Impact of COVID-19 on performance of contractual obligations: force majeure, changed circumstances and anticipatory breach

COVID-19 outbreak has triggered a myriad of legal issues, one of them being how one can lawfully be excused from performance of its contractual obligations where such performance is affected by the consequences of the epidemics.

The golden rule of contract law is pacta sunt servanda (contract must be observed). We will analyse below three contractual law concepts under the Serbian Obligations Act that can be invoked to lawfully derogate from that principle: force majeure, changed circumstances (rebus sic stantibus) and anticipatory breach.

Note: The examples are deliberately simplified. The assumption is that the contracts themselves do not address the impact of a COVID-like event on the parties’ obligations. We do not discuss the real but imagined cases and we do not offer below definite solutions to the presented issues.

Force majeure

Assume a room was booked in a hotel in Belgrade in January 2020 for a stay in the second half of March 2020, and the Government imposes measure turning the hotel into hospital for those infected by COVID-19. Assuming the guests are already in Serbia and thus can check-in, the hotel will be prevented from accommodating them. The hotel will want to analyse whether it can excuse itself on the basis of force majeure.

According to Article 354 of the Obligations Act, an obligation ceases if its fulfilment becomes impossible due to the circumstances for which the debtor of the obligation is not responsible. According to Article 263 of the same law, the debtor will not be liable for damages in such a case if its inability to perform the obligation was caused by circumstances occurring after the entry into the contract which the debtor was unable to prevent, eliminate or avoid. Finally, according to Article 137 of the Obligations Act, in such a case, the obligations of the counterparty, whose performance is not hampered by force majeure, also cease to have effect. If that party has already performed its obligations (e.g. it has paid money to the affected party, in our case the hotel), the party whose performance is affected by force majeure would have to return what it has received under the contract (e.g. repay money received).

Changed circumstances (rebus sic stantibus)

What if an event organizer has undertaken in January 2020 to lease, against a fee, a conference space in a prominent hotel in the second half of March 2020 to hold a seminar, and all registered participants cancel the attendance because of the risk of contracting COVID-19? Is the event organizer obliged to pay the lease fee to the hotel according to the lease agreement even if it will not hold the seminar?

COVID-19 crisis does not technically prevent the event organizer (the lessee) from performing its monetary obligation to pay the lease, so the event organizer cannot excuse itself by invoking force majeure. However, the event organizer may analyse whether the notion of changed circumstances offers an exit from the lease agreement.

According to Article 133 of the Obligations Act, if circumstances occur after the entry into a contract which hinder the performance of a party’s obligation, or obviate the  purpose of the contract for that party, and in either case it is evident that the contract no longer meets the expectations of the parties, and that it would be, based on the general opinion, unjust to maintain it in force as is – the party whose performance is affected by changed circumstance or for whom the contract no longer makes sense, may request the court to terminate the contract.

It follows that the affected lessee cannot withdraw from the contract by making a statement to that effect to the lessor but only by suing the lessor in court and requesting the court to terminate the contract. If the court grants the claim, it may order the lessee to share the burden with the lessor by compensating the lessor for a “fair portion of the damage suffered” as a result of the termination.

Anticipatory breach

What if CORONA-19 situation does not affect Party A’s ability to perform first but does affect Party B’s ability to perform its corresponding obligation? For example, a bank has approved a loan to a company in the hospitality business before the CORONA-19 emerged. In midst of the crises, the borrower makes a disbursement request. The bank fears that the borrower will not be able to repay the loan given how much the existing crises has affected the hospitality business. We are not aware of any cases published in Serbia involving a similar situation, but it is worth testing whether the theory of anticipatory breach may excuse the bank in this example.

According to Article 123 of the Obligations Act, if the financial situation of a counterparty deteriorates to such an extent that it has become uncertain whether it will be able to perform its contractual obligation (“Affected Party“), the other contractual party, which is required to perform first, may suspend its performance until the Affected Party fulfils its obligation first or until the Affected Party provides, within an adequate deadline, sufficient security for its future performance. If the Affected Party does not or cannot perform first or does not provide sufficient security for its performance, the other party is entitled to terminate the contract.

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