In what circumstances is the Coronavirus (COVID-19) construed as a force majeure event in respect of the contractual relationship? How is the applicable legislation interpreted and how do we take the most effective business decisions in the current context?
In these unprecedented times, COVID-19 is spreading rapidly across Europe and around the world, affecting and influencing the economy and all areas of life, both public and private.
Conferences, concerts, even school and university activities are no longer taking place due to the spread of COVID-19, and contractual relationships are unstable due to the difficulty of performing the agreements, and are often followed by the suspension or even termination of them.
Following the decree of the President of Romania, declaring a state of emergency from Monday 16 March, military and other public authorities will be entitled to take measures aimed at restricting fundamental rights and freedoms, which may cause significant difficulties in both existing and future contractual and business relationships.
1. What is force majeure?
Force majeure is an event, arising from unforeseen circumstances, preventing a party from fulfilling its contractual obligations.
Basically, should such an event arise, the party in breach cannot be held liable which results in either the total exemption, or diminishing, of the liability of that party.
2. How are agreements affected?
A force majeure event must be considered by reference to the date the agreement was signed, given that the parties only assumed the risks deemed to be foreseeable at that time. Therefore, a debtor may be exempt from liability, provided that it was unable to foresee the risk of the future event occurring at the time the agreement was signed. If the event occurred after the agreement was signed the debtor will be discharged from its obligations under it. Additionally, in cases of contracts requiring continuous performance, the act of performance may be suspended throughout the duration of the force majeure event.
Contractual liability can only be exempted if the force majeure event and the non-performance of the agreement are closely associated (i.e. failure to transport supplies, following custom restrictions, cancellation of a large-scale event or other cases dealt with below).
Existence of a force majeure clause in an agreement
Considering the impact of COVID-19, if an agreement includes a force majeure clause, an assessment must be made as to whether or not such a provision could constitute a cause for exemption from liability. Certain factors should be taken into consideration when making the assessment, such as:
- the scope of the clause;
- which events shall be considered by the parties as force majeure events;
- the timescale applicable to the failure to perform;
- the effects of the event on the activity; and
- any means of reasonably mitigating the impact of the event.
The fact that the provision of a service, the delivery of a product or the fulfilling of any other contractual obligation becomes much more onerous or difficult, is not sufficient to be construed as force majeure, unless the parties expressly provide otherwise in the agreement.
In the context of COVID-19, the affected party must demonstrate that no alternative for fulfilling its contractual obligations existed, and that all reasonable steps to mitigate the effects of this pandemic were taken. Only then can a decision be made as to whether this event does, indeed, constitute an event of force majeure.
Alternatively, the provision of the service, or the delivery of the product, must be impossible or so difficult that the performance of the agreement is no longer justifiable.
Should the force majeure clause restrict its scope (providing for exhaustive listing, and not including diseases, epidemics, pandemics, or other cases similar to COVID-19), it is possible that the current situation would not entitle a party to invoke that force majeure clause.
Lack of a force majeure clause
To the extent that the agreement does not include a force majeure clause, the parties are still entitled to invoke such a provision through the use of national legislation. The Civil Code is applicable in situations not otherwise covered by the parties.
3. Understanding the COVID-19 pandemic and ways of tackling it
What are the specific reasons that can be used to justify exemption from liability for non-performance under an agreement?
There is no uniform practice in Romania where a situation (be it an epidemic, pandemic or a disease) is construed as a force majeure event. It is necessary to analyse each situation separately in order draw an accurate conclusion.
In order to understand force majeure clauses which exempt a party from liability, the following examples are mentioned:
- the fulfillment of the obligations under an agreement signed before COVID-19 occurred is subject to assignment to other countries;
- the agreement provides for a time-limit for the fulfillment of the obligation, however the debtor is obliged to stay in quarantine or isolation at home for 14 days following their arrival from an area affected by COVID-19, and the respective time-limit is within that 14 day period;
- a cultural, scientific, artistic, religious, sporting or entertainment activity performed in an enclosed area was restricted; and
- organising an event without prior approval issued by the Public Health Directorate.
By contrast, closing down a travel agency in view of the prevention of the COVID-19 pandemic does not represent a force majeure event, because this action does not fall within the mandatory measures imposed by the public authorities (set out below), nor within the specific, isolated cases situation (illness of all the employees or other such cases). In this situation, the decision to close has been made voluntarily and not in response to an absolutely undefeatable event, as provided by law.
In view of COVID-19, undefeatability and inevitability cannot be construed by each individual at their own discretion, in order to produce the results they desire. Currently, Romanian public authorities have published binding measures and informative measures (recommendations) with respect to COVID-19.
The binding measures of the National Committee for Special Emergency Situations (“CNSSU”) are listed below:
- the requirement to delay the working schedule of public institutions with more than 99 employees using public transport;
- the restriction of cultural, scientific, artistic, religious, sporting and entertaining activities in enclosed areas, including activities performed in wellness and beauty salons, gyms, gambling halls and casinos (note: effective as of 18 March 2020);
- the prohibition of public or private gatherings held in open or enclosed areas, and involving more than 100 participants;
- events which are expected to include a reduced number of participants can only be organised following the approval of the Local Health Directorate;
- air flights to and from Italy, Spain and, presumably, more countries to follow (note: status is changing by the day) are cancelled;
- foreign citizens coming to Romania from Italy, China, Iran, Spain or South, Korea, are allowed to enter the country but are required to enter quarantine or self-isolate on their arrival, as appropriate, and irrespective of the means of transport used.
In view of the state of emergency, military authorities, as well as other pubic authorities provided for in the decree, can impose measures restricting fundamental human rights, and so affecting contractual freedom.
Which fundamental rights can be restricted under the state of emergency?
- The ownership right, by means of forcing public institutions, and any other natural or legal person, to assign their right of use of movable or immovable assets to public authorities, for the purpose of ceasing the exceptional event (i.e. means of transport, port and airport facilities, power sources, communications and telecommunications systems, printing and audiovisual material, building materials, land, machinery, animals). Excepting the procurement of consumable and perishable goods, the measures shall be temporary.
- Freedom of expression, by limiting certain messages or events that could cause panic among the population. For instance, publications, radio or television stations may be suspended.
- The right of free movement, by limiting or prohibiting the movement of people. The CNSSU has currently closed certain border points with Serbia, Bulgaria, Moldova, Hungary and the Ukraine.
- The freedom of assembly and association, by measures restricting activities or gatherings of more than a certain number of people. The CNSSU has currently taken such measures, as described above.
These binding measures imposed by the public authorities are crucial because all the contractual obligations which are prevented from being performed by these measures will be covered under force majeure provisions, so exempting the non-performing party from liability.
4. Endorsement of force majeure by the Romanian Chamber of Commerce and Industry (“CCIR”)
Obtaining the CCIR’s endorsement is an optional process agreed to by the parties to the agreement. If the parties agree that the enforcement of the force majeure clause is subject to obtaining the CCIR’s endorsement the exemption of liability will not apply without it. Otherwise, the CCIR’ endorsement is non-compulsory.
In order to obtain the CCIR’s endorsement, the following documents must be submitted:
- a request for an endorsement to be issued, signed by a legal representative;
- a copy of the agreement affected by the force majeure event and incorporating the force majeure clause;
- any certificates issued by competent bodies, authorities and institutions, on a case-by-case basis (other than CCIR), with respect to the existence and the effects of the force majeure event, its location and the start and end of the event (this may include the World Health Organisation Report issued on 30.01.2020 with respect to the international state of emergency, the decisions taken by the CNSSU, as well as the official documents of the Romanian authorities attesting to the COVID-19 pandemic);
- notices to the counterparty to the agreement about the force majeure event and its effects on the performance of the contractual obligations.
Force majeure endorsements are only effective within the framework of the commercial relationship between the parties and shall have no independent effect before the court, or the judge, who may ultimately assess whether the conditions for the force majeure clause to be effective have been fulfilled or not.
5. What to consider when entering into future contracts?
In view of the COVID-19 pandemic, when entering into new agreements, the clauses covering force majeure should be reconsidered, by means of expressively providing for the following:
- an accurate definition of force majeure, including specific provisions with respect to "epidemiological and/or pandemic situations" which are to be construed as force majeure events;
- the agreement of the parties regarding the necessary proof of the force majeure event (i.e. providing for an endorsement issued by the Romanian Chamber of Commerce and Industry);
- options for amending the time limits relating to the fulfillment of the obligations;
- means of adapting the contract price, by reference to the fluctuations of the economy and affecting the parties’ consideration;
- the terms, and means, of notification between the parties;
- the allowable causes of, and time-limits relating to, the suspension of the agreement;
- any issues not rectified within a certain time period, under the force majeure, giving rise to the termination of the agreemen
For further information, please feel free to contact:
Andrei Albulescu (Partner)
- Phone: +40 217 96 52 61
- E-mail: AAlbulescu@saa.ro
Cristina Man (Managing Associate)
- Phone: +40 21 316 87 49
- E-mail: CMan@saa.ro
Cornelia Iordache (Associate)
- Phone: +40 21 316 87 49
- E-mail: CMIordache@saa.ro