Contractual (business) relationships in light of COVID-19

Legal institute /concept

Purpose and meaning of that institute / concept

Release of Debtor’s Liability (Article 240 OZ)

The debtor (i.e. the party required to perform certain contractual obligation) shall be released from liability for damages (which occurred as a consequence of non-performance), if it is shown that the debtor was unable to perform the obligation or was late in performing the obligation owing to:

• the circumstances arising after the conclusion of the contract, and
• the fact that these circumstances could not be prevented, eliminated or avoided.

In that regard, the party, who is unable to perform the contract will have to claim and prove (i) that the contract was concluded before the occurrence of circumstances related to COVID-19, (ii) how and why this situation, related to COVID-19, prevented the performance of their obligation or caused its delay and (iii) that the debtor was unable to prevent, eliminate or avoid these circumstances. According to case law, the actions of contractual partners of the debtor are a risk which should be borne and mitigated by the debtor.

Rescission or  Amendment of a Contract owing to a Change of Circumstances (Articles 112 and 113 OZ)

In the event that:

• after the conclusion of a contract, circumstances arise that render the performance of obligations by one party (hereinafter referred to also as: the First Party) more difficult, or
• owing to these circumstances, the purpose of the contract cannot be achieved,

and in both cases above to such an extent that the contract clearly no longer complies with the expectations of the contracting parties and it would in the general opinion be unjust to retain the contract in force as it is, the party whose obligations have been rendered more difficult to perform or the party that owing to the changed circumstances cannot realise the purpose of the contract, may,

• propose to the other party that the contract is amended (however, the other party is under no obligation to accept such proposal); or
• request the court to rescind the contract.

Rescission of a contract cannot be requested if the party invoking a change of circumstances should have taken such circumstances into consideration at the time the contract was concluded or could have avoided them or could have averted the consequences thereof.

The party requesting the rescission of the contract (i.e. the First Party) may not invoke the change of circumstances if that change occurred after the deadline stipulated for the performance of the First Party’s obligation.

A party who is entitled to request the rescission of a contract, owing to the changed circumstances (i.e. the First Party), must notify the other party of their intention to request a rescission as soon as they learn that such circumstances have occurred. A party that fails to do so shall be held liable for the damage incurred to the other party as a consequence of the notification not being provided on time.

In that regard, the party who realises that due to the  circumstances related to COVID-19 which occurred after the conclusion of the contract (e.g. due to the border crossing restrictions; due to public transport restrictions; due to the closing of the educational institutions; due to the quarantine; etc.), they encountered difficulties in performing the contract or the purpose of the contract can no longer be achieved (and it would be unjust if the other party insisted on the contract), must immediately upon realization of these circumstances notify the other contractual party of their intention to invoke the change of circumstances and to request the rescission of the contract. In practice, parties initially try to reach an agreement on the amendment of the contract with their counterparties. Should that not be successful, a request to rescind the contract before the competent court is required.

Impossibility of Performance (Article 116 OZ)

If the performance of obligations becomes impossible for one party to a bilateral contract, due to a development for which neither party is responsible, the obligation of the other party shall also expire; if the latter has already performed part of their obligations, they can demand the return thereof.

In that regard, a party that contractually bound themselves to perform a certain obligation, e.g. transport a foreigner from an airport in Italy to Slovenia, and cannot do so due to the event for which neither party is responsible (e.g. due to the state order to restrict the crossing of Italian border for foreigners that do not have a medical report stating that they tested negative to COVID-19), will not be bound to perform their obligation, while also the passenger will not be obliged to pay for the transportation (if the passenger already paid for the transportation, the transporter must return that payment).

Uncertainty Regarding the Performance of Obligations by One Party (Article 102 OZ)

If it is agreed that one party will perform their obligations first and, after the contract is concluded, material circumstances of the other party deteriorate to such an extent that it is uncertain whether that party will be able to perform their obligations, or if this is uncertain for other serious reasons, the party that undertook to perform their obligations first, can defer their performance until the other party performs their obligations or until the other party provides sufficient security that their obligations will be performed (e.g. bank guarantee).

If upon the request by the first party (i.e. the party that undertook to perform their obligations first), the second party does not provide the security within a suitable deadline, the first party may withdraw from the contract.

For example, a party, who knows that the material circumstances of the other party have deteriorated to such an extent (e.g. due to the consequences of COVID-19) that it is uncertain whether the other party will be able to perform their obligation (e.g. threat of bankruptcy), or that performance is uncertain for other serious reasons (e.g. the other party did not perform the preparational acts necessary for the performance of the obligation), they can postpone their performance until the other party performs their obligation, or until that party provides a sufficient security. If the other party, upon the request by the first party to provide a security within a suitable deadline, does not do so, the first party can withdraw from the contract.

MAC provisions

The so called »Material Adverse Change« – MAC provisions, are contractual provisions, which enable one party (e.g. buyer) to withdraw from the contract, if the circumstances, which have a material adverse effect on the object of the purchase, arise.

For such MAC provision to be relevant for the case or the consequences of COVID-19, respectively, the contract must be concluded before the materialisation of the consequences, related to COVID-19, while the contract must also contain a MAC provision with suitable content (i.e. the provision must relate to the circumstances arising from COVID-19). Additionally, it is necessary to draw attention to the fact that MAC provisions are sometimes drafted in in a way that the party invoking these provision is only entitled to withdraw from the contract provided that these circumstances affect only the object of the purchase specifically, and do not affect  the whole industry/branch or the whole of the economy, respectively.

In that regard, the parties of the contracts should examine whether their contracts include the so-called MAC provisions, and what is their particular content, while they should also examine which is the relevant law governing these contracts.

Exception from the obligation to pay a contractual penalty   (Article 250 OZ)

The creditor may not demand a penalty if the non-performance or delay occurred for a reason for which the debtor is not responsible.