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18.03.2020
Kambourov and Partners
Kambourov and Partners

Does the coronavirus outbreak and the declared “State of emergency” amount to a force majeure event?

The coronavirus situation and the different actions and measures applied to contain the spread (the State of emergency declared by the Bulgarian Parliament on 13 March 2020 as part of the global effort) has inevitably led to non-performance of contractual obligations. The applicable national legislation and particular contractual provisions would regulate the affected contracts and the potential treatment of COVID-19 pandemic as a force majeure event.

Commercial contracts should be referred to as a primary source in order to determine the presence and content of the force majeure clause and whether these clauses provide for the non-performance/modification/termination of the contract on behalf of one of the parties, or for recovering losses and mitigating risk.

In principle, the COVID-19 pandemic would be treated as a force majeure event, even if it is not explicitly enlisted (although covered by terms such as “natural disaster” or “act of God”).If the contract does not contain a force majeure clause, local legislation and its prescriptions shall apply. It could be anticipated that the Bulgarian legislation would treat a pandemic as force majeure event - an event that prevents performance or where performance is impeded by respective state measures, thus opening the door to release both parties from their contractual obligations.

In principle, there is no need for the party who triggers the cause and is thus released from its obligations, to pay compensation, respectively it cannot request compensation, for damages, unless the party itself contributed to the occurrence of the force majeure event. This makes safety measures at office sites all the more important.

An important aspect to consider is that the COVID-19 pandemic can be treated as a force majeure event or a supervening change in circumstances (“clausula rebus sic stantibus” principle) only if it was not foreseeable at the time the agreement was concluded. Force majeure would not apply to agreements concluded after the event occurred. As the current situation is extremely dynamic and constantly changing, it is worth contemplating the collection of evidence now to demonstrate a causal relationship between anti-pandemic measures and their impact on the agreement in real time.

Force majeure is regulated in Article 306 of the Bulgarian Commercial Act. A force majeure event under Bulgarian law is defined as an unforeseen or inevitable event of extraordinary nature, which has occurred after a contract was concluded. The party, which is not performing its obligations as a result of the force majeure, event is not liable for damages, resulting from the failure to perform (unless the party had already been in delay before the event occurred).

The main legal consequence of the virus outbreak is the suspension of the performance of the obligations, which are affected by the force majeure event, and the related obligations of the counterparty. If due to the duration of the event, the creditor no longer has an interest in the contract, he may terminate it (e.g. if the transaction must be performed at a specific time). The party, which is unable to perform the contract also has the right to terminate it.

Clausula rebus sic stantibus shall apply only if this has been explicitly agreed in the contract. If the contract does not provide for the consequences, resulting from unforeseeable changes in the situation following the conclusion of the contract, the general business frustration principles shall apply. Under Bulgarian law, business frustration occurs when: (i) circumstances arise, which the parties could not have foreseen; and (ii) it is possible but would be unfair and contradictory to good faith to perform the contract as agreed. If these two requirements are met, the affected party may request the court to amend or terminate the contract. This right can be exercised exclusively by way of a court claim. Any significant negative economic changes, resulting from the virus outbreak, will probably give rise to business frustration claims, which the courts will decide on a case-by-case basis based on the principles of good faith and fairness.

Force majeure event will not obstruct the performance of all obligations. Therefore, a situation may occur where a party is not obstructed to perform its obligation but faces the risk of the counter-party nonperformance due to force majeure event. Such situation may apply in full to monetary obligations. In order to mitigate future damages, depending on the nature of the obligation and the specific provisions of the agreement, a party may have the right to refuse performance on the ground of counter non-performance or expected counter non-performance which is presumed based on the force majeure event. Specific regulation is provided in Article 90 of the Bulgarian Obligations and Contracts Act.

Besides, it is advisable within a reasonable period, a notification to be served to the other party of the force majeure event, its expected duration and the possible consequences, resulting from the non-performance. A failure to meet this requirement would trigger a liability for damages. A force majeure certificate can be obtained from the Chamber of Commerce and Industry.

Financial support for businesses in response to mitigate the socio-economic impact and force majeure in loan documents

To reduce the downside, the business may look for a financial support by the state. For instance, Bulgaria already took measures, where the Bulgarian Development Bank proposed to provide liquidity support to businesses suffering because of the State of Emergency declared. Furthermore, the state was ready to support additional capitalization of the bank. At EU level financial instruments financed by the European Structure and Investment Funds are intended also to provide support in the form of working capital to SME as a temporary measure. Besides, EU State aid rules enable Member States to help companies cope with liquidity shortages and needing urgent rescue aid. Article 107(2)(b) TFEU enables Member States to compensate companies for the damage directly caused by exceptional occurrences, including measures in sectors such as aviation and tourism.

The crisis, however, raises the issue regarding whether the State of Emergency and the potential economic downturn may qualify as a force majeure event in loan agreements. Currently, we have no sufficient information whether the event in question will extend to the level of an economic downturn or defined as an unforeseen economic condition. Thus, while force majeure is a defined term in loan documents each case shall be reviewed and assessed separately in accordance with the terms of the respective arrangement (e.g. the loan document may contain a force majeure clause “payments of funds” exception). Often, the loan agreements provide lenders with right to change fixed rates of interest in case of extraordinary circumstances or unforeseen economic conditions. Thus, as a first step the businesses should review their obligations to provide notices under their loan documents and any deadlines by which they are obliged to deliver any such information and notices, so they can address the State of Emergency in question adequately.