The current situation regarding the outbreak of the COVID-19 pandemic caused the need for the competent authorities to take certain repressive measures, with the primary objective of protecting public health. However, such measures inevitably influenced the development of economic flows in all countries, including Bosnia and Herzegovina. In this way, the business capacities of many companies have been reduced, which in turn led to many of them not being able to duly and timely fulfil their obligations arising from contractual obligations.
Bearing this in mind, the burning question is whether the emergence of the COVID-19 pandemic can be treated as force majeure. Can such force majeure affect the viability of the contractual obligations or the mutual obligations of the parties? It is important to emphasize that this is a very complicated question, which cannot be answered uniformly, and which must be viewed considering the circumstances of each particular case. Force majeure provisions may be introduced through different contractual clauses, and such contractual clauses should be particularly considered.
Assuming that the Bosnian law governs a contract, and assuming such contract contains no specific clauses on force majeure or similar matters, generally, the following legal concepts should be taken into consideration when assessing the COVID-19 pandemic implications to contractual relations and the remedies available:
- Impossibility of performance – Article 137 of the Federation of Bosnia and Herzegovina/ Republic of Srpska Law on Obligations;
- Exoneration of liability for failure to perform a contract – Article 263 of the Federation of Bosnia and Herzegovina/ Republic of Srpska Law on Obligations, and
- rescission or amendment of contract due to changed circumstances – Articles 133 to 136 of the Federation of Bosnia and Herzegovina/ Republic of Srpska Law on Obligations.
In more detail:
- If for the party affected by COVID-19 pandemic and related administrative measures (“Pandemic Implications”) performance of a contractual obligation is impossible, such obligation of the affected party terminates. In turn, the obligation of the other party also terminates. The affected party is obliged to return what it received from the other party for the performance of the contract. No damage compensation would be owed by any party involved. It is important to emphasize that the contracting party affected by COVID-19 must prove that the subsequent inability to fulfil was due to this circumstance. For example, if a restaurant was booked for the purposes of a wedding ceremony, and the administrative measure of prohibition of operation of restaurants and public gathering is introduced, the restaurant operator shall have no liability to their clients for cancelling the ceremony. If an advance payment was made, it would have to be returned, but no related damage compensation would be due. In practice, a distinction is made between a strictly individualized obligation (the sale of a specific item) and an obligation that is to surrender generic items (things determined by gender). In the first case, with the appearance of COVID-19, the obligation of the debtor ceases, while in the second case the obligation does not terminate.
- If the party affected by Pandemic Implications was unable to perform its contractual obligation or was unable to perform it in a timely manner for reasons arising after the contract was signed, that party could not have anticipated, prevented or overcome, such party is not liable for damages the other party suffered as a result of such non-performance. However, if the debtor is late in fulfilling its obligation prior to the occurrence of the COVID-19 pandemic, then it will be responsible. That the debtor has the burden of proving that he has been late in fulfilling his obligation due to the occurrence of the COVID-19 pandemic. In practice, it will most likely be the challenge to distinguish whether a particular case falls within the Article 137 (impossibility of performance with the effect of termination of the obligation) or Article 263 (inability to perform as agreed, with no automatic termination of the obligation, but simply no liability for non-performance) of the Federation of Bosnia and Herzegovina/ Republic of Srpska Law on Obligations. We believe that Article 263 will most likely apply in cases where the affected party was unable to duly fulfil the contract due to interruptions in the supply chain.
The Pandemic Implications can also serve as grounds for the affected party to request the court to rescind the contract:
- when the performance of the contract by the affected party was rendered more difficult or
- the purpose of the agreement cannot be fulfilled for the affected party.
Both reasons need to be of such severity that it is obvious that retaining of status quo is unfair.
In order for this remedy to be used by the affected party, the Pandemic Implications must occur after the contract was signed, and before the party entered into default, and must be of such nature that the affected party could not have anticipated, overcome or avoided the particular Pandemic Implications.
The other party can offer an amendment of the contract, in lieu of rescission; however, the affected party is only entitled to request the court to rescind the contract. Additionally, what makes this remedy specific is that the court, once it rescinds the agreement, can order the affected party to pay the equitable portion of the damage the non-affected party suffered by rescission.
Before invoking any of the above remedies as the affected party, or responding to the remedies invoked by the allegedly affected party, the legal position should be carefully analysed taking into consideration specifics of each particular case. The strong-sounding statement that COVID-19 is a force majeure does not provide for simple answers as to how that affects the rights and obligations of the parties to the contract.
