After one month of the state of emergency in the Republic of Serbia, businesses in Serbia are directly or indirectly affected by measures introduced by the Government.
Although state borders are not closed for cargo and there are no restrictions on the movement of goods (except for certain goods such as medical equipment and medicines), the restriction on the
freedom of movement and limitation of working hours made it difficult to perform business, while in some industries government measures caused complete cessation of the businesses (e.g. tourism, restaurants).
Despite the fact that some companies, due to the nature of their business, were able to organize work of their employees from home or to organize work in other manner, which we discussed in our previous blog, problem arises regarding the fulfillment of obligations from their commercial contracts that were concluded before the pandemic occurred and which are still in force.
The question that certainly bothers companies and entrepreneurs is what should be done when they cannot fulfill obligations, monetary or non-monetary, to their business partners in accordance with their mutual contract. Is it possible to terminate the contract without being liable for any damage to the other party?
When discussing the commercial contracts that are affected by the state of emergency, it should be particularly stressed that Law on Contracts and Torts gives the contracting parties several options, which may be applied on a case-by-case basis:
1. Rescission or amendment of contract due to changed circumstances;
2. Impossibility of performance not attributable to either party;
3. Exoneration of liability for failure to perform a contract.
Be aware that the application of these legal institutes is dependent on the circumstances of each case. Thus, in order to make the right decision it is necessary to consider all the facts around the
contract. Case law is very important in deciding how to resolve a contractual relationship during a state of emergency, because arbitrary termination of contract and failure to comply with the
procedure for termination may involve a business entity in the court proceeding and cause damages.
Regarding the lease agreement of the premises, as a specific commercial contract, you can read more in our new blog.
1.CHANGED CIRCUMSTANCES CAUSED BY GOVERNMENT MEASURES
Government measures introduced during the state of emergency have led to new circumstances and companies are suddenly caught in unfavorable business environment. However, introduced
measures affected different industries in different ways, which means the right of each company or entrepreneur to rescind or amend contract should be determined based on the facts of each case.
Should after concluding the contract circumstances emerge which aggravate the performance of the obligation of one party, or if due to them the goal of the contract cannot be realized, to such a
degree that it become evident that the contract meets no more the expectations of contracting parties, and that, generally speaking, it would be unjust to maintain its validity as it stands – the party having difficulties in performing the obligation, namely the party being unable, due to changed circumstances, to realize the purpose of contract, may request its rescission.
It should be emphasized here that a contracting party who is seeking a termination of the contract cannot do so by a mere declaration of will. Namely, the court decides on the termination of the
contract due to the changed circumstances on the basis of the evidence presented. Companies should be aware that courts face difficulties in their performance during the state of emergency.
In any event, before initiating court proceedings, party authorized to request termination of the contract due to changed circumstances shall be obliged to notify the other party on its intention to
terminate contract immediately. On the contrary, it shall be liable for loss that is caused to the other party because it failed to act accordingly.
Business entities shall pay attention to the content of the contract they have entered into, because it may stipulate that contracting parties are deprived of the right to terminate the contract due to
changed circumstances. Additionally, the right to request a change of contract is also valid option.
2. GOVERNEMENT MEASURES CAUSED THE IMPOSSIBILITY OF PERFORMANCE
The second possibility prescribed by the Law on Contracts and Torts, which may potentially be applied, is the impossibility to perform contractual obligations due to an event that no party is liable
That means if the fulfillment of the obligation of one contracting party is impossible due to an event (in particular due to the pandemic caused by the COVID-19 virus) no party is guilty for, that obligation of that party shall be terminated. Consequently, the obligation of other party shall also be terminated. In case the affected party received something from the other party in the name of
fulfillment of its obligation, the affected party shall be obliged to return received.
Contract shall remain in force if fulfillment is only partially impossible due to emergency measures, which shall be determined in each case.
3. FORCE MAJEURE
In the event party affected by pandemic was unable to perform its contractual obligation or to perform it in a timely manner, such party may be not liable for damages. This may apply only if it was
caused for the reasons arising after the contract entered into force and which party could not have prevented, eliminated or avoided.
Namely, the party shall be released from liability for loss upon proving its inability to perform the obligation, or that its delay in performing the obligation was due to circumstances taking place after entering into contract which it was unable to eliminate or avoid.
Force majeure is further elaborated in the laws of the republic of Serbia for some commercial contracts (e.g. lease agreement, shipping of goods). Hence, in order to evaluate the possibility to
avoid liability for damage due to force majeure, it is necessary to determine what type of contract is affected.
WHAT IS THE BEST SOLUTION?
Unfortunately, this question cannot be answered in a general manner.
The Serbian Law has anticipated that state of emergency may bring new business atmosphere and therefore has stipulated solutions for these, which are certainly not universal. Possibilities regarding termination of the contract, amendments to the contract, postponement of fulfillment of the contracting obligations are questions that should be answered in each particular case from the perspective of contractual provisions. Content of the contract, as well as the law which governs the particular contract, is of great significance, especially when determining whether contract is signed between Serbian business entities or with foreign business partner.
The contracting parties should particularly pay attention to the provisions of the contract concerning possible liquidated damages, penalties, indemnification and other similar institutes, which can greatly influence the status of their contract. Mistakes and omissions in termination of the contract and defaults in fulfillment of the obligations may potentially lead to court proceedings, which may cause substantial material costs and liability for damages to the other party.
Having in mind that the COVID-19 disease pandemic has affected a large number of countries, that most of these declared a state of emergency and introduced measures which cause difficulties for businesses to operate, the contracting parties shall be particularly cautious in order to prevent disruption of good business relations and further cooperation.
*The content of this blog is for informative purposes only and does not constitute legal advice.