Coronavirus: Legal Solutions for Business
March, 2020 - Rapolas Kasparavicius, Dr. Egidijus Baranauskas
Covid-19 (coronavirus) is already affecting business relationships in most parts of Europe. Starting February 26th The state of emergency announced by the Government of the Republic of Lithuania obliges businessmen, event organizers and other public figures to adjust even international long-term plans. Thus, the influence of coronavirus already manifests itself in supply chain disruptions, travel and import restrictions, event cancellations, and so on.
What are the risks to business and how to prepare for potential failures? What if you cannot fulfill your obligations to your partners or, conversely, you become the hostage of defaulting suppliers?
Here are some practical insights that will help you evaluate the potential consequences of coronavirus for your business:
1. Is Covid-19 a Force Majeure?
Force majeure is an unavoidable, uncontrolled and unavoidable circumstance that could not have been foreseen. That is how many would look at the coronavirus at first glance.
Article 6.212 of the Civil Code of the Republic of Lithuania (CC) establishes that, in a case of force majeure, the failure to fulfill contractual obligations is justified. The Supreme Court of Lithuania identifies specific features that can be considered force majeure. Reading them again, it seems that coronavirus could fall into the concept because:
(1) the circumstances were not present at the time of the conclusion of the contract and could not reasonably have been foreseen;
(2) the circumstances render the contract objectively unenforceable;
(3) the party failing to perform the contract could not control or prevent those circumstances;
4) the party did not assume the risk of such circumstances or their consequences.
In any event, whether a party has the right not to perform the contract due to force majeure must be assessed on a case-by-case basis. Therefore, whether a coronavirus or the circumstances that result from it (such as various actions by state authorities) will be considered force majeure will depend on a series of factual circumstances.
2. What are the legal consequences of force majeure?
If the resulting situation is deemed to be force majeure, the contractor shall have the right to suspend his obligations for as long as the force majeure situation continues. For example, a country may be temporarily relieved of the obligation to deliver goods if the production of the goods lacks components or quarantine is declared on the manufacturer's premises. If force majeure continues for a longer period, termination of the contract is also possible. It shall be assessed on a case-by-case basis whether this is a case of force majeure and whether such failure is justified.
2.1. What to do if you are affected?
If your business has been the victim of a partner's default and the other party seeks to justify its default by force majeure, not only the terms of the particular contract but also the factual circumstances should be assessed. For example, is there really no alternative supplier on the market, so your partner might still be able to supply the product at higher costs. In this case, it is advisable to set out a reasoned position and seek the other party to fulfill its obligations. There is also always the possibility of applying to the courts for damages for the other party's default.
2.2. Immediately notify customers and partners
It is not enough simply to default on your contractual obligations, assuming that you are in a situation of force majeure. The CC obliges the aggrieved party to notify the other party of the occurrence of this circumstance and its influence on the performance of the contract. It is also often recommended in practice to apply to the Chamber of Commerce, Industry and Crafts and obtain a certificate of force majeure. It would facilitate proof of force majeure in court.
2.3. Contractual force majeure conditions
It is clear that Covid-19 will go down in history even as some contracting parties immediately include epidemics as a condition of force majeure. We are happy if you have already anticipated such a risk and this allows you to suspend your duties. If not, we want to remind you that the parties are free to agree on how they define the conditions of force majeure. Their formulation can sometimes be crucial and it is very important to do it properly.
2.4. Force majeure and loss insurance
In many cases, insurers may refuse to pay for damages resulting from a force majeure situation, so in the event of a risk, it is important to reassess existing insurance policies and consider in future insurance contracts that force majeure (or more specifically, epidemics) is an insured event.
3. Performance of contractual obligations under changed circumstances
Without force majeure, the coronavirus may result in an objectively enforceable but materially constrained performance, ie a change in the balance of the parties to the contract (increase in cost of performance or decrease in performance). A list of such circumstances is given in Article 6.204 CC:
(1) such circumstances arise or become known to the injured party after the conclusion of the contract;
(2) the circumstances could not reasonably have been foreseen by the aggrieved party at the time of the conclusion of the contract;
(3) those circumstances are beyond the control of the injured party;
(4) the injured party had not assumed the risk of such circumstances occurring.
As with force majeure, the answer as to whether the coronavirus and the circumstances that result from it will be considered to be a material change in the balance of the parties to the contract will depend on a variety of factual circumstances. In addition, the parties to the contract are free to elaborate on what is considered a material change in circumstances.
If this happens, the injured party must comply with Article 6.204 CC to avoid performance of the contract. Day 3 established order. First, as soon as the contract is made more difficult, the injured party must apply to the other party to request a change of contract (but the referral alone does not give the right to suspend the contract!). Secondly, if the parties do not agree within a reasonable time on the modification of the contract, they may both apply to the court, which may terminate the contract (setting the date and conditions for termination) or modify its terms.
What to do next?
We will provide you with prompt advice regarding your or your partners' compliance with Covid-19.
Link to article