World Health Organization declared a international health emergency. The assesment whether the character of the change is exceptional shall be done, by analizing the actual facts of the case and the ability of the party to foresee the event, depending on its knowledge, level of preparation etc.
  • which would make it manifestly unfair to oblige the debtor to execute the obligation: this condition is very subjective and shall be analyzed by making a parallel between the intention of the parties at the date the contract was concluded and the situation when Hardship is invoked, and generally is considered as being met in circumstances in which the party invoking Hardship would be deprived of the benefits it wanted to obtain when concluding the contract, and its financial situation would be deteriorated while the other party would continue to obtain benefits from same contract.

Resorting to Hardship implies a threefold procedure, namely: Firstly the party invoking Hardship should notify the other party and request the renegotiation of the contract, if the other party replies positively to the notification, the second stage shall be initiated in which negotiations shall take place for the adaptation of the contract. Conversely, if the other party does not reply to the negotiation request or if the negotiations fail, the third stage shall commence through the filing of a judicial claim for the modification of the contract in order to distribute equitably the losses and benefits of the contract or the termination of the contract.

If the parties did not exclude the applicability of Force Majeure/ Fortuitous Case / Hardship from their contract, either party may rely of the provisions of RCC and request either exoneration from liability or the rebalancing of the obligations. However, if the contract does contain a provision regarding the exoneration cases and/or Hardship, the latter shall prevail.

If the contract in connection to which the party wants to invoke any of the exoneration causes or Hardship is one for sale of goods between parties headquartered in different countries, then the Vienna Convention on Contracts for the International Sale of Goods (“CISG”), to which Romania is a contracting state, shall apply (if the parties did not expressly derogate from its provisions).

The CISG does not specifically define Force Majeure or Hardship but merely sets forth in art. 79 of the Convention, the cases in which one of the parties may be exonerated from its obligations, namely if the following conditions are met:

  • the occurrence of an impediment beyond his control
  • the event could not reasonably be expected to have taken the impediment into account at the time of the conclusion of the contract
  • the event or its consequences could not have been avoided or overcame

The exoneration case from article 79 of the CISG is a combination between the elements of the Force Majeure and the Hardship from Romanian national legislation, but the wording is more permissible since it does not require the party to prove an absolute invincibility and inevitability of the event but just to prove that it was is out of its control.

Should an international contract, regulated by Romanian law not contain any exoneration clause, the provisions of CISG shall prevail because it constitutes Lex specialis by comparison with RCC that is Lex generalis.

The mechanism through which the exoneration clause is triggered is the same as in the case of the Force Majeure/Hardship, namely the party invoking it must send a notification within a reasonable time after the occurrence of the impediment.

Can the Coronavirus be regarded as a Force Majeure or Hardship in Romania?

The outbreak of the COVID – 19 pandemic in Romania has lead the state authorities to:

  • Declare a state of emergency through Presidential Decree published in the Official Gazette no. 212/16.03.2020 for a period of 30 days, with the possibility of its extension;
  • Adopt the Decision no. 9 from 14.03.2020 in order to establish measures to prevent the spread of COVID-19, which foresees the restriction of cultural, scientific, artistic, religious, sports and entertainment activities, which involve the participation of more than 50 persons, carried out in confined spaces (Restricted activities);
  • Adopt Order no. 2/21.03.2020 through which the activity of the shopping malls is suspended temporarily, and quarantine mesures are enacted, limiting the free movement of the individuals;
  • Adopted several measures amongst other a Government Emergency ordinance no. 29/2020 published in the Official gazette no. 230/21.03.2020 (GEO no. 29/2020) through which it is stipulated that the small and medium entreprises (SME) that have stopped their activity in whole or in part due to a decision of the state authorities and that hold a situation of emergency certificate issued by the Ministry of Economy, Energy and Business, shall benefit from postponement of the payment term for the following services: utilities, internet, electricity, gas as well as from the postponement of the payment term for the rent of the headquarters and the working points. For contracts other than the ones indicated above, the SMEs can invoke Force Majeure only if they prove (through any written evidence – including electronic correspondence) that they have attempted to renegotiate the contract and adapt its provisions considering the current situation.
  • The same GEO no. 29/2020 mentioned above, stipulates that the party is presumed to be in a Force Majeure case as defined in art 1351 RCC, following the activity of the authorities that have enacted measures to prevent and fight COVID – 19 and have affected the activity of the company, as ascertained through the certificate of situation of emergency. The presumtion can be overturned by the other party through any type of evidence.The unforseable character of the event is assessed at the date the contract was signed. Also the ordinance provides that the measures taken by the authorities following the presidential decree declaring the state of emergency cannot amount to Force Majeure. In other words, for the contracts concluded after 16.03.2020 – when the decree passed, the parties could not rely of Force Majeure to be exonerated from their obligations.
  • However, the procedure for the issuance of the situation of emergency certificate has not been adopted yet.

The problem with the provisions of GEO no. 29/2020 is that in article X second paragraph, it adds a precondition for the SMEs that want to invoke Force Majeure that did not exist in RCC, namely to demonstrate through any written evidence – including electronic correspondence, that it has attempted to negotiate the modification of the contractual clauses before invoking the exoneration clause. Imposing a precondition only to a particular type of companies seems discriminatory and abusive.

Hence, in the case of the SMEs that obtain a certificate for the situation of emergency – the prorogation of the payment terms for the utilities, internet, electricity, gas as well as from the postponement of the payment term for the rent of the headquarters and the working points is automatic, and for the other types of contract they benefit from a Force Majeure presumption.

Conversely, the companies that are not SMEs or the SMEs that do not work in sectors of the industry that have been restricted in whole or in part by the authorities should rely on the provisions of the contracts and the RCC to invoke an exoneration cause or hardship.

Regarding the criteria to consider Coronavirus as Force Majeure, the Chamber of Commerce and Industry of Romania (CCIR) which is the entity that ascertains on request the occurrence of a Force Majeure case for Romanian companies, has published a press release, accessible here detailing what are the elements based on which they reply favorably to a certificate request, namely: “Some force majeure clauses may even be provided to include epidemics or pandemics. When a force majeure clause is provided in a more general sense – even without including epidemics or pandemics, but provides for any act or fact that has occurred beyond the control or will of the affected parties, then the spread of the epidemic or pandemic may be considered a force event majeure. However, an insufficiently defined force majeure clause, which refers only to natural events, weather, etc. or just mentioning the phrase a force majeure event, could be considered insufficient to be able to exempt from liability.

 In other words, the fact that a force majeure clause explicitly covers the situation of outbreaks or pandemics, as is the case with Coronavirus, is not enough by itself. The person attempting to rely on it must demonstrate that it cannot perform the contract because of circumstances beyond its control (generated by the virus). It must also demonstrate that reasonable steps could not be taken to avoid or mitigate the event or its consequences.”

It is to be mentioned that the Chamber of Commerce and Industry of Romania cannot state if a certain situation amounts to a Force Majeure, but checks and ascertains if any of the cases defined as Force Majeure in the contract have occurred. For example if the contract contains a provision according to which a state of emergency constitutes Force Majeure, the CCIR shall check whether indeed the state of emergency was declared and if so it shall issue the certificate.

In a case (HCCJ decision no. 4916/2012), a party had successfully requested in court the annulment of a certificate issued by the CCIR through which a strike was acknowledged as a Force Majeure event, and the court has held that since the force majeure clause did not contain strikes as one of the cases that were defined as such, the CCIR cannot extend the scope of the contractual provisions.

On the other hand, invoking Coronavirus as a cause for Hardship should follow the same logic, namely the pandemic itself does not constitute a good enough reason for the renegotiation of the contract, but the party shall have to also register a more onerous contractual obligation that in most cases is due to external cases such as: shortage of supplies, blocking of the activity and decrease of the sales, absence of personnel due to quarantine etc., and also to meet the other criteria detailed above.

How to prove a Coronavirus event of Force Majeure in Romania?

The general rule is that the burden of proof when invoking an exoneration event lies with the party that attempts to avoid its contractual obligations. Consequently, the party whishing to invoke an exoneration case or Hardship is the one that must demonstrate that all elements foreseen by the contract/law are met. In order to do so, the party may use any means of evidence from documents deriving from the public health organizations/authorities up to excerpts from their statutory documents that attest that the activity is affected by authorities measures for the prevention of COVID – 19. From our perspective, even if the contract does not specifically request a certificate issued by a chamber of commerce or another public authority to ascertain the Force Majeure, it is advisable to obtain one.

Nevertheless, in the matter of the COVID – 19, GEO no. 29/2020 reverses the burden of proof in the case of the companies that obtain a situation of emergency certificate, that shall no longer be requested to prove to the other party how their activity was affected or that the event was unpredictable, absolutely invincible and inevitable.

What is interesting is that fact the state authorities considered as force majeure not the COVID- 19 pandemic but the actions of the authorities that have been directed towards the prevention and fight of the spread of the virus.

What is the best course of action in case a party invokes an exoneration event or Hardship?
  • Should an event occur that could amount to an exoneration case or to an adaptation of the contract, one must make sure that it documents the facts. For example:

if the suppliers increase the prices due to shortages of stocks, a manufacturer should make sure that it has correspondence with the supplier to justify the price increase to its end clients, and not only rely of telephonic negotiations;

If a party that unrolls activities in a shopping mall has noticed a decrease of clients traffic in the mall starting with February 2020 it should immediately notify the landlord of the facts and indicate the decrease it had in its turnover;

  • The party that wishes to invoke an exoneration case must firstly check the provisions of its contract to see if the exoneration case is regulated by the contract and if the answer is positive, see if it does strictly fit under the situations covered by the clause or not. Also, attention must be given to the contractual mechanism that should be activated to invoke the Force Majeure.
  • For example, courts (HCCJ 2584 from 14.04.2005) have held that the non-observance of the term the contract put forth for notifying the Force Majeure event renders the notification ineffective and the party that sent the notification cannot be exonerated from its obligations.
  • The notification must contain the explanation why the fact amounts to an exoneration case or Hardship and should be documented and must be sent through a mean that can certify the receipt.
  • If the contract foresees that Force Majeure must be certified by a chamber of commerce or a state authority we would recommend firstly sending a notification as soon as the event occurs, in which it shall be mentioned that a certification from a third party has been requested and shall be provided and subsequently after the certificate is obtained (which usually takes around 10-15 days) a new notice shall be sent to which the party shall attach the evidence obtained.
  • In the situation of an exoneration case and or Hardship due to COVID – 19 make sure that you check all the remedies and measures that the state has made available to the companies and resort to them in order to mitigate the damages both to your activity as to the activity of the other contracting party.
  • The SME should check the procedure allowing them to obtain a situation of emergency certificate to benefit from the automatic postponement of the payment terms for the rent and utilities and try to renegotiate the other contracts, as foreseen in the GEO no. 29/2020 indicated above.
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