The effects of coronavirus on contractual relations – Can the spread of the virus constitute a force majeure event?

Published on businessnews.gr

The rapid spread of the new coronavirus SARS-CoV-2 (disease COVID-19) worldwide is an unprecedented situation that will undoubtedly affect the domestic and international economic and business environment. Ministerial decisions have already imposed temporary suspension measures on a large part of public services and private businesses, with the aim of restricting the spread of the virus.

Personnel’s absence from the workplace, business closures, travel restrictions and generally the coronavirus outbreak will probably affect the smooth performance of contractual relations and obligations.

But can the spread of the virus and the preventive measures taken by the companies and the state be events of force majeure leading to exemption from contractual obligations?

  1. The concept of force majeure under Greek Law

Pursuant to Article 330 of Greek Civil Code ‘The debtor shall be liable, unless otherwise specified, for any breach of his obligation by fraud or negligence, his own or his legal representatives. Negligence exists when the due diligence required in transactions is not observed’. Liability for damages in case of breach of obligations is governed by the principle of fault, that is, the debtor is liable only if being at fault (deliberate or negligent).

The term ‘accidental events’ is used for all incidents that are not due to a fault (deliberate or negligent) of the damaging party and therefore do not create liability on his part. In the broad sense of accidental events, there is force majeure, which includes extreme cases of incidents that are impossible to be prevented by human forces or at least more difficult than other accidental events. It is settled case-law that force majeure means any unforeseen and extraordinary event, whether objective or related to the person concerned, which cannot be prevented by measures of extreme diligence and prudence of the average person. The definition of an incident as a force majeure event is a matter of fact, judged on a case by case basis according to the agreement between the parties.

  1. Service/Work contracts – The “outsourcing” agreements 

Service or work contracts that businesses sign with customers and suppliers usually provide that the parties are not liable for failure to fulfill their contractual obligations if failure is due to force majeure. In cases where the contract does not provide which events constitute force majeure that excludes liability, the question arises as to what the law means with force majeure. The answer is a matter of interpretation, taking into account the nature and purpose of each contract, the relation of interests and the economic power of the parties. The party invoking force majeure will have to prove that (a) a certain unforeseeable event has occurred, which is beyond that party’s control; (b) this event has hindered or delayed the performance of the contract on the part of that party and (c) that party has taken all appropriate measures to avoid or mitigate the event and its consequences. These facts will determine the proper distribution of risks between the contracting parties, i.e. if there will be an exemption from liability due to force majeure or not.

As regards the present case, there has so far been no similar epidemiological phenomenon judicially held to be a case of force majeure. Thus, even in the case of contracts where no specific reference is made (to ‘epidemic’ or ‘pandemic’), contracting parties could claim that the coronavirus outbreak is a force majeure event since this is a fact which is unavoidable even with the utmost diligence on their part.

However, a serious argument in favor of the absence of force majeure in the case of coronavirus SARS-CoV-2 outbreak is that each party should have taken such measures to prevent the suspension of existing contracts and the failure to fulfill their contractual obligations. This obligation arises out of the bona fide performance of the obligations under Article 288 of the Civil Code, whereby the parties are obliged to provide all necessary assistance in order to fulfill the contract. The virus had been diagnosed already in December 2019 and since then, multiple warnings have been given by the scientific community that the possibility of an epidemic – not least a pandemic – will have a profound effect on business conditions with the closure of businesses. Businesses should, therefore, have considered alternative ways of providing and accepting services, depending on the nature of each service. Indeed, in cases where the nature of the service or project allows for remote performance, it seems that the creation of remote access infrastructures does not require excessive financial sacrifices, nor is it a particularly time-consuming process, and furthermore, the creation of such infrastructures is beneficial to the businesses themselves. Furthermore, it could be argued that force majeure may be established only if the closure of the business is required by a decision of the authorities and not in the event of a preventive closure by the decision of the business itself.

Within that framework, the outsourcing agreements are of particular interest, whereby a business (“Company”) undertakes the provision of services, e.g. IT services, software development, accounting, etc. to another business (“Client”), through personnel who work in the premises of the Client. In these cases, the issue that arises is whether the closing down of the Client’s business constitutes a force majeure event which exempts the Client from the obligation to pay the agreed fees to the Company. It is again necessary to consider the nature of the provided service (i.e. if it is a service which can only be provided through the physical presence of the personnel in the premises of the Client or if it can be provided remotely), the reason for closing down the Client’s business (i.e. if it was the result of the Client’s own volition or was imposed by a decision of the authorities), as well as the measures taken by the Client to mitigate the impact of the spread of the virus on the fulfillment of its contractual obligations (e.g. capacity to make use of the services remotely, the establishment of safe network and infrastructure allowing telework, etc.). In this way, there could be a well-founded basis to argue that in case the specific services can be provided remotely, as happens, for instance, with IT services, whereby the offer of the services from the Company remains available, but the Client does not have the capacity to make use of the services due to lack of security measures or lack of telework equipment, the Client is not exempted from the agreed fees against the Company.

  1. Contractual relationships with employees

According to article 656 of the Greek Civil Code, “[…] The employee has the right to claim salary even when the acceptance of work is impossible for reasons concerning the employer and are not the result of force majeure”. Therefore, if the reason why the employer cannot employ the employee is a result of force majeure, he is exempted from the obligation to pay the agreed salary.

Two distinct cases can be analyzed: either the employer decides to close down his business under the menace of the spread of the virus, or the closing down of the business is imposed by a decision of the authorities. If the employer decides to close down his business, either because he suspects there is a potential COVID-19 case amongst the personnel or out of health security reasons as the pandemic reaches its peak, then he is not exempted from the obligation to pay salary to his employees. This argument is enhanced by article 42.10 of Law 3850/2010, which provides that measures that protect the health and security of employees do not entail any financial burden on them. On the contrary, if the closing down of the business is imposed by a decision of the authorities, this is a force majeure event and subsequently, no salary is due to the employees.

In the case of the aforementioned legal scheme of outsourcing, the closing down of the Client’s business, either imposed by a decision of the authorities, or as a precautionary measure, does not seem to constitute a force majeure event for the relationships of the provider of the services (the Company) with its own employees who are occupied in the Client’s premises. The suspension of a services agreement of the Company for a force majeure event which concerns the activity of the Client does not entail respectively that this is a force majeure event for the Company itself (unless the Company is also closed down by a decision of the authorities). However, a counterargument could be that the concept of force majeure is common in both cases, namely, both in the services agreement, as well as in the contractual relationship between Company and employees, given that the closing down of the Client’s business is an event outside the Company’s responsibility and with direct impact on its commercial activity.

  1. Conclusions

It is a fact that the spread of the coronavirus and the current pandemic has already a financial impact on the market and the business activity, whereas it is almost certain that in the near future it will give rise to force majeure arguments for non-fulfillment of contractual obligations. It is clear that the success of a force majeure argument follows an ad hoc interpretation, in compliance with the contractual terms and the special circumstances of each case. Nevertheless, in all such cases, it is crucial to take into consideration the special precautionary measures that each business has taken to mitigate the consequences of the pandemic and ensure the continuity of its activity and the fulfillment of its contractual obligations.

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