The companies are anxious over the restrictions placed on their business activities and the resulting supply problems in terms of both goods and services, not to mention overdue payments. It also raises the questions of who should undertake the risk of losses. Should the losses be divided among all involved parties attempting to resolve the situation via negotiations and discounts? Or, perhaps, should each entrepreneur care for the interests of his/her company only and assume the position that “saving a drowning man is his own business”? Should, then, the State, in other words, all of us, take on the part of this burden as the restrictions have been placed for the benefit of the society and, thus, the entire country which had decided upon such measures should also be paying its due without singling out any legal entities?
Over the past week, the lawyers received hundreds of calls and messages, and the newspapers released a number of articles trying to answer the question whether or not the contracting parties have the right to suspend, change or terminate their contractual obligations based on the force majeure clause. In addition to this, the matter of the legality of the certificates issued by Vilnius Chamber of Commerce, Industry and Crafts regarding the force majeure circumstances was analyzed.
Even though the mass media offers many different interpretations of what the legal entities or natural persons encountering such problems should do, yet, no one can give a clear-cut answer. This is actually quite understandable. Even though the companies might not want to hear it, there is no magical answer to resolve all the situations at hand as everything depends on the respective circumstances.
All that the prevalent legal regulation and court practice can do is give general guidelines and rules. Not to mention, the court practice regarding similar matters is poor indeed and of extremely traditionalist views. Only the future will show the direction that the court practice will take as our legal system reacts to the situation retrospectively. So, in the end, the final decision on what to do in each specific case and which share of the responsibility to undertake will befall the contracting parties.
While the mass media provides a lot of information on the legal regulation and limited court practice in case of force majeure as the basis for the suspension or termination of contractual obligations, it says little about the hardship which is also a legal instrument and is much more relevant during the quarantine. This article will offer a brief overview, analysis and conceptual information about the hardship as a legal measure allowing to modify the contractual relations in a balanced way in case of non-performance. This information will allow for easier navigation amongst the abundance of legal algorithms, especially when one of the parties is on the lookout for its own interests.
Firstly, one should keep in mind that the legal regulation of agreements is relatively conservative and, as a general rule, is intended to ensure stable legal relations. Thus, the announcement of quarantine itself cannot be used as a basis of non-performance even in case of difficulties in fulfilling one’s obligations as agreed.
Secondly, legal regulation sets forth limited possibilities to modify contractual relations in case of non-performance or difficulties in fulfilling one’s obligations due to reasonable circumstances that are not dependent on the Parties:
a) Force majeure (Articles 6.127 and 6.212 of the Civil Code) is applicable in situations, where a Party cannot fulfill its obligations properly and completely and provided that such a situation occurs due to objective reasons. Under quarantine, this applies only to those whose activities have been prohibited entirely. However, in this case, it might not apply to all prohibited businesses but rather to those that cannot be objectively undertaken precisely due to quarantine. Hence, only the cases, where the fulfilment of obligations is deemed entirely impossible can be used as a basis for release from liability in case of partial or full non-performance due to force majeure.
As people say, “the devil is in the detail”; thus, one should carefully examine whether force majeure can be applied in the respective situation. Courts can be very conservative, and little to no examples can be found in practice, where force majeure has been successfully proven. Unfortunately, the force majeure certificates issued by the Vilnius Chamber of Commerce, Industry and Crafts hold little significance in court, despite granting mental relief. In case of a dispute, the court will assess the facts independently and make their own decision whether or not force majeure could be applied in the respective situation.
However, we have to admit that force majeure favours the non-performing party as it allows to suspend all obligations immediately, provided that the other party has been duly informed of the situation. The suspension of obligations is possible until the force majeure events subside. In the event of non-performance due to force majeure, the parties are released from liability, have the right to terminate the agreement, request restitution or take other legal measures to reduce their losses.
Thus, force majeure may seem like an appealing measure for a way out under the quarantine. Yet, proving and substantiating the application of force majeure might become quite difficult. Not to mention, one must keep in mind the list of circumstances that cannot be deemed force majeure, which is published in the Civil Code and is applicable at all times: 1) No goods available in the market to fulfil the contractual obligations; 2) The contracting party does not have the necessary financial resources; 3) Non-performance by the parties outsourced by the debtor. In other words, even though it raises certain short-term inconveniences related to lack of finances and/or goods in the market, the prevailing situation in the country cannot be deemed force majeure to be used as a basis for release from liability.
b) Hardship rules apply to both those entities, the activities of which have been entirely prohibited, and those that have experienced hardships in fulfilling their contractual obligations (Article 6.204 of the Civil Code).
This legal measure applies when the situation relating to the fulfilment of contractual obligations of one of the parties is more complicated than that of the other one. Hardship is defined as a temporary situation, where the balance in a contractual relationship is changed due to certain events, e.g. the expenses of fulfilling contractual obligations increase or the output decreases, significant rise in the prices of raw materials necessary to produce the goods or render the services, the introduction of new safety rules that make the manufacturing process essentially more expensive, etc. Similar situations might also occur due to significant changes in the market conditions or the purpose of the agreement falling through (e.g., a prohibition to export the goods which were acquired for the use of export).
While this measure does not allow for automatic suspension of obligations, it does enable the affected party to look for a mutually agreeable solution, to negotiate with the other party regarding modification or termination of the agreement. In case of failure to reach an agreement, the dispute will be resolved in court or by the arbitral tribunal (if stipulated so in the agreement). In terms of court practice, the situation is similar to that of force majeure: the number of such cases is low and of traditionalist view, so far not bringing much clarity to the situation at hand.
When trying to answer the question of what situations are worthwhile of being resolved in court and whether or not the party may expect for justice to be served, the best recommendations are to apply the respective soft law provisions (e.g. UNIDORIT, DCFR and PECL) that the Lithuanian courts usually take into great consideration.
c) The situation may either be facilitated or aggravated by specific provisions of the agreements that should be considered, nevertheless. Also, the legal regulations in Lithuania point out to other similar legal instruments, such as St actions (Article 6.253 of the Civil Code). However, the conditions of applying this legal instrument have not been properly developed and essentially do not differ much from that of force majeure.
Thirdly, in any case, legal regulation and court practice obligate the contracting parties to cooperate and collaborate without abusing the law, i.e. the law prohibits to use the situation for the purpose of avoiding the fulfilment of contractual obligations at the account of another party or refusing to help the other party fulfill its obligations in case of any difficulties the non-performing party is not at fault for. Thus, to be able to suspend, reduce the scope of or terminate the contractual obligations during the time of quarantine announced by the Government, one must first take all the possible measures to maintain the contractual relationship and share the mutual losses proportionately. The law will only be on the side of those legal entities that go for honest cooperation and maintaining balance in protecting each other’s interests.
Fourthly, the matter of whether or not the State, in other words, all of us, should or could take on the part of this burden as the restrictions have been placed for the good of the society and, thus, the entire country which had decided upon such measures should also be paying its due without singling out any legal entities. Nowadays, raising the question of the possibilities that the State will undertake full or partial liability for the losses incurred by legal entities is indeed an unpopular thing to do. However, the lawyers are the ones who must bring this matter to light, if only to encourage everyone, including state institutions making the respective decisions, to do their homework and to remember that the principle of “the end justifies the means” cannot be applied in a democratic state even in the case of a pandemic. Thus, if the Government applied measures without adhering to the procedures set forth by the Rule of law or such measures were disproportionate, irrational or discriminating, the question of the liability borne by the Government will undoubtedly be raised. Moreover, even if all the standards are adhered to, but the burden carried by the business sector is disproportionately large, the question of the reimbursement of the damage caused by lawful actions of the Government may also be raised. In this case, the principles of property protection (including the legal expectations of companies) will apply. Thus, in reality, the Government might have to bear part of the burden based on the rules applicable to the expropriation rule for the needs of society.
To sum up, certain legal remedies to assist the parties looking for a compromise during quarantine obviously do exist. However, we must always remember the rule of “a la guerre comme a la guerre” (“all is fair in love and war”) and understand that at the end of the day businesses will have to make the final decision themselves. Very likely, some of the decisions will not be pleasing or beneficial to the company and its partners. Those who will think rationally and act quickly in this extraordinary and difficult time will win. Notwithstanding, the law will always try to protect those who will remember the code of honour in this unprecedented war.
Translated by MP Translations Agency in Kaunas.
