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Almost two months after the state of emergency has been introduced, the initial stress of the current situation and immediate fear of the disease itself has given way to the justified concerns about the effects that the anti-epidemic measures will have on the economy and trade in the short and long term.
The law evaluates the extraordinary nature of such situations and has long-established mechanisms in place that allow parties to a transaction to deviate from the fulfillment of their obligations under the conditions of force majeure.
This institute provides a number of rules and requirements, and its application is not unconditional. We would like to note that the legislation is applicable and the protection it provides is guaranteed, even if there is no explicit force majeure clause in the specific contract.
However, the force majeure clauses in the contract are not irrelevant and should be analyzed. Each particular contract should also be analyzed from the point of view of the applicable law, insofar as the effects of force majeure may vary according to different national legislation. For example, in English law there is no legally guaranteed possibility of invoking force majeure.
Generally, force majeure is an unforeseen or unpreventable event of extraordinary nature occurring after the conclusion of the contract.
Prerequisites for applying the force majeure rules
The application of force majeure rules does not automatically occur by law. In order for a party to a contract to invoke force majeure, in addition to the presence of an unforeseen or unpreventable event of an extraordinary nature, it is also necessary:
-The contract must be concluded before the occurrence of the unforeseen or unpreventable event, which makes its execution impossible. In the context of the COVID-19 pandemic, force majeure will most often occur when restrictive measures are imposed by public authorities that prevent a party from fulfilling its contractual obligations.
– Execution has become objectively impossible, and this objective impossibility is caused by force majeure which means that a causal link between the force majeure and the default is necessary. The case law accepts that, in the case of proving force majeure, it must be established indisputably that the party has done everything possible, but the consequences of force majeure cannot be overcome, despite the efforts made.
– The party invoking force majeure should not be in a delay at the time of the emergency. The Act recognizes the possibility of invoking force majeure only by the party which is not in default.
-In the event when the parties have reached a new agreement due to a sudden, unforeseen circumstance that impedes the correct execution of the obligations committed with the contract, the debtor cannot invoke the same circumstance again.
-Notification of the other party. The Act provides that the party, invoking force majeure, must notify the other party to the contract in writing what the force majeure is and the possible consequences for the execution of the contract. This notification is supposed to be received within an appropriate period.
Consequences of invoking force majeure
– For the duration of force majeure, the fulfillment of obligations and related counter-obligations is suspended
-The party which has invoked force majeure in a timely manner does not suffer the unfavorable consequences of its default while the force majeure lasts, such as payment of damages and penalties under the contract. Thus, however, the obligation to fulfill the contractual obligations after the end of the extraordinary circumstances is not eliminated.
-In a case when the force majeure lasts for a considerable period of time, the creditor has the right to terminate the contract. The debtor also has this right. This possibility is not unconditional and applies to cases where force majeure lasts so long that the creditor is no longer interested in the execution.
– In the event of termination of the contract, the costs incurred in connection with the contract shall remain for the account of the party that made them in the first place. This is because the principle rule is that the contract will be terminated for the future.
-As a rule, the lack of funds cannot fall within the scope of force majeure. Monetary debtors do not have the opportunity to invoke force majeure and to refuse payment.
In view of the above, we recommend that every commercial entity takes the following measures regarding pending contractual relations:
– To follow the restrictive measures introduced in Bulgaria;
– To analyze pending contracts in order to assess the impact that the measures will have on the fulfillment of their obligations;
– To analyze the force majeure clauses included in the contracts;
-In case it is expected for a failure to arise as a result of the state of emergency, the partners should notify in writing in accordance with the requirements of the Act;
-To apply for a certificate of force majeure from the Bulgarian Chamber of Commerce and Industry. Such a certificate facilitates proof of the occurred force majeure, and in some cases is required by the applicable law or agreed between the parties. Force majeure certificates issued by BCCI are internationally recognized and accepted as evidence by international arbitration institutions.
-Consultation with an experienced lawyer for each specific case.
The duration of the emergency situation, created by the COVID-19 pandemic, can cumulatively cause economic problems that affect business income and make costs unbearable, i.e. extra-large, which they were not at the time of the conclusion of the relevant contract.
In this case, the parties have the opportunity to invoke the so-called economic intolerance. This institute is different from force majeure and the prerequisites and consequences are different.
The important thing here is to know that if the parties fail to reach an agreement, the court is the authority which, at the request of one of the parties, may amend or terminate the contract, as a whole or partly, when circumstances, which the parties could not and were not obliged to foresee, have occurred and the preservation of the contract is contrary to justice and good faith. Unlike force majeure, economic intolerance is the basis for reaching an amendment or termination of the bond when it is not agreed by the parties and the objective economic situation in its continuation under the initial conditions creates prerequisites for extreme injustice in the relations between the parties.
The above means that the amendment or termination of the contract due to economic intolerance is carried out only by court. Economic intolerance may also be applied by arbitration if the parties have negotiated a valid arbitration clause.
Like the restrictions already discussed, force majeure and economic intolerance cannot be invoked by the debtor after the contract has expired or the debtor has already fallen into a delay.
Undoubtedly, economic intolerance is a good opportunity for parties to limit the unfavorable economic impact of the crisis, especially if there is no agreement to renegotiate the terms of the contract, but at the same time it has its disadvantages. The fact that it is settled only by court means that the procedure involves costs and time that may not be acceptable for the party. To date, the time limits for such proceedings have been suspended and it is difficult to predict how long such proceedings could develop.
Furthermore, the amendment or termination of the contract by a judicial authority (be it state or arbitration) would be effective in the future, which, given the relatively slow procedure, raises the question of the effectiveness of this legal possibility. Of course, when all other options are exhausted, economic intolerance is the only way to limit the damage from the severely deteriorating economic environment.
Our clients have already contacted us for the preparation of the relevant notifications and each case is different and individual. The Murgova and Partners Attorneys at law team is available for further clarification and consultation on the issues raised in this article, as well as any assistance needed by contracting parties seeking to settle relations with their partners.