CEE Legal Matters

Category: Comparative Guides

  • CEELM Covid-19 Comparative Legal Guide: Contracts in Austria

    Contributed by Graf Patsch Taucher, member of PONTES

    How might businesses in your jurisdiction be impacted by the Covid-19 pandemic?

    Companies can be affected by the virus in many ways.

    This may include, among other things:

    a. Employment relationships

    Among other things, loss of employment issues around continued payment, short-time work, the implementation of home offices, missing employees due to sickness.

    b. Loss of revenue

    The fact that many retailers and organizers of major events have to close their outlets/premises for at least one week currently strongly affects restaurants, bars, shops, organizers of major events and conferences and the sports industry. Only supermarkets, gas stations, post offices, pharmacies, banks and certain other fundamental businesses may be kept open.

    c. Impact on management issues

    Stock companies and limited liability companies are currently not allowed to hold their annual general meetings or general assemblies if they expect more than 100 people to be present.

    d. Border controls or border shutdowns to neighbor countries

    This may affect in particular companies operating across borders. Exporting products may be delayed or not work at all. Employees from neighboring countries may not be able to get to work because of restricted access to Austrian territory.

    e. Contractual obligations

    Companies may generally not be able to meet their contractual obligations due to the current restrictions in place. Certain activities may no longer be permitted at all, companies from regions under quarantine will not be able to service their customers, sick employees may lead to enterprise shutdowns and production losses.

    In your jurisdiction, if it becomes impossible for a party to perform its contractual obligations because of an external event beyond its control (such as the Covid-19 pandemic), can that party cancel its contract?

    To answer these questions, three things need to be clarified in advance:

    a. Is the virus to be regarded as force majeure under Austrian law?

    According to case law, force majeure is to be assumed if an extraordinary external event occurs which does not occur or cannot be expected to occur in a certain regularity and which cannot be averted or rendered harmless in its consequences even by exercising the utmost reasonable care. Any event is deemed unavoidable if it cannot be averted despite all conceivable expertise and precautionary measures.

    b. Is there a contractual agreement on the legal consequences in case of a force majeure event?

    A right to terminate or suspend an agreement is usually embedded in a force majeure clause if upholding the contractual obligation is no longer reasonable for either party. Usually a party may only terminate an agreement in case of a force majeure event after observing a certain grace period. At the end of such a grace period the agreement may be terminated in case the force majeure event still continues. Where a termination right has been agreed only in favour of the party that is still able to perform its obligations the following applies (c. below).

    c. No contractual provision on force majeure

    In this case, statutory law applies, which offers the following options for all parties:

    1) Frustration of purpose

    The basis on which parties enter into a transaction is a set of circumstances typical for such a transaction which both parties assume when concluding an agreement. If the fulfillment of the agreement has become useless for a party due to a misconception about such circumstances, that party may be entitled to contest or adjust the contract (e.g. fulfillment after the force majeure event), provided that these circumstances are not attributable to a party and the force majeure event was not foreseeable at the time when the contract was concluded.

    If, however, the fulfillment of the contract is generally no longer possible, the provisions on subsequent frustration shall apply.

    2) Subsequent Frustration

    Subsequent frustration shall be deemed to exist if the performance of a contract is impossible due to a permanent obstacle.

    If performance becomes frustrated due to a force majeure event the parties´ obligations are no longer valid. The economic disadvantage shall be borne by the party whose performance is thwarted by the force majeure event.

    In your jurisdiction, if a party’s performance of its contractual obligations is adversely affected by an external event beyond its control (an “FM Event”) but does not become completely impossible, can that party typically seek relief from compliance with its obligations?

    See our answers to the point above (In your jurisdiction, if it becomes impossible for a party to perform its contractual obligations because of an external event beyond its control (such as the Covid-19 pandemic), can that party cancel its contract?)

    If yes, what considerations should be borne in mind by such parties, in particular in relation to:

    Any notification obligations (Is the affected party typically required to notify any counterparties of the FM Event within a specific time period?)

    There is no specific provision under Austrian law in this respect. In principle, however, the parties should try to find a solution as quickly as possible. If the affected party does not inform the other party in due course it may be in default, which would entitle the other party to withdraw from the contract after a reasonable grace period. Also, the mitigation obligation described below may apply.

    Any causation requirements (Is the affected party typically required to demonstrate that it would have performed its contractual obligations but for the FM Event?)

    In general, no.

    Any mitigation obligations (Is he affected party typically required to demonstrate that it took specific steps to avoid the impact of the FM Event as far as possible?)

    Generally, yes. There is no duty to mitigate damages in the sense of a legal duty. However, in the Austrian legal system, the obligation to mitigate damages applies.

  • CEELM Covid-19 Comparative Legal Guide: Contracts in Ukraine

    Contributed by Avellum

    How might businesses in your jurisdiction be impacted by the Covid-19 pandemic?

    The Government of Ukraine has issued a series of regulations launching extraordinary measures aimed at combating the Covid-19 pandemic, namely:

    • it is prohibited to run culture, entertainment, religious, sport, social, and other events with more than ten participants
    • offline shops and shopping malls are closed except for pharmacies, gas stations, and grocery stores
    • restaurants, cafes, entertainment venues, gyms, and other public services (e.g., spa and wellness centers and beauty shops) are also closed
    • a quarantine has been introduced for educational institutions (e.g., schools, colleges, and universities) for the period between March 12 and April 3, 2020
      regular and irregular passenger transportation by auto transport in suburban areas and for long distances within Ukraine is prohibited for the period from March 18 and April 3, 2020
    • From March 18 until April 3, 2020 it is prohibited to have more than 10 passengers at once in one tram, trolleybus, auto transport, or bus that executes regular passenger transportation within each city
    • Subways in Kyiv, Kharkiv, and Dnipro must suspend their operations from March 17 until April 3, 2020
      railway connection between cities and regions of Ukraine must be suspended until the date of issuance of a separate Government decision in this regard
    • The Ministry of Healthcare must temporarily suspend execution of regular planned hospitalizations and planned surgical measures except for urgent and emergency cases. It is also necessary to prepare and reorient healthcare institutions to the extent possible tin order to ensure the treatment of infected patients who are in critical condition.
    • On March 17, 2020, the Parliament of Ukraine took things a step further, approving the Draft Law of Ukraine “On Amending of Certain Legislative Acts Aimed at Prevention of Occurrence and Spreading of Covid-19”, No. 3219 as of 16 March 2020 (the “Law”).

    The Law, among other things, introduces the following measures:

    (1) In the employment area

    • the Law establishes employers’ right to introduce remote work as well as the right to grant unpaid vacations for employees for the entire term of the quarantine (i.e., for a term exceeding 15 business days per year)
    • owners of businesses and/or executives of Ukrainian companies are able to rearrange their businesses’ work schedules

    (2) In the area of procurements of medicines, and medical devices

    • temporarily, for 3 months starting from the Law’s date of publication, the state must ensure a 100 percent advanced payment for medicine and related works and services that are procured with the purpose of combating Covid-19;
    • temporarily, for 3 months starting from the Law’s date of publication, operations related to the procurement of necessary medicines, medical devices, and equipment will be free of VAT and customs duty
    • The Ukrainian Government will execute control over the prices for medical goods and socially important goods.

    (3) In the area of provision of administrative services, and conducting of state control

    • the term for consideration of all applications for receiving administrative services is suspended
    • foreigners and stateless persons who failed to exit Ukraine in time (i.e., who stay for more than 90 days cumulatively within a 180-day term without holding Ukrainian residency permit) are exempt from liability for exceeding the term of stay in Ukraine
    • the Law establishes a prohibition on the conducting of regular audits by state regulatory bodies. This rule, however, does not apply for the following types of state audits:

    (i) those aimed at securing the sanitary and epidemiological security of the populace

    (ii) state audits of businesses that rank as high risk as per the established criteria

    (iii) state audits regarding the fulfillment of requirements for forming, establishing, and applying the administrated prices.

    The Law also establishes certain other measures, for example:

    • the protection of interests of refugees, and internally displaced persons;
    • establishing increased remuneration for medical and other personnel who are directly engaged in activities related to preventing, localizing, and liquidating outbreaks of Covid-19;
    • exemption of individuals from liability for delays in payment for utilities
    • introduction of changes into the Code of Ukraine “On Administrative Offenses” and the Criminal Code of Ukraine establishing administrative and criminal liability for violations of the rules aimed at protecting the populace from the spread of Covid-19.

    On top of that, the National Security and Defense Council of Ukraine ruled that:

    • starting from March 16, 2020, it is prohibited for foreign nationals and stateless persons to enter Ukraine for 2 weeks (i.e., before March 30, 2020). This rule does not apply to those foreigners and stateless persons who hold either Ukrainian temporary or permanent residency permits, as well as to accredited representatives of foreign diplomatic missions, consulates, and international organizations if there is a respective decision of the Ministry of Foreign Affairs in place
    • starting from March 17, 2020 for 2 weeks (i.e., by March 31, 2020) the frontier checkpoints of Ukrainian border are closed for air, railway, and bus connections. Ukrainian nationals can return to Ukraine on their own transport using a very limited number of frontier checkpoints.

    Apart from the above requirements, a lot of businesses launched their own preventive measures, for example:

    • business trips (both abroad and within the country) are limited
    • to the extent possible, businesses have rearranged their work in a way that enables them to limit direct interaction between people (e.g., offline business meetings are cancelled, employees are encouraged to work remotely, where possible).

    On a separate note, on March 17, 2020, the Draft Law “On Introduction of Changes to the Tax Code of Ukraine and Other Laws of Ukraine Regarding Support of Taxpayers During the Term of Validity of Measures Aimed at Prevention of Occurrence and Spreading of Covid-19”, No. 3220 as of 16 March 2020 was approved by the Ukrainian Parliament.

    This draft law establishes temporary rules aimed at relief and suspension for payment of determined taxes for certain categories of taxpayers. Apart from that, the draft law introduces a moratorium of documental tax audits for the period from March 18 until May 31, 2020 (apart from tax audits related to VAT tax refunds of over UAH 100,000). The draft law also establishes relief from penalties and fines for the violations of the tax rules (with certain exceptions) for the period from March 1 until May 31, 2020.

    So far, it is almost impossible to make an accurate estimation of the overall impact of the above measures on business. It is now clear that such measures have made an immediate adverse effect on businesses that operate in the retail and entertainment industries and the running of public events, hospitality and tourism, wellness, and transportation industries, etc. We, however, understand that going forward, these measures indirectly will affect other industries (e.g., banking businesses due to decrease of operations, businesses that require certain licenses and permits will not be able to operate due to suspension of terms for issuance of such authorizing documents, businesses where sales activities are mostly linked to offline interaction, and many others).

    In your jurisdiction, if it becomes impossible for a party to perform its contractual obligations because of an external event beyond its control (such as the Covid-19 pandemic), can that party cancel its contract?

    Under Ukrainian law, if a party to a contract cannot perform its contractual obligations due to external events beyond its control it does not automatically lead to termination of the contract.

    As a general rule, the availability of such events enables the affected party to claim exemption from liability for delays caused by events beyond its control (e.g., not to apply penalties and late-payment interests). The Law determines that Covid-19 pandemic (the “FM Event”), is an external event beyond its control that will serve as a ground for exemption from liability for delays in performing a party’s contractual obligations.

    The affected party needs, therefore, to provide its counter-party with sufficient evidence that circumstances related to the Covid-19 crisis had a determining influence on the party’s ability to perform its contractual obligations.

    Termination of the contract can be an ultimate measure if the delay caused by the FM Event exceeds a term indicated in the respective clause in the contract or if the fulfillment of the contract is no longer possible.

    In your jurisdiction, if a party’s performance of its contractual obligations is adversely affected by an external event beyond its control (an “FM Event”) but does not become completely impossible, can that party typically seek relief from compliance with its obligations?

    When the performance of the party’s contractual obligations is adversely affected by an external event beyond its control but performance does not become completely impossible, such party is not eligible to claim for being exempt from liability due to FM Event.

    It is, however, possible for the party to initiate the procedure of introduction of amendments in the contract or its termination due to significant change of business circumstances.

    A change of circumstances can be considered significant if they have changed to such an extent that, if the parties could have foreseen such change, they would not have entered into such a contract or would have concluded it on other terms.

    The UCCI also is empowered to issue certificates confirming the availability of a significant change of circumstances for the purpose of further amending or terminating commercial contracts.

    If the parties agree to amend or terminate the contract, such amendments/termination clause must be introduced in the same form as the initial contract (i.e., in a notarized form for contracts concluded in a notarized form, in simple writing form for contracts concluded in written form).

    If the parties fail to agree on the terms for amending the contract in order to bring it in line with the updated business circumstances, or for its termination, the agreement may be terminated or amended by a court ruling if all of the following circumstances exist simultaneously:

    • at contracting the parties were sure that the circumstances would have not changed
    • the change of the circumstances is caused by grounds that the affected party was not able to overcome acting with the due care and diligence
    • the performance of obligations under the contract could have affect the balance of commercial interests of the parties and deprive the affected party of the initially expected effect
    • it is not apparent from the essence of the contract or from the usual and customary business practices that the affected party shall bear the risk of change of circumstances

    In such a case, the court, based on the demand of any party, may determine the consequences for termination of the contract, keeping in mind the necessity to ensure the fair distribution of expenses between the parties.

    The introduction of amendments in the contract is possible based on a court ruling under exceptional circumstances when termination of such contract contradicts public interests or may cause damages for the parties in an amount that significantly exceeds expenses required for the performance of the contract on the terms determined by the court.

    If yes, what considerations should be borne in mind by such parties, in particular in relation to:

    Any notification obligations (Is the affected party typically required to notify any counterparties of the FM Event within a specific time period?)

    Any causation requirements (Is the affected party typically required to demonstrate that it would have performed its contractual obligations but for the FM Event?)

    Any mitigation obligations (Is he affected party typically required to demonstrate that it took specific steps to avoid the impact of the FM Event as far as possible?)

    Typically, the terms and procedures for applying the consequences of FM Events are indicated in the clauses of each commercial contract. Notably, foreign trade contracts must have such clauses, while for internal contracts the presence of such a clause is not mandatory.

    The following information can be found in the relevant clause of each contract with respect to the procedure for applying for the consequences of FM Events:

    • the term for notifying a counter-party regarding the available impediment and its effect on the party’s ability to perform its obligations under such contract
    • the determined form and details for such notice (e.g., it is possible to agree that such notice needs to be given via email or in writing using a regular mail)
    • the specific terms for recognition of certain circumstances as FM Event (e.g., the parties can determine specific circumstances that are not directly envisaged by legislation as FM Events for the purpose of fulfilling heir obligations under this particular contract, or the parties may also determine a specific body that will be authorized to recognize the circumstances as FM Events specifically for this contract)
    • determination on whether the performance of parties’ obligations under the contract needs to be postponed or the contract needs to be terminated due to FM Events
      rights and obligations of the parties in case a FM Event exists for a certain term (e.g., the parties may agree that if the FM Event exists for more than a certain term, each party may terminate such contract unilaterally)
    • the consequences and liability for non-fulfillment of the above-mentioned procedure
    • the term and procedure for notifying the counter-party regarding the termination of FM Events

    In case the above-described clause is missing in a contract, the general terms of legislation apply.

    Under Ukrainian law, the party that fails to perform its obligations under each specific contract due to FM Event must give relevant notice to the other party within a reasonable term. If the notice is not received by the other party within a reasonable term after the party who fails to perform knew or ought to have known of the impediment, the party is liable for damages arising from such non-receipt.

    In order to be eligible to claim the above-mentioned release from liability, the party that failed to perform its obligations under the contract needs to receive a confirmation of the availability of the FM Event issued by the relevant notified body. Unless otherwise set out by the contract, the Ukrainian Chamber of Commerce and Industry and its territorial units (the UCCI) is the notified body that is authorized to confirm the availability of FM Events.

    The party that would like to receive a confirmation that events related to spreading of Covid-19 must be considered as an FM Event for such contract needs to provide the UCCI with reliable evidence confirming that:

    • the events related to the spread of Covid-19 made it impossible for the party to fulfill its specific obligations under the particular contract in full or partially
    • the circumstances in question were out of that party’s control and were irreversible (i.e., the UCCI will consider whether such party could, theoretically, could have averted the negative implications and whether such party made reasonable efforts to do so)
    • the spread of Covid-19 has, for these parties, an extraordinary character (i.e., it was impossible to predict the circumstances at contracting).

    It should be mentioned that the following events under no circumstances can be recognized as FM Events even if they directly or indirectly were caused by the spread of Covid-19:

    • financial and economic crisis
    • default
    • increase of the official and commercial currency exchange rate
    • non-fulfillment or improper fulfillment of obligations by debtor’s counter-parties under other contracts
    • absence of the necessary goods on the market, etc.

    Given the above, the party that would like to benefit from being exempt from liability for non-fulfillment of its contractual obligations must carefully collect evidence and provide them to the UCCI for consideration in order to prove the causal connection between events related to the spread of Covid-19 and the party’s inability to fulfill its obligations under the contract.

  • CEELM Covid-19 Comparative Legal Guide: Contracts in Belarus

    Contributed by Arzinger

    How might businesses in your jurisdiction be impacted by the Covid-19 pandemic?

    We can specify direct and indirect consequences of the impact of the Covid-19 pandemic on Belarus: direct consequences can be observed at the moment and have already influenced the profits of a business in the short term, and the indirect ones are presumed to become apparent along with the changes in economies of key trade partners of Belarus.

    Among the main consequences, we can mention the following:

    a. Transportation services

    Transportation services, particularly automobile and rail, generate a great part of the revenues of Belarusian businesses. Private business is concentrated in the automobile sphere providing transportation, logistic, and forwarding services supporting trade turnover between Russia and the Asia region from one side and the European Union from the other.

    An imposition of quarantine by the EU member states and other neighboring countries, as well as the ongoing tense situation in China, not only suppresses international freight traffic but also reduces demand for these services by foreign clients.

    Export of machinery and industrial production
    The Covid-19 pandemic has led to a gradual decrease in the pace of implementing projects in the industrial, mining, and energy spheres in neighboring states, and Russia, the main trade partner of Belarus, is in a particular focus here. Even considering that the Covid-19 has not greatly influenced the Russian economy yet, in perspective investors seem to keep from introducing new powers and exploiting new production fields. Most Belarusian machinery production is export-oriented and significantly exceeds domestic consumption of these goods, and this can add risks to the profitability of Belarusian industrial giants.

    b. Construction works

    In recent years, Belarusian construction companies have achieved meaningful progress in the export of construction services: both the private and public sectors are actively involved in road, energy, and residential construction in Russia, Ukraine, and the Baltic states.

    The pandemic can create additional borders for Belarusian contractors with transportation of machinery and business trips of specialists.

    c. Rent services and tourism

    Currently, tourism does not make up an important percentage of Belarus’s GDP, but it received a boost during the World Hockey Championship in 2014. Since then, the number of tourists has dramatically grown, as has the role of businesses that work in the renting, hotel, accommodation, and excursion spheres.

    Following the global trend this year, Belarus’s domestic hospitality business may face a decreasing client base and a growth of cases of canceled reservations. As the tourist season is only starting, businesses in this sector need to find new solutions to maintain their revenues.

    In your jurisdiction, if it becomes impossible for a party to perform its contractual obligations because of an external event beyond its control (such as the Covid-19 pandemic), can that party cancel its contract?

    In general, the current situation with the Covid-19 pandemic provides two possible remedies for contract parties unable to perform their obligations: (I) substantial change of circumstances and (II) force majeure.

    Substantial change of circumstances

    In Belarus canceling a contract due to a substantial change of circumstances is possible only upon a court decision (if the parties are unable to settle the situation by themselves).

    A substantial change of circumstances has specific classifying criteria: the parties would have not concluded the contract or would have concluded it under absolutely different terms if they had been aware of these circumstances initially.

    In each case a court shall seek for the following legal grounds in aggregate for canceling a contract by an interested party:

    • while concluding the contract, the parties presumed that they would not face that circumstance;
    • the change of circumstance was caused due to reasons that the interested party could not avoid while acting in good faith;
    • the execution of the contract in the new circumstances would break the balance of interests of the parties and entail damage for one of the parties if this damage would largely deprive it of contract benefits;
    • the contract does not provide that the interested party bears the risks of a substantial change of circumstances.

    Upon a claim of one of the parties, the court is entitled to specify canceling consequences considering expenses incurred by the parties in relation to execution of the contract.

    Classification of the Covid-19 pandemic as a substantial change of circumstances will differ for each particular situation. For example, let’s trace the classification points above in an air cargo delivery contract.

    The initiation of quarantine in European and Asian states has caused serious damage to both air passengers and cargo air transportation. It is quite clear that numerous air carriers are now unable to perform their contractual obligations due to cancellation of flights, and this entails a serious damage for their clients.

    If an air carrier asks a court to cancel a contract, the weak point here may be the requirement to prove that the parties could not presume this situation in advance: in light of the total quarantine and prohibition of cross-border transportation a carrier should have borne in mind such risks.

    Alternatively, a carrier could have known about anticipated quarantine, but did not perform its obligations when there was an opportunity – with a high probability a court would dismiss the claim to cancel a contract.

    Force majeure

    The second possible remedy for a party to avoid liability for non-performance of its obligations under a contract is force majeure. Domestic legislation and court practice do not give a precise clarification of force majeure and do not provide a list of relevant cases – it just stipulates that these circumstances shall be extraordinary and unavoidable.

    Some examples of force majeure are provided in sub-statutory regulations. Epidemic and epizootic are mentioned in one of legislative acts of Belarusian government concerning commercialization of results of scientific and scientific-technical activities by state bodies. This act had a narrow scope and already ceased to be in force. However, it can guide court and state bodies while analyzing a current pandemic situation. Belarusian law doctrine also tends to classify epidemics as a force majeure.

    Parties to a contract can provide additional characteristics of force majeure in their agreement and specify a virus pandemic or epidemic as a legal ground for canceling the contract. However, in this case a party failing to perform its obligations may be required to prove that the current situation has an extraordinary and unavoidable character and should indeed be classified as an “epidemic.”

    The situation gets sophisticated for Belarusian business due to the fact the Belarus has not declared a state of emergency: the state has not initiated domestic quarantine and has not closed borders with neighboring states yet. From a legal perspective, it complicates the ability of an entity or person to prove in court that a force majeure is actually taking place, even if the pandemic has affected their business.

    The generally recognized commercial tradition is to include a reservation in contracts that any force majeure circumstance shall be proved with a certificate of a competent body of a relevant state. For Belarus this body is the Belarusian Chamber of Commerce and Industry which can potentially characterize the Covid-19 pandemic as a force majeure and give a party to a contract necessary evidence in court proceedings. However, this certificate is not absolute proof: the other party can always provide additional evidence of absence of extraordinary and unavoidable circumstances. As of now, we have not yet observed cases involving the issuance by the BelCCI of certificates regarding the situation with the Covid-19 virus.

    In any case, the court will investigate details of each particular case and verify if the negative circumstance (namely, the Covid-19 pandemic):

    • is unforeseen, exceptional, and unavoidable for a party to a contract seeking relief;
    • took place exactly in the period of time when a party to the contract cancelled or did not perform it;
    • to what extent it caused the cancelation or non-performance of the contract.

    In your jurisdiction, if a party’s performance of its contractual obligations is adversely affected by an external event beyond its control (an “FM Event”) but does not become completely impossible, can that party typically seek relief from compliance with its obligations?

    Belarusian law does not make a clear distinction between obligations completely impossible to perform due to an FM event and obligations which are adversely affected by an FM event. There are no special legal remedies for parties able to perform their obligations only partially and/or by commercially unreasonable means. In both cases, the court will seek classifying points of a substantial change of circumstances or force majeure and analyze all circumstances in total evaluating business risks that a party initially bore while concluding a contract.

    However, having at least a theoretical possibility to perform obligations despite negative conditions beyond control, a party may be required to provide additional evidence that performing the contract in good faith can lead to disproportional damage and loss of a commercial sense of the deal.

    What is vital here is that Belarusian legislation and courts consider a partial alteration of a contract as a much more serious interference in the business relations of parties that its cancellation.

    In order to alter a contract upon a claim of one of the parties, in addition to all classifying features of a substantial change of circumstances, a court shall also ascertain that the cancellation of the contract is contrary to the public interest or can entail material damage to parties.

    Thus, in case of settlement a dispute in court it seems to be easier for a party to claim cancellation of the contract than alteration of some specific obligations that this party is unable to perform due to an FM Event.

    If yes, what considerations should be borne in mind by such parties, in particular in relation to:

    Any notification obligations (Is the affected party typically required to notify any counterparties of the FM Event within a specific time period?)

    Belarusian legislation does not provide mandatory notification obligations. However, a party shall prove that it has acted in a good faith (both before and after a substantial change of circumstances/FM event). In this regard, a party shall notify the other party of the impossibility to perform is obligations under the contract as soon as possible under the current circumstances.

    Additionally, commercial contracts usually include a reservation that a party may refer to force majeure only in case of immediate notification of the other party in specified terms.

    Any causation requirements (Is the affected party typically required to demonstrate that it would have performed its contractual obligations but for the FM Event?)

    As mentioned above, while establishing the fact of the FM Event a court shall analyze to which extent the FM Event caused the cancelation or non-performance of the contract. A court may request evidence that the FM Event is the only ground for non-performance of the contract and that it is not just a cover of bad faith of a party.

    Any mitigation obligations (Is he affected party typically required to demonstrate that it took specific steps to avoid the impact of the FM Event as far as possible?)

    Mitigation obligations are not directly specified in legislation, however, it should also be analyzed in view of good faith conduct of parties: each party shall seek all commercially reasonable means to perform its obligations under the contract before referring to the FM Event.

    By analogy with other aspects of an FM reservation in contract, parties may specify an algorithm of obligatory actions in case of alleged FM, which can include provisions related to the mitigation of consequences of FM Events.

  • CEELM Covid-19 Comparative Legal Guide: Contracts in Bulgaria

    Contributed by Gugushev & Partners, Member of PONTES

    How might businesses in your jurisdiction be impacted by the Covid-19 pandemic?

    The impact that Covid-19 pandemic might have on different types of businesses is a complex mix of various factors coming into play, including the scope and nature of the security measures enforced on a national, regional, and local level, accompanied by socio-economic relief that will be implemented for most vulnerable businesses.

    In its attempt to combat a national outbreak, and similar to many other countries, the Bulgarian Parliament declared a state of emergency on March 13, 2020, an unprecedented act in the democratic history of the Republic of Bulgaria. The overall long term consequences on businesses are not only yet to be determined, but it is highly likely they would vary significantly depending on the type and modus operandi of the business activity.

    The response of the Bulgarian government and all public institutions — trying to enact preventive and proactive rather than reactive measures — is as dynamic and fluid as the spread of the virus itself. Various options of assistance for the most-impacted businesses are currently being considered.

    Medium to small scale businesses and self-employed persons whose activities can not be easily adapted to “home office” and have to completely shut down operations, such as bars, restaurants, fitness centers, cinemas and another kind of establishments not proving goods or services of necessity (food, medical supplies, bank and/or insurance services), are most vulnerable and at high risk of irreparable negative impact. The entire tourism sector in Bulgaria has also been severely impacted, not only by the current and near-future loss of revenue due to the lack and/or cancelation of reservations but in regions with stricter local measures implemented, hotels/guesthouses are prevented from welcoming even the few new guests left and are faced with having to provide full refunds due to the force majeure circumstances.

    The emergency closure of borders and/or restrictions on the movement of goods and people would most likely create significant financial risks for any type of businesses whose work activities and/or performance of contractual obligations are related to transportation, logistics, and import/export from or into China, the United States, or any of the other of the affected countries. This pull is much larger than simply airlines and transportation/logistics companies, as it also affects various retailers, manufactures, and others. The highest risk of facing liabilities for non-performance of contractual obligations lies with businesses that will be subject to the residual and/or secondary effects of the measures and might not be able to enjoy the force majeure exception as stipulated in their contracts or the Bulgarian Commercial Act on prima facie basis as they might be facing a higher burden of proof of the causal link as explained in further detail below.

    In your jurisdiction, if it becomes impossible for a party to perform its contractual obligations because of an external event beyond its control (such as the Covid-19 pandemic), can that party cancel its contract?

    Yes, even if not provided in the contract itself, under Article 306 of the Bulgarian Commerce Act a party whose performance has become impossible due to a force majeure event such as the ongoing Covid-19 disease outbreak may cancel the contract, provided that the following conditions are fulfilled:

    • The party is to have been fulfilling its obligations under the contract diligently before the force majeure event occurred. Thus, for example, a company may not cancel a contract for the delivery of goods if it had already been delayed prior to the Covid-19 outbreak.
    • The force majeure event has to be an unforeseen or unavoidable event of an extraordinary nature; if the party could have either foreseen the event or avoided it, then it cannot cancel the contract.
    • The force majeure event occurred after the parties have concluded the contract. The logical continuation of p.2 above. As the parties to any contracts concluded after the outbreak of the Covid-19 pandemic could have foreseen the consequences of the event, including their inability to perform, and therefore may not cancel the contract citing force majeure event.
    • The party who cannot perform its obligations under the contract because of the force majeure event has notified the other party in writing within a reasonable time about the nature of the force majeure and its potential consequences for the performance of the contract.
    • There is a causal link between the force majeure event and the party‘s non-performance, i.e. the party should be able to prove that but for the occurrence of the force majeure event, it would have performed its obligations.
    • The duration of the force majeure makes the parties no longer interested in the performance of the contract. Note that the Bulgarian Act does not immediately provide the parties with the opportunity to cancel the contract, but merely to delay their performance, i.e. to not be held liable for their delay. Only where the delay makes the performance of the contract practically impossible or means the parties are not interested in such late performance may they cancel the contract. For example, a two-week delay of the delivery of goods related to the performance of a building contract, where performance/construction usually lasts for years, may not be considered sufficient to cancel the contract altogether, but merely a circumstance excusing the party‘s delay in completing the building provided that all other circumstances above are also fulfilled.

    In your jurisdiction, if a party’s performance of its contractual obligations is adversely affected by an external event beyond its control (an “FM Event”) but does not become completely impossible, can that party typically seek relief from compliance with its obligations?

    Yes, even if not provided in the contract itself, under Article 307 of the Bulgarian Commerce Act a party whose performance has been adversely affected, but not rendered completely impossible, by an unforeseen event may seek relief from compliance with its obligations. Note that under Bulgarian law this circumstance does not represent a force majeure event, but (economic) hardship, and that it is the court which – on the basis of the party‘s request – may amend or cancel the contract (unlike when in case of force majeure event the party may cancel the contract out of court or delay its performance without being held liable for the delay).

    For example, a party may petition the court for relief from its obligations under a contract on grounds of economic hardship where the party could still deliver the goods under the service agreement/purchase order, but as a result of the Covid-19 outbreak the costs for the production, delivery, or insurance of the goods has increased substantially in a way neither party could or should have foreseen at the moment of the conclusion of the contract.

    If yes, what considerations should be borne in mind by such parties, in particular in relation to:

    Any notification obligations (Is the affected party typically required to notify any counterparties of the FM Event within a specific time period?)

    In case of cancellation of contract on grounds of a force majeure event: yes, the party is required to notify its counterpart within a reasonable time. If not stipulated in the contract, since there is no objective criteria what constitutes a “reasonable time,” whether notification has been given within a reasonable time is decided by the courts on a case by case basis.

    In case of (economic) hardship, there are no notification requirements, since the party does not address its counterpart, but submits its request to the courts, which are to rule whether to amend/cancel the contract or not.

    Any causation requirements (Is the affected party typically required to demonstrate that it would have performed its contractual obligations but for the FM Event?)

    In case of cancellation of a contract on grounds of a force majeure event: yes, a direct causal link is required (circumstances, where such link is presumed, may, however, be included in the contract to shift the burden of proof).

    In case of cancellation/amendment of a contract on grounds of economic hardship, not only does the unforeseen event has to be causally linked to the party‘s performance being adversely affected, but also the party has to prove that the performance of its obligations under the contract has been adversely affected to a degree where it has become contrary to the legal principles of fairness and good faith.

    Any mitigation obligations (Is he affected party typically required to demonstrate that it took specific steps to avoid the impact of the FM Event as far as possible?)

    In order for a particular circumstance to qualify as a force majeure event it should typically be outside of the control of the non-performing party and it should render performance completely impossible. Thus it is practically impossible for the party to make any effort in mitigating the event‘s consequences as these are outside of its control. The same to a varying degree is valid for the (economic) hardship event when cited for grounds of cancellation of a contract – the costs of any steps to mitigate the consequences of the event are to be so significant in their nature, that they should be considered to alter the very economic essence of the contract insofar as they are contrary to any and principles of good faith and fairness.

  • CEELM Covid-19 Comparative Legal Guide: Contracts in Czechia

    Contributed by Rowan Legal

    How might businesses in your jurisdiction be impacted by the Covid-19 pandemic?

    Businesses are likely to be affected by similar issues faced by businesses elsewhere, such as the disruption of global supply chains and generally weaker demand in all affected countries. Companies active in travel, food & hospitality, sports, culture and many other sectors will be among those hit the hardest, while others, in particular online shops, delivery services, etc. may actually reap some benefits.

    Additionally, businesses operating in the Czech Republic will be affected by the measures the government has adopted to limit the spread of the Covid-19 pandemic. These measures were adopted gradually over the course of the whole week from 9 March, and came into force as follows:

    • 10 March 2020 – closure of all primary and secondary schools and universities, and suspension of all events for more than 100 people
    • 12 March 2020 – declaration of a state of emergency, restriction of travel to and from the country, suspension of all events for more than 30 people, prohibition of entry to fitness and wellness centres, museums, galleries, public libraries etc., prohibition of entry to restaurants and bars for the public (though restaurants and bars may offer takeaways and food delivery services)
    • 14 March 2020 – closure of all shops except for food and groceries shops, pharmacies, service stations, garages and certain other necessary services
    • 16 March 2020 – nation-wide quarantine, restriction of movement within the country (travel is only possible to and from work, and to shops for food and other necessities)

    These measures are likely to affect virtually all businesses, either directly (especially those in the service industry) or indirectly (especially those in the manufacturing industry, due to the weaker demand for products). All employers will need to deal with the absences of employees (due to their own illness or quarantine, or because they are caring for children or other relatives).

    The Czech government is already implementing steps to help business – so far, it was announced that the deadline for submission of tax returns will be extended by 3 months and small / medium business will be able to draw a subsidized loan from the Czech-Moravian Guarantee and Development Bank to cover expenses caused by the above measures. Entrepreneurs (natural persons) will also most likely be able to apply for a “childcare allowance” if they have to take time off to take care of their children – this is normally available to employees only.

    In your jurisdiction, if it becomes impossible for a party to perform its contractual obligations because of an external event beyond its control (such as the Covid-19 pandemic), can that party cancel its contract?

    Under the Czech Civil Code, the impossibility to perform a contract, for example because the export of certain goods has been forbidden by the government, leads to the frustration of the contract, and thus to the cancellation of the contract by law (i.e., not by the action of the party obligated under the contract). However, the obligated party must, without delay, inform the entitled party that the frustration of the contract has occurred, otherwise it is liable for the damage incurred by the entitled party.

    The frustration of the contract can be invoked only if the performance of the contract becomes impossible, not, for instance, more complicated or more expensive. The frustration of the contract can happen only if the contract was entered into before the event causing the frustration was known.

    In addition, contracts with a fixed term of performance (e.g. management of an event that was planned for a certain date) expire automatically when the obligated party defaults in the performance of the contract, unless the entitled party insists on the performance of the contract.

    If the contract is frustrated or expires in the above manner, the party that has already accepted payment or other consideration is obligated to return such consideration (if not, it constitutes unjustified enrichment which can be recovered by means of a civil law action).

    In your jurisdiction, if a party’s performance of its contractual obligations is adversely affected by an external event beyond its control (an “FM Event”) but does not become completely impossible, can that party typically seek relief from compliance with its obligations?

    Under the Czech Civil Code, it is possible to invoke an FM Event, or a “substantial change in circumstances”. In such case, the affected party may ask for the negotiation of changes to the contract, or for the change or cancellation of the contract by the court. However, it is necessary to carefully examine each contract, as B2B contracts often exclude the possibility to invoke a substantial change in circumstances.

    An FM Event that presents an exceptional, unforeseeable and insurmountable obstacle may also exempt the obligated party from the liability for damages, provided that this party was not obliged to overcome such obstacle (this does not preclude the obligation to pay contractual penalties).

    If yes, what considerations should be borne in mind by such parties, in particular in relation to:

    Any notification obligations (Is the affected party typically required to notify any counterparties of the FM Event within a specific time period?)

    If the affected party knows that it has breached, or is likely to breach, its contractual obligations due to the FM Event, it must notify the entitled party. The notification must also contain the possible consequences of the breach. The notification should be made without undue delay (there is no specific time period). In case of late notification, the affected party is liable for the damage incurred by the entitled party as a result of the delay.

    There is no prescribed form for the notification (it can be done in writing or orally), but written form is highly recommended, due to possible disputes.

    Any causation requirements (Is the affected party typically required to demonstrate that it would have performed its contractual obligations but for the FM Event?)

    The affected party is required to demonstrate that it would have performed its contractual obligations but for the FM Event in case of a dispute, not necessarily in the notification phase (however, it is always advisable to describe in the notification in detail at least what prevents the affected party from the performance of its contractual obligations). The burden of proof is always on the party affected by the FM Event.

    Any mitigation obligations (Is he affected party typically required to demonstrate that it took specific steps to avoid the impact of the FM Event as far as possible?)

    For an FM Event to exempt the affected party from liability for the breach of its contractual obligations, it must be exceptional, unforeseeable and insurmountable. The affected party must try and prevent the impact of the FM Event on the performance of its contractual duties if possible. This is especially important in case that a dispute arises.

    However, it is important to point out that the party otherwise entitled under the contract must also take steps to limit the damage caused by the FM Event once the affected party notifies it. The party affected by the FM Event is not liable for preventable damage incurred after the notification.

  • CEELM Covid-19 Comparative Legal Guide: Contracts in Estonia

    Contributed by Cobalt

    How might businesses in your jurisdiction be impacted by the Covid-19 pandemic?

    The Government of Estonia declared an emergency situation on March 12th due to the worldwide Covid-19 pandemic and the threat of mass infections. The government has decided to ban public gatherings and implement distance learning at schools, implemented sanitary controls at the border, and closed cultural and entertainment institutions until the 1st of May.

    The Covid-19 pandemic certainly has an impact on local businesses. Depending on the economic sector, the adverse effects of the pandemic can vary to a great extent. One of the most severe problems is related to employment issues, considering that by the Government’s orders people are strongly encouraged to work from home, if possible. This, together with the decision to close nearly every establishment (including all cultural and entertainment institutions such as night clubs, casinos, sports halls, sports clubs, gyms, spas, swimming pools, water centers, day centers, and children´s play rooms) other than supermarkets and pharmacies has raised questions as to whether employers are obligated to continue to pay salaries even if distance work is not possible. Furthermore, acute concerns about the need to start making redundancies are inevitable for businesses today.

    A lot of sectors have already experienced the negative impact of the current economic situation and businesses are doing everything they can to minimize their losses and ultimately avoid bankruptcy. The current crisis is preventing businesses from making important business and investment decisions due to uncertainty about the future. As a result of the state of emergency and the ban on travel across borders, another obstacle for businesses is the struggle to comply with contractual obligations, mainly due to major disruptions to supply chains.

    Overall, businesses are under great pressure to adapt their business models to make them compatible with the unprecedented government-imposed measures and there has already been significant change across industries.

    In your jurisdiction, if it becomes impossible for a party to perform its contractual obligations because of an external event beyond its control (such as the Covid-19 pandemic), can that party cancel its contract?

    The Covid-19 pandemic is an external event which is beyond the control of a party, i.e. the current pandemic can be considered a force majeure event. Should it become impossible for a party to perform its contractual obligations due to the Covid-19 pandemic, that party cannot nonetheless terminate its contract nor does the contractual relationship between the parties terminate automatically. Only if the contract itself foresees the possibility to terminate it due to a force majeure event can that party terminate the contract unilaterally.

    It is deemed that a force majeure event is something that makes it impossible for a party to fulfill its contractual obligations or obstructs it (at least temporarily). However, such non-performance is excused only for the time period during which the force majeure event impeded performance of the obligation. After the impact of the force majeure event ceases to exist, that party is still expected to perform its obligations.

    The possibility to unilaterally terminate the contract in such an event has been given to the creditor, i.e. the non-breaching party. However, even then certain prerequisites have to be fulfilled. Thus, it is possible for the creditor to terminate the contract, if: i) the non-performance constitutes a material breach of the contract, and ii) a declaration of withdrawal has been submitted to the other party.

    However, it is possible that a situation in which the breaching party finds itself due to these circumstances provides a basis to rely on the force majeure event and therefore extend the time period foreseen for performing the contractual obligations. On the other hand, the breaching party can try to demonstrate that due to these circumstances, the balance of the contractual obligations has materially changed and therefore, the contract as a whole should be amended in order to restore the original balance of obligations. If the bases for amendment of the contract exist but, due to the circumstances, amendment of the contract is not possible or would be unreasonable with respect to the other party, the party aggrieved by alteration of the balance of the obligations may terminate the contract.

    In your jurisdiction, if a party’s performance of its contractual obligations is adversely affected by an external event beyond its control (an “FM Event”) but does not become completely impossible, can that party typically seek relief from compliance with its obligations?

    If a party’s performance of its contractual obligations is adversely affected by an external event beyond the control of that party, that party can seek relief from compliance with its obligations to a certain extent. If the adverse effects are due to a force majeure event, the party is released from liability for the performance of an obligation for the time period, during which the force majeure event occurred. However, this does not exempt the party from fulfilling its obligations once the force majeure event and its consequences cease to exist.

    If yes, what considerations should be borne in mind by such parties, in particular in relation to:

    Any notification obligations (Is the affected party typically required to notify any counterparties of the FM Event within a specific time period?)

    The affected party is required to notify any counter-parties of an impediment to performance by the affected party immediately after becoming aware of the impediment. In addition, the affected party is also required to notify the counter-parties of the effect of such an impediment on the performance of the obligation. The obligation to notify extends to all impediments, irrespective of their cause. It is therefore necessary that the notification take place as soon as reasonably possible, i.e. without delay and at the earliest opportunity.

    Any causation requirements (Is the affected party typically required to demonstrate that it would have performed its contractual obligations but for the FM Event?)

    If the affected party wishes to rely on the FM Event the burden of proof lies on the affected party. It must be demonstrated by the affected party that the circumstances of FM Event actually prevent the fulfillment of this specific obligation.

    Any mitigation obligations (Is he affected party typically required to demonstrate that it took specific steps to avoid the impact of the FM Event as far as possible?)

    The affected party is typically expected to take steps to avoid the impact of the force majeure event as far as possible and mitigate any potential losses. One possible way of doing this is also by notifying any counter-parties as soon as possible of the force majeure event, thus allowing them to take measures to also minimize any potential losses.

  • CEELM Covid-19 Comparative Legal Guide: Contracts in Hungary

    Contributed by Nagy es Trocsanyi

    The pneumonia epidemic, which originally broke out in the Chinese city of Vuhan at the end of 2019, reached the borders of Europe by early 2020. The Government of Hungary declared a state of danger in Governmental Decree No. 40/2020. (III. 11.), legal ground of which is Article 53 of the Fundamental Law, which contains additional rules on the special legal order. Pursuant to this, the Government may issue a decree authorized by provisions of cardinal laws by which it may suspend the application of certain laws, deviate from the provisions of the law, and take other extraordinary measures. As a general rule, decrees enacted in this manner shall be effective for 15 days, which may be extended by the Government, subject to the authorization of the Parliament. Such decrees, however, cease to be effective once the state of emergency has ceased. To the decrees enacted in this manner the usual rules of promulgation shall be applicable, but the provisions of Act CXXVIII of 2011 on Disaster Management and Amendments to Related Laws (hereinafter: Disaster Management Act) provide the possibility of extraordinary promulgation, when the decree is published by public service broadcasting, communicated word by word (publication in the Official Journal of Hungary is also required in this case).

    The following summary provides a general overview of the potential legal effects of the virus outbreak in Hungary, with particular reference to its effects on the operation of businesses and contractual legal regulations.

    How might businesses in your jurisdiction be impacted by the Covid-19 pandemic?

    Hungarian businesses are affected by the coronavirus on many different levels, but these effects might be categorized into three main topics. These topics are: (i) labor law effects on businesses as employers; (ii) effects regarding the operation of the supreme body of the company; and finally (iii) measures to be taken by the Hungarian Government in relation to companies after the declaration of the state of emergency.

    Labour Law

    The general obligations of the employer and the employee

    Under Section 2 (3) of Act XCIII of 1993 on Occupational Safety, the employer is responsible for ensuring safe and healthy labor conditions. This also includes appropriate measures to be taken by the employer to protect employees’ health in the event of an epidemic. Employers have this responsibility when employees are working from home as well.

    The employee cannot, solely as a precaution, refuse to perform his or her obligation to work, but if the employer obliges the employee to work after the increased risk of infection present in the workplace, the employer must also consider that the illness of an employee originating from such conditions may be classified as a workplace accident. The employee may refuse to carry out the instructions of the employer where those instructions would result in direct and grave risk to his or her life, physical integrity, or health. It should be noted that in the event of such refusal to carry out an instruction issued by the employer, the employee shall be available for work nonetheless.

    During an epidemic, the employer may request information from the employee regarding his non-workplace activity, especially information regarding traveling abroad. For example, the employer may request that the employee report the date of the employee’s trip to or date of return from a region affected by the epidemic. The employee is obliged to answer these questions on the basis of his general legal obligation to cooperate with the employer. Such information obtained by the employer is considered personal data and shall be handled in accordance with the relevant data protection rules.

    Labor measures applicable by the employer

    If the employer orders, for the sole purpose of prevention, that certain employees shall ‘stay at home” without the employees being unfit for work, the employer is obliged to pay the wages which the employees would normally receive for their work (including basic salary, bonuses, cafeteria, etc.).

    The employer may also unilaterally grant leave, since under Section 122 (1) of Act I of 2012 of the Labor Code the employer is entitled to grant leave after the employee has been heard. The date of leave must be communicated to the employee no later than fifteen days before the start of the leave-period. As a limit to this – except for the first three months of the employment relationship – the employer is required to grant up to seven working days a year, in a maximum of two installments, at a time in accordance with the employee’s request. The leave shall be granted in such a way that the worker is exempted from his duty to work and be available for work at least for fourteen consecutive days per calendar year.

    It is also possible for an employee to be released from his or her work obligation with the employer’s consent. In this case, the employee shall be entitled to remuneration for the lost work-time as agreed by the parties.

    In addition, the employer may enter into an agreement with the employee whereby the employee, with the consent of the employer, will later make up for his or her unemployed period so that the wages paid for the time spent at home will be calculated for actual work performed by the employee at a later point in time. The employer may also order “home-office” if the employee has a job that can also be performed at home.

    Employees that become ill or subject to an epidemiological measure will be considered unfit for work and will be entitled to sickness benefit for the period of time concerned. In the light of the social security regulations, if employees are prevented from appearing in their workplaces due to an epidemiological measure and cannot be employed at another workplace or job, they are considered to be unfit for work, even without showing any symptoms of the infection, and are entitled to sickness benefits. If the employees are unfit for work due to illness, they are entitled to sick leave for the first fifteen working days of each calendar year, during which time they should receive seventy percent of absence fee from the employer under Section 146 (5) of the Labor Code. There is no sick leave during the time period during which the employee is unfit for work due to an epidemiological measure, thus the seventy percent of the absence fee is not paid by the employer either.

    Pursuant to Section 146 (1) of the Labor Code, employees are paid a basic salary if the employer does not fulfill its obligation to provide work, except if this is a result of unavoidable external circumstances. Thus, if the employer (including the employer’s headquarters, premises, office, plant) is affected by epidemiological measures and therefore cannot fulfill its obligation to provide work, the employer is not obliged to pay wages to the employee, even if the employee is considered unfit for work and is entitled to sick benefit.

    Operation of the supreme body of the company

    Concerning the organizational bodies of companies, the operation of the supreme body might be affected by special measures taken with respect to the coronavirus. In order to prevent the spread of the virus, the Hungarian Government ordered several restrictive measures which may seriously affect the operation of businesses. For example, from March 11, 2020 any indoor event hosting more than one hundred people and any outdoor event hosting more than five hundred people are banned for an indefinite period of time. Therefore, participating at the meetings of the supreme body of a company – if the company has a significant number of members – may be performed by way of a representative or by means of electronic communications or as another alternative, and resolutions may be adopted out of sessions. The rules of these special means of participation are established by Act V of 2013 of the Civil Code.

    Participation through a representative

    Generally, one representative shall be allowed to represent more than one member of the company, so the number of participants can be reduced. The power of attorney for representation shall be fixed in an authentic instrument or in a private document with full probative force. In case of limited companies, special rules apply regarding the proxies, since the names of proxies shall be entered into the register of shareholders before the general meeting. The latest date of registration is different for private limited companies and for public limited companies. In private limited companies, if the articles of association contains provisions to specify the time by which the proxies shall be registered, it may not be earlier than the second working day before the general meeting. However, if the articles of association do not contain any special timing for registration, the proxies may be registered at any time until the beginning of the general meeting. In public limited companies, the names of proxies wishing to participate in the general meeting shall be entered into the register of shareholders at the latest by the second working day preceding the beginning of the general meeting.

    Participation by means of electronic communications

    Members of companies may exercise their rights in meetings by means of electronic communications if the articles of association defines the type of such electronic communications equipment that can be used and the condition for their use to contain facilities for the identification of members and for mutual and unrestricted communication between the members. If the articles of association do not regulate the participation via electronic communications, the members shall attend a general meeting in person or they shall appoint a proxy.

    For private limited-liability companies and also for limited companies, if the general meeting is held by means of electronic communications, the discussions and adopted resolutions shall be recorded so they can be retrieved at any time in the future.

    For limited companies, the shareholders shall have the right to decide whether they wish to participate in person or via electronic means at the shareholders’ meeting. The articles of association, or a resolution adopted by the general meeting, shall define the procedure for checking the identification of shareholders participating through a telecommunications connection, along with the voting procedure and the authentic conclusion of the results, and should also define the procedure for the election of general meeting officers and the requirements for shareholders to make their opinions known and to make proposals. The costs arising from using means of electronic communications shall be borne by the company and not its shareholders.

    Adopting resolutions without holding a supreme body meeting

    If the articles of association establishes it, resolutions may be adopted out of general meeting sessions, so the members of the company do not have to participate in general meetings or send a representative to participate in their place. In this case, the management of the company shall send the draft of the resolution to the members and the members shall send their votes to the management. The members shall have at least eight days after the time of receipt to do so.

    Measures to be taken in relation to companies after the declaration of the state of emergency

    The Covid-19 pandemic might affect the decision-making process of certain business associations on a higher level than the special provisions for the operation of the supreme body, elaborated in the previous point. According to Section 48 of Act CXXVIII of 2011 on Disaster Management, in the event of an imminent danger of aggravation of the state of emergency, the operation of a business organization to prevent such aggravation might be subject to regulation by the Hungarian State. On behalf of the State, the Minister responsible for public finances or a government commissioner proceeds and it reviews the financial state of the entity and approves and countersigns the financial commitments of the entity and makes the most significant decisions to directly address or mitigate the consequences of imposing an emergency measure in matters within its powers acting instead of the supreme body of the legal entity. It shall immediately inform the executive officers and the members of the supervisory board of those decisions.

    In your jurisdiction, if it becomes impossible for a party to perform its contractual obligations because of an external event beyond its control (such as the Covid-19 pandemic), can that party cancel its contract?

    Effects of the coronavirus on the economy

    The rapid spread of the coronavirus in Europe and around the world has put market participants under significant pressure to keep their contractual obligations. The relevant provisions of the Civil Code shall be examined in order to determine what the legal consequences may be of non-performance due to the epidemic.

    Many businesses may be in a situation where either they or their contractual partner will be unable to fulfill their obligations (whether late or partial performance), leading to breach of contract. The question arises who shall bear the responsibility for non-contractual performance and who shall be liable for the resulting damages.

    Invoking force majeure

    The Civil Code places the liability for breach of contract on an objective basis, as opposed to tort, where the culpability of a party has significant influence on the allocation of liability. The act defines three conjunctive conditions for the breaching party to be exempted from the consequences of non-performance or default. First, there must be a cause for the breach of contract which was beyond its control; second, this cause was not foreseeable at the time of the conclusion of the contract; and third, it could not be expected to avoid the cause or to prevent the damage. (Section 6:142 of the Civil Code).

    Of the causes that are typically viewed as causes outside the control of the contracting party, we now highlight only those that could potentially be considered in relation to the coronavirus: the epidemic itself and events affecting certain political communities (such as roadblocks, potential border control, etc.). State measures can also have a restrictive effect on economic life, which is generally beyond the control of the contracting parties: import-export bans, foreign exchange restrictions, embargoes, boycotts and so on.

    The coronavirus, which was officially recognized by the World Health Organization as a pandemic on March 11, 2020, can be considered with certainty to be outside the control of the party, since it has little influence on the spread, severity, and other aspects of the epidemic.

    The parties should assess, at the time of the conclusion of the contract, the risk factors that may hinder their performance. If the actual cause that leads to the breach of contract could not have been foreseen at that time, the second condition for exoneration is fulfilled. In assessing this, one shall consider the extent to which the breach of contract resulting from the coronavirus can be considered unpredictable in contracts that were concluded in the beginning of 2020, where several news portals and press agencies published articles on the spread of the coronavirus.

    The last condition is that the breaching party should not be expected to avoid the circumstance or to prevent the damage. In contrast to the above, this factor becomes relevant at the time of the breach of contract. It must be considered in light of particular the circumstances of the case: For example, in case of a roadblock, whether the supplier could have been able to deliver the goods to the buyer on another route or if he could have obtained the goods from another supplier. In the event that an alternative solution was available, the invocation of force majeure could fail.

    Breach of contract due to impossibility

    A potential consequence of force majeure may be the impossibility of performance. Obviously, this goes beyond late or partial performance, as it becomes fundamentally impossible to fulfill the obligation undertaken. In such cases, the role of the parties in the impossibility must be examined, and the liability for damages will depend on this. There are three options, depending on whether the parties can exempt themselves based on the criteria outlined above (Section 6:180 of the Civil Code). If both parties are exempted, it is called objective impossibility, and the parties shall settle their claims based on the services performed so far. If only one party is unable to exempt itself, the other party may claim compensation for the damage caused. Lastly, if both parties are responsible for the impossibility, they must bear the damage in proportion to their contribution. It is also important to mention the obligation of the party who is aware of the impossibility to inform the other party without delay, otherwise it will be liable for the damage caused by the omission (Section 6:179 of the Civil Code).

    In your jurisdiction, if a party’s performance of its contractual obligations is adversely affected by an external event beyond its control (an “FM Event”) but does not become completely impossible, can that party typically seek relief from compliance with its obligations?

    Partial performance may also constitute a breach of contract under Hungarian law, thus the same provisions apply to such circumstances as to breach of contract due to complete non-performance.

    If the obligee is able to perform his contractual obligations in part – even against the odds of force majeure – the obligee, with respect to partial non-performance, may invoke the provisions of force majeure of the Civil Code to seek relief from his obligations.

    Nevertheless, in the case of non-performance of an obligation concerning a part of a divisible service (res divisibiles), the consequences of non-performance shall stand only in respect of that part, unless such limited use of legal consequences is likely to harm the relevant lawful interests of the obligee.

    If yes, what considerations should be borne in mind by such parties, in particular in relation to:

    Any notification obligations (Is the affected party typically required to notify any counterparties of the FM Event within a specific time period?)

    Pursuant to Section 6:126 (1) of the Civil Code, where any impediments are likely to occur in the performance of any contractual obligation, the parties shall notify one another thereof, unless the other party should have been aware of the impediment even without notification. In the event of failure to communicate an impediment, the negligent party shall be held liable for damages in accordance with the provisions on liability for non-performance of an obligation.

    As the epidemic has been spreading throughout the world for the past few months, the impeding effects of the coronavirus with respect to the economy shall be well known by the public by now. Nevertheless, such impediments are ought to be communicated by the obligee in order to ensure to exclude his liability for late notification.

    The notification shall be issued as soon as the obligee becomes aware of the impediment due to which his future non-compliance may arise; no general time limit is set by the Civil Code, the timing of the notification shall be assessed on a case-by-case basis.

    The obligee shall be liable for any damage that may be caused in relation to the failure to comply with the obligation to communicate any impediments, even if he is otherwise exempt from liability for non-performance. In other words, even if the obligee succeeds in exempting himself from his liability for breach of contract, he must compensate for the amount by which the injured party could have reduced his damage sustained.

    Any causation requirements (Is the affected party typically required to demonstrate that it would have performed its contractual obligations but for the FM Event?)

    The obligee – in the event of failure to fully perform his contractual obligations – shall present the causal link between the force majeure and the failure to comply with his obligations.
    Furthermore, the obligee shall also present that this cause of con-compliance was not foreseeable at the time of the conclusion of the contract and that he could not be expected to avoid the cause or to prevent the damage.

    Any mitigation obligations (Is he affected party typically required to demonstrate that it took specific steps to avoid the impact of the FM Event as far as possible?)

    As an underlying principle, the contracting parties shall cooperate during the lifespan of the contract, and shall communicate every information to one another on circumstances relevant to the contract. This also includes the obligee’s obligation to mitigate any possible future damage which may affect the other contracting party.

    Changing circumstances in long-term legal relations

    Another legal institution, which takes changing circumstances into account, and may be relevant in the context of the epidemic, is the clausula rebus sic stantibus principle. The doctrine allows the court to modify a long-term legal relation if the party requests it due to significant changes in its circumstances following the conclusion of the contract. The court examines the following conditions: (i) the unmodified performance would adversely affect the legal interest of the party requesting the modification; (ii) the possibility of the change in the circumstances was not foreseeable at the time when the contract was concluded; (iii) the change in circumstances was not caused by the party requesting the modification and (iv) the change in circumstances falls outside his normal business risk (Section 6:192 of the Civil Code).

  • CEELM Covid-19 Comparative Legal Guide: Contracts in Lithuania

    Contributed by Cobalt

    How might businesses in your jurisdiction be impacted by the Covid-19 pandemic?

    In response to the COVID-19, the Lithuanian Government has imposed a nationwide quarantine and adopted various preventive measures. Based on the decision of the Lithuanian Government, the following main restrictions affecting business have been implemented:

    • visits to and provision of physical contact services in culture, leisure, entertainment, and sports establishments are prohibited
    • all mass gatherings in both open and closed spaces are prohibited
    • activities in health service centers, sanatoria, and recreation centers, except individualized rehabilitation services related to treatment, are prohibited
    • activities of public catering establishments, restaurants, cafes, bars, night clubs, and other entertainment places, except when food is taken away or delivered to customers in other ways, is prohibited
    • activities of (a) shops, except supermarkets and other shops selling food, (b) trading and entertainment centers, except spaces where food, veterinary, pharmaceutical, and optical products are sold, (c) market places, except food stalls, are prohibited. Exceptions are available for Internet trade and cases when goods are delivered to customers
    • activities of gambling and slot machine saloons (casinos) are prohibited
    • provision of beauty services is prohibited
    • The Lithuanian Government also approved work from home in state and municipal institutions of the public sector, in state-owned and municipal enterprises, except cases where certain functions must be fulfilled in working places. It is recommended that businesses in the private sector organize work in the same manner.

    Taking into account the wide scale of Governmental preventive measures, Lithuanian businesses will be definitely negatively affected. The imposed restriction creates a great risk of significant losses due to the distracted supply chain and decreased demand.

    In your jurisdiction, if it becomes impossible for a party to perform its contractual obligations because of an external event beyond its control (such as the Covid-19 pandemic), can that party cancel its contract?

    According to Lithuanian law, external events that are beyond the control of a party can serve as a ground to amend, suspend performance, or even terminate an agreement in the following cases:

    Force majeure circumstances

    • Material change of circumstances (clausula rebus sic stantibus principle)
    • Both of these options are described in more detail below.

    Force majeure circumstances

    Force majeure events are unavoidable, uncontrolled, and irremovable circumstances that were not or could not have been foreseen. According to Lithuanian and prevailing case law, in order to invoke force majeure, the circumstances must meet the following requirements:

    • the circumstances did not exist at the time of conclusion of the agreement and they could not have been reasonably foreseen
    • due to the circumstances, it is not possible to perform the agreement objectively
    • the party could not control or prevent the occurrence of those circumstances
    • the circumstances were beyond the control of the party
    • the party did not assume the risk of such circumstances or their consequences

    It should be also noted that force majeure does include such circumstances as absence in the market of goods needed for the performance of the obligation. Lack of the necessary financial resources or failure to perform obligations by other counter-parties (e.g., suppliers) will also not serve as a ground to invoke force majeure.

    In practice agreements usually contain a force majeure clause. It might be drafted in different ways, including by providing exhaustive or non-exhaustive list of force majeure events (strike, fire, flood, etc.). However, Lithuanian law allows for the invocation of force majeure even if no such clause is established in the agreement.

    The party may invoke force majeure only when it informs the other party about the occurrence of force majeure circumstance and its consequences for the performance of obligations under the agreement. Such notification should be provided within reasonable time after the non-performing party became or should have become aware of force majeure circumstances.

    If the situation is considered to be force majeure, the party relying on force majeure is exempted from liability for failure to perform the agreement. This does not deprive the other party of the right to terminate the agreement, suspend its performance, or request payment of interest.

    Governmental preventive measures adopted in the light of COVID-19 do not qualify as force majeure per se. It is the obligation of the party to prove that due to those currently-adopted preventive measures it is unable to perform its obligations to its counter-party. The assessment of whether or not force majeure can be invoked due to the impact of the COVID-19 must be made on a case by case basis.

    Material change of circumstances (clausula rebus sic stantibus principle)

    According to Lithuanian law, the aggrieved party has a right to initiate an amendment of the agreement when performance of the agreement becomes obstructed. In particular, this right may be invoked when the balance of contractual obligations is materially (fundamentally) altered, i.e., either the cost of performance has essentially increased or the value thereof has essentially diminished. However, this amendment may be initiated only if:

    • the circumstances occur or become known to the aggrieved party after the conclusion of the agreement
    • the circumstances could not reasonably have been foreseen by the aggrieved party at the time of the conclusion of the agreement
    • the circumstances are beyond the control of the aggrieved party
    • the risk that the circumstances would occur was not assumed by the aggrieved party

    If these conditions are met and the parties fail to reach an agreement on the amendment of the contractual obligations within a reasonable time, any party may bring an action in court. The court may either (a) terminate the agreement and establish the date and terms of its termination, or (ii) amend the conditions of the agreement with a view to restoring the balance of the contractual obligations of the parties.

    In Lithuanian case law it is emphasized that in order to rely on a change of circumstances, such change should be “fundamental.”

    Also, it is important to keep in mind that:

    • despite the fact that it becomes difficult for the party to continue performance of its contractual obligations, the party must continue performing the agreement until it is amended or terminated
    • request to amend the agreement has to be submitted to the counter-party immediately after a change of the circumstances
      the agreement may be amended or terminated only by mutual agreement of the parties or by the court. It is not possible to refuse to perform contractual obligations unilaterally
    • Similarly as in cases of force majeure, assessment whether the preventive measures adopted in the light of COVID-19 form a basis to initiate amendment of the agreement on the basis of change of circumstances must be assessed on a case by case basis.

    In your jurisdiction, if a party’s performance of its contractual obligations is adversely affected by an external event beyond its control (an “FM Event”) but does not become completely impossible, can that party typically seek relief from compliance with its obligations?

    Please see our answers to Question (II) under Section “Material change of circumstances (clausula rebus sic stantibus principle)”.

    If yes, what considerations should be borne in mind by such parties, in particular in relation to:

    Any notification obligations (Is the affected party typically required to notify any counterparties of the FM Event within a specific time period?)

    Yes, as mentioned in our answers to Question (ii), the affected party is required to notify the counter-party about the force majeure circumstances or material change of circumstances. There are no specific terms. The law, however, requires the provision of relevant notice within a reasonable period after occurrence of force majeure circumstances and immediately upon a material change of circumstances.

    Any causation requirements (Is the affected party typically required to demonstrate that it would have performed its contractual obligations but for the FM Event?)

    No such particular requirement exists. However, the party relying on force majeure circumstances or material change of circumstances must prove that the relevant requirements set under the law and court practice are met. Please see our answers to Question (II) under Section “Material change of circumstances (clausula rebus sic stantibus principle)” for further information.

    Any mitigation obligations (Is he affected party typically required to demonstrate that it took specific steps to avoid the impact of the FM Event as far as possible?)

    Yes, the affected party should demonstrate that force majeure circumstances or a material change of circumstances or the consequences thereof could not be prevented.