Wars, natural disasters, diseases, economic crises… common risks accompanying human life and business over centuries. The law reflects and reacts to what is happening in our society.
That is why the law (already Roman law) developed certain rules governing the occurrence, consequences and economic burden (i.e. who will pay the cost) of such emergencies. In the calm and safe period after World War II and, particularly, in the years of prosperity after the collapse of the Soviet bloc, the importance of these rules was considerably diminished. They were “something” that was part of the law, but was not really considered in contracts (except for a general reference to circumstances excluding liability for damage). In practice, we did not get to resolve many disputes concerning such emergencies (at least in my experience; other colleagues may disagree).
More frequent occurrences of various natural disasters, both globally (volcano eruptions, earthquakes, tsunami) and in the Czech Republic (floods, drought or windstorms), riots and terrorism and new diseases with pandemic potential, such as the current coronavirus threat, together with economic globalization (nothing is happening at home, but certain parts for the products I sell to Germany are imported from Asia) clearly increase the risk. Detailed contractual clauses laying down possible scenarios of default due to fairly realistic emergency incidents will, in the future, certainly become crucial.
What must or should be regulated in such case and what are the options available under the law? First of all, knowing what is covered by the Czech law and what Czech judges think about a particular issue (i.e. knowing the case law) is obviously useful. But even before that, we need to know whether a contract will be governed by the Czech law and whether the claims arising from a breach of the contract will be brought to Czech or other courts (and, whether the foreign court will apply the Czech law chosen in the contract or certain rules of its own national law). Another equally important question is whether, after the court proceedings have taken place and a decision has been adopted in my favour, I will be able to enforce the judgment against the contractor in the country where the contractor is based or has at least some property? This is governed by the choice-of-law clause and the choice-of-jurisdiction or arbitration clause. These issues have to be considered in advance and integrated into the contract.
Termination of contractual obligation in case of emergency
If a contract is governed by the Czech law, the occurrence of an emergency preventing the performance of a contractual obligation may have several consequences. An emergency incident, such as war, epidemic or natural disaster, does not typically automatically render the contract invalid due to inability to perform. The obstacle would have to be a permanent one (meaning that performance of the contract will never again be possible). Under the Czech law, performance is not impossible if the contractor cannot perform, but another party hired by the contractor can (the contractor will find a replacement). Neither do increased costs or difficulty of performance due to emergency constitute a reason for the contract to terminate due to inability to perform. A law prohibiting performance of the contract (i.e. inability to perform for legal reasons) would cause termination of the contract; temporary legislative or administrative measures, on the other hand (e.g. current ban on respirator mask exports), do not have such effect.
If a contractual obligation cannot be fulfilled due to an emergency, the defaulting party is in delay. The delay will occur regardless of whether the contractor caused, participated in causing or could have anticipated the emergency, etc. The most significant consequence of the delay in such case will be the other party’s right to withdraw from the contract (subject to the conditions stipulated by law). This means the termination of the contract and, where appropriate, the obligation of the parties to return the provided performance. Contracts often include comprehensive provisions stipulating various reasons for terminating the contract while excluding statutory provisions on withdrawal. If this is the case, do not forget to clearly stipulate the termination of the contract in the event of an emergency temporarily preventing a contracting party to perform the contract (the time after which the contract can be withdrawn from or otherwise terminated, or whether, and how, the performance provided will be returned).
Vis major
The most frequently mentioned consequence of emergency incidents (in this context commonly referred to as vis major, force majeure or Act of God) is exclusion of the contracting party’s liability for damages caused by the default on (or delay in) the performance. The Czech Civil Code regulates such consequence in Section 2913(2). The person who caused damage shall be released from the obligation to compensate such damage if they are prevented from fulfilling their contractual duty by an extraordinary, insurmountable and unforeseeable obstacle that arose independent of their will (and before the delay in performance).
For example, the coronavirus infection currently is such an obstacle. Whether a regularly recurring influenza epidemic affecting most of a manufacturing plant’s employees would fall into this category, is unclear. Probably not, as the epidemic can be predicted and prevented by vaccination. Obstacles arising from the personal circumstances of the defaulting party (including the default of their subcontractor) do not release the party from the obligation to compensate the damage. In the past, the Commercial Code clearly stipulated the circumstances under which an emergency affecting a subcontractor (e.g. a supplier of components) excluded the liability of the main contractor (the one selling the product as a whole). Such explicit regulation is now absent from the law.
Those invoking an extraordinary obstacle pursuant to Section 2913(2) of the Civil Code must, obviously, prove its existence, extraordinary character, insurmountability and other legal requirements, rather than merely claiming existence of the obstacle. This applies in law in general. Therefore, the Chinese government now issues for Chinese companies an official confirmation of the existence of the infection at the company’s site.
The Czech Civil Code (as well as the court decisions) allows these issues to be contractually regulated (i.e. allows to specifically define what an event pursuant to Section 2913(2) of the Civil Code involves/does not involve, how long the event must last, or what is/is not foreseeable) and the extent of damages to be agreed, etc. Do not forget to regulate these things.
Contractual penalty and other questions
If the contracting parties agree on a contractual penalty for a default on a contractual obligation, the occurrence of an emergency (extraordinary event) has, by operation of law, no effect on the obligation to pay the penalty (i.e. the defaulting party is not released from the obligation to pay the contractual penalty). It is therefore recommended to also regulate this in the contract.
In the event of an emergency, the incapacitated party is obliged to notify the other party, without undue delay, of the occurrence of the extraordinary event and the inability to perform and/or to take measures to prevent or mitigate the damage.
The simplest answer to the question: “Who will pay the costs?” is, in fact, taking out insurance and, in the event of an emergency, claim benefits from the insurance company (“business risk insurance”). Extraordinary events, such as wars, terrorism and large-scale natural disasters, may, however, often be excluded from insurance (an uninsurable event). With increased incidence of various emergencies, such insurance will inevitably become more expensive and less affordable.
Source:
Act No. 89/2012 Coll., the Civil Code, as amended