17. 3. 2020

Legal Essence of Coronavirus (CoVID-19) and some facts about the impact of coronavirus on existing contractual relationships

Due to the fact, that numerous measures are rapidly being taken (reasonably) by the competent authorities in order to prevent the spread of the virus and to mitigate the damage it causes to households and the economy, as well as the direct effects of the virus itself on business operations, many legal (and other) issues arise. 

What is the "legal nature" of coronavirus? 

By its "legal essence", coronavirus is an infectious disease as defined by the Communicable Diseases Act (ZNB). Due to the rapid spread of the infectious disease, on March 12th, 2020, i.e. a day after the World Health Organization (WHO) declared a pandemic, Slovenia has declared a coronavirus epidemic. The epidemic is a marker for the sudden outbreak and rapid spread of human infectious disease, in which it far exceeds normal morbidity. The pandemic, however, represents an epidemic that has plagued humanity in a large geographical area. The occurrence of an epidemic also meets the definition of a natural disaster, as defined in Article 8 of the Protection Against Natural and Other Disasters Act (ZVNDN). 

One of the most common questions these days is whether coronavirus represents a force majeure and, if so, how such force majeure affects different contractual and other legal relationships. The basic definition of force majeure (although the legislature did not use this notion, which is otherwise well established in legal theory and jurisprudence) in Slovenian civil law is given in Article 153 of the Obligations Code (OC) in a provision governing the liability of the holder of a dangerous object for the damage it causes - which states that in the case of force majeure the cause (the damage) does not come from the thing or activity in question (i.e. an external cause) and it could not be expected, avoided or deterred. Considering the definition of force majeure, which is well established in our theory and case law, in our opinion the coronavirus epidemic corresponds to the occurrence of force majeure, since it is an unexpected external cause, the consequences of which cannot be completely avoided or prevented.

The impact of coronavirus on some of the most typical contractual relationships 

The fact that a coronavirus epidemic represents a phenomenon of force majeure does not mean that anyone whose compliance with contractual (or other) obligations has become more difficult as a result of coronavirus may be relieved of their obligations by invoking force majeure. The possible legal impact of these circumstances on a particular legal relationship will need to be assessed on a case-by-case basis. It is also necessary to distinguish between the consequences of the epidemic itself and the authorities' actions, which are, or will be accepted on this basis. 

One of the more common assumptions that emerges in practice is e.g. the fact that a tenant can stop paying rent for the leased business premises on the basis of the law in the event that, due to force majeure, he is temporarily unable or no longer able to perform his business and if his income has been reduced as a result. The described force majeure does not represent an event by which the tenant would automatically relieve himself of his obligations, since the landlord still provides him with the lease of business premises, i.e. fulfils his fundamental contractual obligation. 

The answer to the question what the tenant can expect in such a case will need to be primarily sought in the lease agreement or in the concrete contractual relationship between the parties. If the contractual parties did not regulate the consequences for force majeure, the tenant would, for example, have to show the occurrence of the conditions from Article 112 of the OC for the termination of the contract, i.e. that, in the general opinion, it would be unfair to keep the contract in force as it is. In the event that the landlord does not agree to the termination of the contract or offers a fair modification of the contract, the tenant will have to pursue his / her claim for the termination of the contract through court. If the termination of the contract application succeeds, the tenant will also have to compensate the landlord for the damage caused by the termination. 

Primary sources for answering questions about the effects of the coronavirus on a particular contractual relationship - because of the relatively broad principle of contractual freedom - are specific contracts with individual contractual partners. This applies to all types of contracts, and in the case of contracts with an international element, it will also be important, which law the parties choose, since different legal systems govern the concept and consequences of force majeure.

With regard to the legal bases in the field of Slovenian (Obligation) Law, in addition to the aforementioned provision of Article 112 of the OC, which regulates the rights of an individual contracting party in the event of substantially changed circumstances arising after the conclusion of the contract, it will also be necessary to check on a case-by-case basis whether the conditions under Article 116 of the OC are fulfilled, i.e. whether the fulfilment of the contract by (at least) one contracting party has become impossible for objective reasons. As a rule, the coronavirus will not directly prevent the fulfilment of the contract (unless, for example, a client who has a personal obligation to fulfil a contractual obligation, such as a professional singer, becomes so ill that he cannot fulfil that obligation due to illness) - it is more likely that the fulfilment of the contract will be prevented by any of the coronavirus measures taken by the authorities (e.g. the organization of any public events has become objectively impossible due to government decrees, as well as the fulfilment of numerous obligations in the field of hospitality, catering, passenger transport, etc.). In such cases, both parties will become free from their contractual obligations (in the case of partial fulfilment, they will terminate the unfulfilled part of the obligation) and they will have to repay each other what they have already received under the contract. 

Due to the coronavirus epidemic and its consequences, we can also expect that many companies - as well as individuals - will begin to face liquidity and other issues that may cause the party whose claim becomes compromised to raise a threat under Article 102 of the OC. For this reason, many companies may also opt for refinancing or even preventive restructuring of their liabilities (which are not discussed in more detail in this section). 

One of the more frequent consequences of force majeure will be the (conventionally or contractually provided) extension of the deadlines for fulfilling the contractual obligations (for the duration of force majeure or its consequences), except in cases where fulfilment of the purpose of the contract beyond the originally agreed deadline could not be achieved (for example, when the buyer buys an engagement ring for a specific date and where the delivery of the ring would no longer reach the intended purpose two weeks after the originally agreed time). Since the impact of coronavirus on contractual relationships will depend to a large extent on the duration of the epidemic, its (detrimental) consequences, and on the actions of the authorities to be adopted on this basis, in this part of the section we primarily draw attention to the foreseen legal implications and to the relevant legal institutes, which could be applicable, since at the moment the adverse effects of coronavirus and individual measures have just begun to emerge.

Law Office Fabiani, Petrovič, Jeraj, Rejc d.o.o.
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