COVID – 19 & LEGAL CHALLENGES & COMMERCIAL CONTRACTS
On March 5, 2020, the first case of coronavirus infection (COVID – 19) was confirmed in Bosnia and Herzegovina (“BiH”). Thereafter, an increase in the number of corona infected persons occurs throughout BiH, and it is expected that the number of infected will increase for over the time. Increase in the number of infected coronavirus in BiH, i.e. and in Republika Srpska (“RS”) and the Federation of Bosnia and Herzegovina (“FBiH”), as well as declaring a pandemic of the coronavirus at a global level will have an impact on economic activity throughout BiH.
Today, on 16 March 2020, the RS Government declared a state of emergency for the territory of RS due to the epidemiological situation in RS caused by the appearance of the 2019-nCoV coronavirus. On the other hand, also today, on 16 March 2020, the FBiH Government declared the accident caused by the emergence of coronavirus (COVID – 19) in the territory of the FBiH. According to publicly available data, the competent authorities in the RS and FBiH will in the forthcoming period consider and adopt several measures related to the preservation and improvement of liquidity of the economy and fiscal stimulation. They are mainly aimed at unhindered supply of the necessary goods and services to the population, as well as assistance to the business entities working with the countries that are most severely affected by the coronavirus. The situation is similar in other countries of Europe and the world – governments and other competent authorities adopt draconian measures that are mainly aimed at: (i) suppressing the spread of a coronavirus infection (e.g. closure of certain border crossings, mandatory quarantine upon entry into the country, etc.); and (ii) mitigating the economic consequences of the coronavirus outbreak (e.g. postponement of tax and credit obligations, export bans on certain products, etc.). For instance, the Republic of Serbia has temporarily banned the export of basic foodstuffs and hygiene products.
Closure of state borders, delays in deliveries of raw materials and other materials, adoption of various measures by competent authorities are circumstances that may affect the fulfilment of previously assumed contractual obligations of business entities. In addition, the consequences extend to a very broad social sphere, starting from the areas of labour law, movement, public order and peace, etc. In this brief notice, we will focus on issues arising in relation to commercial contracts.
In the light of the abovementioned, business entities may find themselves in the aggravated circumstances with respect to the fulfilment of their contractual obligations. Companies and entrepreneurs may be prevented from fulfilling their contractual obligations in full, in part or in contractually agreed terms.
I. WHAT ARE THE MAIN CONSEQUENCES OF A CONTRACT INFRINGEMENT?
In general, inability to perform and delay in the performance of contractual obligations can lead to the following consequences:
1. obligations for compensation of damage to the other contracting party arising out of non-performance and / or delay in performing the contractual obligation. This damage, in principle, consists of the actually sustained damages and loss of profit (lat. lucrum cessans) that the other contracting party expects to receive by performing or timely performing the obligation of the breaching party or delaying the performance of the contractual obligations; and
2. a request for performance of a contractual obligation (made through court or out of court) or potential termination of the contract (whether the other party unilaterally terminates the contract (the reasonableness of this termination should in any case be analysed separately) or the inability to perform the obligation within a time limit has by the very contract stipulated as the consequence for the termination of a contract). Depending on all the circumstances of a case, it may sometimes be necessary to provide an additional deadline for fulfilment of the obligation, while in other cases a default / delay will lead to an automatic termination of a contract (e.g. the deadline for execution was agreed as an essential element). It is important to emphasise that under certain circumstances, termination of a contract may occur even before the deadline occurs (e.g. if it results from the circumstances that the other party will not be able to perform its obligation within the agreed term).
II. WHAT SHOULD BE SPECIALLY ANALYSED?
In order to mitigate the legal consequences that may result from a breach of a contract (e.g. indemnification requests), it is advisable to perform following:
CLASSIC COMMERCIAL CONTRACTS (TRADE WITH GOODS AND SERVICES)
1. to analyse contractual clauses on force majeure (lat. Vis maior, local language. Viša sila). As a rule, a contracting party is not liable for damages if it proves that it could not: (i) fulfil its obligations or it delays with a fulfilment due to circumstances that arose after the conclusion of the contract; and (ii) prevent, eliminate or avoid these circumstances. Commercial contracts often contain special provisions on force majeure, so those provisions (if any), in conjunction with the general legal rules, should be considered before making specific business decisions. Our law does not recognize the legal definition of the force majeure, but commercial contracts often contain force majeure clauses. When contracts do not contain these clauses, there are laws, regulations and general rules of the law of obligations, which applies in these cases (changed circumstances, inability to fulfil obligation, general rules on liability for performance of obligations, etc.). It is virtually inconceivable that until a few months ago anyone in BiH could have predicted the outbreak of a coronavirus infection, as well as enacting various state measures to combat this infection. This circumstance certainly provides a good starting point for considering the release of a counterparty’s liability due to force majeure. However, it is important to know that, by law, a contracting party calling for the release of its liability by force majeure should prove this in the event of a dispute. In this respect it will be necessary to prove all of the following: (i) that circumstances which prevent the performance of the contractual obligation or which delay the performance of the obligation occurred after the conclusion of the contract. For instance, if the contract was concluded 6 months ago then it is likely that force majeure will be easier to prove than if the contract was concluded before e.g. 15 days; and (ii) respective circumstances could not have been prevented, remedied or avoided;
2. to consider the obligation to inform the other party of the facts that have an impact on the contractual relationship. As a general rule, each contracting party is obliged to inform the other party in a timely manner of the facts affecting the contractual relationship. Breach of this obligation entitles the other party to compensation for the damage it has suffered as a result of failure to notify or untimely notify. For instance, if the party who, on the basis of the contract, supplies raw materials to the other party and the trucks with raw materials will not arrive in BiH on time, the supplying party should inform the other party as soon as it becomes aware of this delay;
3. to analyse the clauses of the insurance contract and consider the obligation or need to communicate with the insurance companies. In the first place, it is advisable to analyse which cases are covered by an insurance policy. When it comes to a property insurance, the insurance contractor is obliged to inform the insurance company of any change in circumstances that may be relevant to the risk assessment. Further, as a rule, the insured party is obliged to inform the insurance company of the occurrence of the insured event within three days from the day when he / she learned that the insured event occurred (this does not apply to life insurance and other specific types of insurance);
4. to analyse the possibility of obtaining appropriate certificates of force majeure from the competent authorities in BiH. According to informal information from the RS Chamber of Commerce: (i) business entities may request in writing that the RS Chamber of Commerce issue a certificate of force majeure; (ii) these force majeure certificates are public deeds and serve as evidence of the inability (in full or in part) of the performance of contractual obligations. However, it should be emphasized that business entities cannot rely on these certificates as deeds that will fully or partially release them of their respective contractual liability in a potential court proceeding. On the other hand, the FBiH Chamber of Commerce informally confirms that they do not issue such certificates because, according to their informal interpretation, the occurrence of the effects caused by the infection of the coronavirus does not result in the occurrence of force majeure;
5. to analyse contractual clauses re liability for contract performance. As a rule, the liability of the contracting party may be extended beyond statutory defined frames. On the other hand, the contract may also narrow the liability of the contracting party – e.g. by stipulating the maximum amount of compensation that the breaching party will be obliged to pay to the other contracting party for damages. Accordingly, in order to properly determine the situation, it is necessary to consider in particular the extent to which the legal provisions and the provisions of a particular contract, favour or harm defaulting party;
6. analyse the possibility of termination or amendment of the contract due to changed circumstances (lat. Rebus Sic Stantibus). Circumstances that make difficult for one contracting party to fulfil an obligation (e.g., the inability to continue to procure raw materials procured from countries affected by a coronavirus infection) that occur after the conclusion of the contract may be grounds for termination or modification of the contract. In such a case, the party who has difficulty in fulfilling the contract may propose to the other party to modify or terminate the contract due to these circumstances or to seek judicial termination of the contract. When considering this option, it is also important to consider the following: (i) the party intending to amend the contract should submit to the other party proposals for changes to the contract that would result in a fair modification of the contract; (ii) the party intending to terminate the contract due to changed circumstances is obliged to notify the other party of its intention to terminate the contract due to these circumstances; (iii) the other party may prevent the termination of the contract by offering or agreeing to fairly modify certain contractual terms; (iv) the court may order to the party requesting the termination of the contract to compensate the other party for the just amount of the damage suffered as a result of the termination of the contract; and (v) the contract may expressly exclude the right of the contracting party to request termination of the contract due to changed circumstances;
7. to analyse the possibility of termination of the contract due to the complete inability to fulfil the obligation. As a rule, when the fulfilment of an obligation of one party becomes impossible due to an event for which neither party is responsible, then the entire contract ceases to exist. It should be noted that the contracting party who has completed something previously given based on the contract, has the right to request the appropriate return of the completed / given one. If a contractual obligation cannot be fulfilled only partially because of an event for which neither party is responsible, then the other party expecting the performance of that obligation has the right to terminate the contract provided that it proves that this partial failure does not meet its needs. Otherwise, if the contract still remains in force, the other party, which receives only partial fulfilment, has the right to request for its obligation to be reduced proportionally (e.g. if it is possible to deliver only 70% of the contracted quantities of goods, then the other party to whom the goods are delivered will require to pay only those 70% of the contracted quantities of goods, and not all 100% of the originally contracted quantities).
MERGER AND ACQUISITION CONTRACTS (M&A CONTRACTS
1. to analyse the contractual clauses governing the consequences of material adverse events (MAC provisions). In practice, the MAC Provisions authorize the buyer to terminate the M&A contract if, in the period between the conclusion of the contract and the fulfilment of all conditions defined in the contract, occurs a materially negative event defined by the contract. For instance, a buyer may terminate M&A contract if, before the full payment of reimbursement is due, the turnover of the target company falls more than 20% from its current turnover. In this respect, it is necessary to analyse whether the present disturbances and changed circumstances resulting from the outbreak of the coronavirus can trigger the application of contracted MAC provisions. On the other hand, when drafting new M&A contracts, special attention should be paid on the consequences of an outbreak of coronavirus infection as well as the effects of measures taken by the competent authorities to restrain this infection;
2. to analyse clauses stipulating seller’s warranties. With respect to the already concluded M&A contracts, it is necessary to analyse the provisions of the seller’s warranties and examine to what extent the current situation regarding the infection of the coronavirus will affect compliance with these warranties and whether due to the inability to respect these warranties customers will be entitled for damages. With respect to new M&A contracts, sellers should insist on provisions that limit or exclude the seller’s liability for the negative consequences of the acquisition of the target company and the consequences resulting from the outbreak of the coronavirus (e.g. this can be done by referring to generally known facts what a buyer had to be aware of, changes in the regulations that the buyer is required to meet, etc.);
3. to consider the risks of insolvency or bankruptcy. Particular consideration should be given to whether the consequences of the resulting coronavirus could lead to the insolvency of the target company and what the consequences would be in that regard;
4. to look at the bigger picture. Depending on the business being conducted by the target company, it may be advisable to pause the ongoing acquisitions (for instance, until the first stroke of the coronavirus epidemic has passed, when things will be much clearer and more predictable). This especially relates to the industries that are significantly affected by the outbreak of coronavirus infection, e.g. tourism, catering, etc.
III. NOTIFICATION CONTEXT
All the above is an outline of the legal consequences of a breach of the commercial contracts that may arise from circumstances caused by the outbreak of a coronavirus infection. None of the above constitutes legal advice, nor do we assume any liability in the event of any of the aforementioned.
For more detailed information regarding the above, please contact the following addresses:
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Republic of Srpska, Bosnia & Herzegovina
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