Covid-19 is having a major adverse effect on many existing contracts. Contract parties may be faced with government measures, drop in demand and lack of resources. This article addresses the position of contract parties in light of these circumstances.
Contractual remedies
The provisions that have been agreed between the parties should always be the first port of call in any analysis: to what extent can they be deemed to deal with the current situation. Relevant contractual provisions include: (a) the contract duration; (b) termination and suspension provisions; (c) force majeure clauses; (d) guarantees, indemnities and representations and warranties, and (e) limitation of liability and damages clauses.
If the contract does not deal with a particular situation (in this instance the Covid-19 crisis), and no specific statutory provisions apply, the contract may have to be supplemented on the basis of the standards of ‘reasonableness and fairness’. Also since in the current circumstances ‘societal interests’ (Section 3:12 DCC) are at stake, parties are best advised to seek a dialogue with their counterparties to resolve Covid-19 related issues.
Statutory remedies
Force majeure
To invoke force majeure it is required that it is (permanently or temporarily) impossible (factually or on legal grounds) for the debtor to perform. The fact that goods or services purchased are of no use anymore to the purchaser’s operations does not create force majeure. Impossibility to perform would typically not apply to monetary obligations. However, legislation that prohibits certain services (such as flights from certain countries or the organizing of a mass event) would render those services legally impossible.
Secondly, it is required that the inability of the debtor to perform cannot be ‘attributed’ to it. The creditor may argue that the debtor can be blamed for not having taken reasonable measures that would have prevented its inability to perform, especially if it still could have done so after the onset of the Covid-19 crisis.
If a party was already in default, it cannot invoke force majeure even if performance has now become impossible as a result of the Covid-19 crisis.
Unforeseen circumstances
A party can, in some cases, request the court (or arbitrators if arbitrations was agreed upon) to modify or terminate contracts on the basis of ‘unforeseen circumstances’. It is decisive whether the potential event was, implicitly or explicitly, factored into the contract.
The way that Covid-19 has spread over the world and the government measures taken are historically unprecedented. It is therefore uncertain how a court will rule on the (un) foreseeability of the current pandemic and its consequences. This will be different, however, for contracts that have been entered into after Covid-19 became endemic.
Reasonableness and fairness
The standards of reasonableness and fairness may in exceptional cases imply that contractual provisions are not applied (Section 6:248(2) DCC). This is temporary relief that may be the more appropriate remedy.
Actions a creditor can take
In case a debtor wrongly invokes the above defenses and does not perform the contract, the creditor may suspend performance of its own obligations. Also, a creditor can claim specific performance as long as performance is not yet impossible. Once the debtor is in default, a creditor may convert its right to performance into a damages claim or set aside the contract.
We note that it is currently the policy of the courts to be much more reticent in allowing attachments on the assets of the defaulting party in view of the Covid-19 crisis. The same applies to bankruptcy requests.
Creditor default
The Covid-19 crisis may also result in the inability of a creditor to accept performance (such as taking delivery of goods or services). In that case, ‘creditor default’ (schuldeisersverzuim) may arise. In general, any obstacle to performance on the part of the creditor would be deemed for the risk and account of the creditor. Creditor default automatically ends any default of the debtor.