The coronavirus (COVID-19) outbreak in Romania led to the presidential decree issued on 16 March 2020 declaring the state of emergency in Romania for the next 30 days (the Decree), followed by the emergency measures taken on 17 March 2020 by the Ministry of Internal Affairs (the Emergency Measures) with direct impact on the activity of various businesses. Let’s see the impact on ongoing contracts.
Impossibility of performance. Should the performance of a contract become temporarily or permanently impossible for one of the parties, such party is not considered in default and has no liability for the non-performance. This is the so called fortuitous impossibility of performance (in Romanian imposibilitatea fortuita de executare a contractului); it is triggered by either a force majeure event (if out of control, unforeseeable, invincible and unavoidable for everybody) or, as the case may be, a fortuitous event (if unforeseeable and unavoidable just for a specific party). Should the impossibility to perform be temporary, then such contractual performance could be suspended for a reasonable term, considering the length and the effects of the event.
Hardship. Where there is no force majeure or fortuitous event but, because of an event very difficult or impossible to foresee upon execution of the contract, the contract becomes very unbalanced so the performance by one of the parties becomes excessively onerous, such party may, under certain conditions, invoke the hardship (in Romanian, impreviziunea) to rebalance its obligations and interests under that contract.
The above mechanisms (impossibility of performance and hardship) refer to the allocation of the contractual risk, which is not generated by a default by one of the parties, as opposed to the contractual liability of the parties, which is triggered by a default of one of the parties.
2. Force Majeure
a. What is it exactly?
A force majeure event must be: (i) external (out of the parties’ control or conduct); (ii) unpredictable; and (iii) absolutely invincible and unavoidable. Recent case law has acknowledged natural disasters, earthquakes, wars, strikes or terrorist attacks as force majeure. Events related to national health (such as epidemics or pandemics) have not been specifically dealt with in the Romanian case law so far. Our view is that the COVID-19 pandemic may be seen as force majeure, but this still remains to be tested in courts.
b. Is it relevant for each contract?
Can the regime of force majeure be invoked even if it is not regulated in the contract? Yes, the legal provisions will apply by default.
But contracts may further regulate the regime of force majeure, generally by defining force majeure events or contractually allocating the force majeure risks to one of the parties. Contracts may also regulate the procedure for invoking a force majeure event (e.g. a notice within a certain deadline, a certificate from the chamber of commerce/other third party) or a maximum duration (e.g. 90, 180 days) which would enable the parties to terminate the contract.
The effects of a force majeure event can only be assessed on a case by case basis and depending on the specific provisions of the contract.
c. Is it really force majeure? Who decides so?
The Romanian Chamber of Commerce may issue force majeure certificates. These are usually requested by the interested contractual party, either if required in the contract or just to strengthen the position in a litigation. However, in case of litigation, it will be ultimately up to the court to decide if the COVID-19 pandemic represents a force majeure event for the case at hand (irrespective of the force majeure certificate).
d. Emergency Measures consequences – is this force majeure?
The Emergency Measures include (without limitation): (i) closing down restaurants, pubs, hotel, coffee shops etc (except for home-delivery services, drive-in, room-service), fitness and health clubs, beauty salons and any other business dealing with in-doors cultural, scientific, sport, entertainment or gambling activities; and (ii) prohibition of outdoor events with more than 100 persons.
The above will negatively impact many businesses. But to call it force majeure there must be an absolute impossibility (invincible and unavoidable) for anybody to carry out the business or professional activity within such premises/circumstances. In other words, there must be no other way to carry out the business (not just a financial distress).
So those businesses which can still operate (home-delivery, drive-in, room-service) do not seem to meet the force majeure requirements, while those which cannot (events for less than 100 persons) seem to fall under the concept of force majeure.
What if an office building or a shopping mall will be forced by authorities to close? We are of the view that this should be qualified as force majeure.
Force majeure should be assessed on a case by case basis. Invoking it without sufficient grounds may affect the long-term commercial partnership between the parties and may even trigger the payment of penalties/damages in case of litigation.
3. Hardship (impreviziunea) – what about it?
a. Hardship is an exceptional change in the contractual circumstances triggering a serious contractual imbalance (not an impossibility to perform as in the case of force majeure/fortuitous events but just a very cumbersome performance/serious imbalance). In such case, the parties may negotiate an equitable adjustment of the contract. But the contract goes on even if it becomes more cumbersome than initially expected.
b. What if the parties fail to reach an agreement? Courts may either adjust or terminate the contract.
c. Can the parties contractually waive the hardship effects? Yes, and in such case the contractual waiver shall prevail.
Business affected by the current COVID-19 outbreak should carefully check their contracts to see if any force majeure or hardship provisions can be successfully invoked. They should also check out any existing business loss/interruption insurance and pay attention to force majeure/hardship clauses when entering any new contracts.
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