Covid-19 coronavirus and businesses in Slovakia: force majeure
19 März 2020
The coronavirus has a serious impact on the world’s economy and people’s social lives. Closures of factories and ports, restrictions on transport of goods and workers, a declining demand in energy and reduction of public expenditure are adversely influencing inter-continental supply chains and impacting various sectors, including the manufacturing, transport, tourism and retail industries.
Following the initial spread of the epidemic, during a meeting in Geneva on 30 January 2020 the World Health Organization declared the coronavirus outbreak a global health emergency. Recently, the first cases of the virus have been reported in the Slovak Republic.
Within the framework of commercial relations, the question has recently been raised as to whether the epidemic caused by the coronavirus may be considered a force majeure event and, as such, what impact this could have on contractual obligations. For example if we consider a situation where a Slovak manufacturer purchases components from a third party in another country or even a Continent, assembles them in Slovakia and resells the finished product, and the governments close borders or restrict access to certain regions due to the coronavirus outbreak, can a Slovak manufacturer claim that it was unable to deliver the contracted product to its customers in time due to the epidemic caused by the coronavirus?
In general, the debtor is required to fulfil its contractual obligations (debt) duly and on time. If it fails to fulfil its obligations in this way, it is in default until the obligations are duly performed or until the obligations are discharged in another manner (Section 365 (1) of the Commercial Code). The default of the debtor entitles the creditor in particular to damages under Section 373 of the Commercial Code and eventually to a contractual penalty, if so agreed.
For commercial relations, the claim for damages is based on the principle of strict liability. This means that no fault is required. Liability can only be relieved in circumstances that exclude liability (liberation reasons), referred to in Section 374 of the Commercial Code. To consider an event as a circumstance excluding liability, the following conditions must be satisfied:
(a) it must be an obstacle that arose independently of the obligated (liable) party's will (independence);
(b) it must prevent this party from performing its obligations, provided that it cannot be reasonably expected that the obligated party could avert or overcome such an obstacle or its consequences (insurmountability); and
(c) the occurrence of such an obstacle must have been unpredictable at the time the obligated party undertook to perform such obligations (unpredictability).
In the case of international trade it should be noted that, under Section 736 of the Commercial Code, circumstances excluding liability (or responsibility) do not include the non-granting of an official licence required to fulfil the obligation (e.g. an export licence).
The occurrence of “force majeure” does not automatically extinguish the liability to fulfil its obligation. The liability exclusion effects are in place only as long as the obstacle connected to these effects persists. If an obstacle ceases to exist, the party concerned must fulfil its obligations. If such an obstacle were of a permanent character, the impossibility to perform its obligations and frustration would also be an issue. In such a case, the obligation of the liable party would cease to exist and no liability for damage would arise (Section 352 et seq. of the Commercial Code).
For the sake of completeness, we state that circumstances excluding liability do not affect the obligation to pay a contractual penalty (Section 300 of the Commercial Code). This means that if the parties have agreed to a contractual penalty, the liable party must pay the penalty even upon the occurrence of a force majeure event.
Coronavirus (COVID-19) can be considered without any doubt an obstacle that occurred independently of the will of the obligated party, which, at the time of undertaking the obligation, was not foreseen by the obligated party (at least in the period before December 2019). However, does the coronavirus or the measures taken in relation to it prevent contractual obligations from being fulfilled?
Fortunately, in our area, there have not been many natural disasters that could be considered force majeure events that would prevent contractual obligations from being fulfilled. Nevertheless, a few examples can be found to demonstrate the approach of Slovak courts on this issue:
Adverse climate conditions and poor harvest – the defendant, an agricultural company, failed to fulfil its obligations and failed to deliver the agreed quantity of crops due to adverse climate conditions and extremely poor harvest. The court did not consider this a force majeure event excluding liability because, in the opinion of the court, it was predictable and surmountable. According to the court, it can reasonably be assumed in agricultural production that poor harvest may occur. In addition, the court concluded that the defendant company was obliged to deliver the crop and not to produce it. The defendant was therefore obliged to secure the supply by other means, for example by purchasing from another grower.1
Currency depreciation – the defendant did not deliver lumber under the contract with the plaintiff. It justified this failure by a 100% increase in the transport rates on German transport flows. The court described the event as foreseeable because the increase in transport rates could be expected due to the devaluation of the German mark at that time. While it was difficult to predict when and to what extent this would happen, this was not decisive. The defendant should have considered the possibility of this happening when concluding the purchase price. In addition, according to the court, the defendant could have fulfilled its obligation if it had sent the consignment through Austria or Switzerland, which were not affected by the increase in transport rates.2
Theft of goods – Samsung (the defendant) ordered from the plaintiff the transport of electronics from Slovakia to Bulgaria. The plaintiff secured the transport with the defendant. The vehicle, including the goods, was stolen during transportation. The defendant claimed damages from the plaintiff. The plaintiff in turn claimed damages from the defendant. The contractual relationship was governed by the Convention on the Contract for the International Carriage of Goods by Road (CMR). According to Art. 17(2) of the Convention, similarly to the Commercial Code, the carrier is to be relieved of liability as it could not have foreseen the circumstance and prevented the consequences of this circumstance. According to the court, the theft of the vehicle and the goods in this circumstance constituted a liberating reason and relieved the carrier of liability for damages.3
In connection with force majeure events, it is also necessary to mention certificates of facts important in legal relations arising in international trade issued by the Slovak Chamber of Commerce and Industry (Section 5(2)(g) of the Chamber of Commerce and Industry Act). The Chamber of Commerce will issue a certificate of the occurrence or circumstances of “force majeure” and their consequences in relation to the impossibility to fulfil contractual obligations to a Slovak entrepreneur who is exposed to sanctions from his contractual partner. The Chamber of Commerce does not assess whether the event is indeed a force majeure event under the law or the contract. However, it certifies that such an event has occurred and that there is a causal link between the occurrence of such an event and the impossibility of fulfilling the obligation under the contract in question. This certificate may be considered an authentic instrument. This means that the court will consider these facts proven and the burden of proof will shift to the other party to prove the opposite (Section 205 of the Civil Procedure Code).
In each situation it will always depend on the specific circumstances as well as whether and how the parties have regulated the issue of force majeure in their contract. Force majeure does not necessarily have to be a natural phenomenon, but can also entail human action (e.g. theft). However, the above-mentioned court decisions indicate that the courts will strictly consider the issue of insurmountability. The burden of proof will therefore lie with the party invoking force majeure to prove that those circumstances actually prevented it from fulfilling its obligations and that this obstacle could not have been overcome, for example by the performance of a substitute subcontractor.
1Decision of the Supreme Court of the Czech Republic of 25 January 2012, file no. 23 Cdo/3066/2010 (due to the same laws in the given period, Slovak courts also rely on decisions of Czech courts when interpreting Slovak laws).
2Decision of the Supreme Court of the Czech Republic of 25 January 2012, file no. 23 Cdo/3066/2010 (due to the same laws in the given period, Slovak courts also rely on decisions of Czech courts when interpreting Slovak laws).
3Judgment of the Bratislava Regional Court of 23 April 2015, file no. 1Cob/301/2013.