Covid-19 as Force Majeure

17.03.2020 Dmitrijs Sustovs, head of the Litigation department of the Law

On March 12, 2020, the Cabinet of Ministers of the Republic of Latvia, hereinafter referred to as CM, adopted regulation No.103 “On declaring an emergency situation”, which was later amended and supplemented by regulations of the CM No.104 of March 13, 2020 and No.105 of March 14, 2020, hereinafter referred to as the Regulation of the CM, according to which an emergency situation was declared throughout the country until April 14, 2020 in order to limit the spread of the Covid-19 virus during an emergency situation.

An emergency situation is a special legal regime that gives the authorities of the country additional powers, and also provides for a number of restrictions for both state and municipal institutions, and for individuals.

The declared emergency situation and the restrictions that have been adopted have probably already caused, or in the near future will cause, negative consequences for businessmen (suspension of production, difficulties in providing services and delivery of goods, etc.).

Could a declared emergency situation be a Force Majeure, and could it serve as a basis for interruption or termination of contractual obligations?

There is no definition of “force majeure” in the national law of the Republic of Latvia. The Regulation of the CM also does not say anything about whether an emergency situation is a Force Majeure.

As a rule, the basis for exemption from fulfilment of obligations may be either the law or the conditions provided for in the contract that preclude the parties from fulfilling their obligations and/or exclude the use of penalties for failure to fulfil obligations.

So, according to the norms of the Civil Law of the Republic of Latvia, hereinafter – the Civil Law, a loss shall be considered direct when its result is caused by a chance event or force majeure. An accidental loss is not required to be compensated by anyone. Therefore, if a fortuitous impediment prevents a person from performing an obligation that has been undertaken, it shall be considered that circumstances are as if the person had performed the obligation (Section 1773 and 1774 of the Civil Law).

Pursuant to Section 1657 of the Civil Law, a court may release the debtor from unprofitable consequences of delay if performance did not occur due to force majeure.

In turn, according to the Section 2147 of the Civil Law, the duty to pay the lease or rental payment shall cease and the payments that have been made shall be returned – fully or partly – if the property to be leased has not been used due to such event as was not caused by the lessee and as occurred without the fault of the lessee. Such events shall include the following cases where the lessee become unable to use the property due to force majeure.

Measures aimed at limiting the spread of the Covid-19 virus and listed in the Regulation of the CM can be regarded as an objective factor that directly affects the execution of previously concluded contracts. Merchants whose field of activity is directly affected by the restrictions imposed (the field of education, entertainment, organization of leisure, cultural and sports events, travel services, passenger transportation, etc.) have the right to withdraw from the performance of contractual obligations without liability for damages.

If there are assumptions that the concluded contracts due to the presence of these circumstances will not be fulfilled, if possible, it is urgent to prepare and send the opposite party a notification about the occurrence of these circumstances, their consequences and the estimated period for eliminating these consequences. Depending on the nature of the contracts, the performance of contractual obligations can either be postponed (postponement of execution to a later date), or change the type of performance, or completely terminate the performance of obligations. If the notice was not sent to the other party in a timely manner, then a reference to Force Majeure when considering a dispute in the future may not be recognized as a good reason for refusing to fulfil obligations. The delay in performance of obligations that occurred prior to the notification is not valid.

In turn, when receiving notification of the onset of Force Majeure, it is necessary to carefully evaluate the circumstances referred to by the other party, in particular: is there a causal link between the circumstances and the inability to fulfil obligations.

In law theory, the concept of force majeure is based on four elements:

1) an event that is impossible to get rid of and the consequences of which cannot be overcome,

2) at the time of conclusion of the contract, the person, acting reasonably, could not foresee the event,

3) the event did not occur through the fault of the person or person under its control,

4) the event makes the fulfilment of obligations not only burdensome, but also impossible.

If the circumstance declared by the opposite party meets all of the above criteria, the presence of force majeure should be recognized.

The emergence of a global virus and a declared emergency situation aimed at limiting its spread is not automatically a universal basis for terminating or suspending the performance of any contractual obligations. The measures introduced should not serve as an excuse for exempting merchants from the performance of any unprofitable or inconvenient obligations for them. Each case should be considered individually, taking into account whether there are alternative ways of fulfilling obligations or reasonable mechanisms, how to fulfil contractual obligations, even if they incur losses and violate the agreed deadlines.

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