Impact of COVID-19 on Commercial Contracts

17 March 2020

It is to be expected that the recent developments in the coronavirus pandemic will impact the companies’ ability to perform under ongoing agreements.

The Romanian legislation provides several grounds under which a contracting party may be relieved, under certain circumstances, from performing its contractual obligations, leading either to temporary postponement of the relevant obligations or to a termination without fault of the agreement. Most commonly available options include force majeure (Romanian: “forta majora”); fortuitous event (Romanian: “caz fortuit”) and hardship (Romanian: “impreviziune”).

The interpretation and application of either of these grounds to the coronavirus pandemic must be made on a case-by-case basis and depends heavily on the wording of the contractual clause under consideration and the specific facts of the case.

The event itself may have a different impact along the supply chain (while it excuses the failure to perform of company 1 towards company 2, company 2 may not be excused from the failure to perform towards company 3 although the failures are linked). The difference may result from:

●specific legal or contractual provisions (e.g. force majeure will not be applicable for obligations to provide generic goods – including money, institutional lease agreements almost always exclude hardship, facility agreements generally include borrowers’ waiver of the right to rely on force majeure, fortuitous case or hardship etc.) or

●the actual impact of the pandemic to the activity of the party due to perform.

While it is unlikely that the parties’ temporary relief of contractual obligations will result, on the short term, from the applicable legal or contractual provisions, there is a probability that this will result from governmental measures. The emergency status declared by the Romanian president does not amount in itself to force majeure and the specific measures ordered by the authorities will need to be analyses on a case by case basis.

With or without such measures taken by the Romanian authorities, one may expect that there may be spill-over effects from measures imposed in other states (e.g., Italy, China etc), that will limit the circulation throughout the supply chain and will impact Romanian companies and their employees.

Regardless of whether you find yourself in a position to invoke the coronavirus pandemic seeking relieve of contractual obligations or a counterparty does, please bear in mind that:

a) it is essential to check the relevant contractual wording and the specific facts of the case;

b) there is a statutory duty to perform contracts in good faith;

c) the burden of proving that a given circumstance qualifies as force majeure, fortuitous event or hardship rests on the party invoking it;

d) an unwarranted claim of force majeure, fortuitous event or hardship rests may lead to payment of significant damages;

e) there is a statutory duty for the creditor to mitigate damages; and

f) it is essential to check whether the parties agreed on specific notification duties.

On a final note, for contracts under negotiation the coronavirus pandemic will not be an unpredictable event, so including specific provisions in relation thereto is recommended.