As governments implement ever stricter measures to combat the global COVID-19 pandemic more and more businesses find themselves in the unfortunate position in which they are unsure if they will be able to perform their contractual obligations to their business partners. The Slovenian Government has imposed several measures aimed at slowing the virus spread, such as suspension of all public transport, air traffic, limiting border crossings with Italy, Austria, and Croatia, closing schools, suspending all non-urgent court proceedings. Slovenian Prime Minister also called for self-isolation. Neighbouring EU member states have imposed similar measures, the most restrictive of which even prohibit travel to or from Slovenia.
It is not hard to imagine how these restrictive measures on the movement of people and goods can be extremely disruptive to the Slovenian businesses. Growing global COVID-19 pandemic and governmental restrictive measures already affect the Slovenian economy and the domestic and international operations of Slovenian business, especially in supply chains and lack of workforce. Slovenian companies are already assessing their options to mitigate operation risks under existing contracts with invoking Force majeure clause under which they would be excused from performance of their contractual obligations, in whole or in part, or entitled to suspend or extend the deadline for performance, without breaching their contracts, as a result of COVID-19 pandemic and governmental restrictive measures.
Applicability of Force majeure
Since contracts are first and foremost governed by the contractual provisions and the governing law, the determination of whether Force majeure clause can be invoked and in what scope mostly depends on 1) whether the contract includes such clause, 2) on the wording of such clause and 3) on the time when the contract was executed.
Slovenian legal theory and court jurisprudence interpret Force majeure as an event, the occurrence of which was outside the control of the affected party, was not foreseeable, could not be mitigated, avoided or prevented and that prevents the performance of contractual obligations. It is readily apparent how the affected party could argue that the new COVID-19 pandemic and governmental restrictive measures and forced shut-downs aimed at preventing the pandemic’s spread suit this definition. However, the restrictive interpretation of Slovenian courts must be considered, as the Force majeure presents an exception form the principle of Pacta sunt servanda.
Force majeure must prevent, and not only hinder the performance of contractual obligations or render the performance of contractual obligations more financially burdensome or more expensive. Therefore, under Slovenian legislation, the affected party would have to prove that the performance of its obligation was not merely more expensive or burdensome but it was prevented by the pandemic or governmental restrictive measures and that there exists a causal link between party’s non-performance and the pandemic (including governmental restrictive measures). The affected party is also under the obligation to mitigate the damage and risks of its non-performance. For example, in construction agreements, Force majeure would be hard to prove if certain goods (which the contractor usually supplies from its Italian partner) can be ordered and supplied from other countries or if goods can be supplied for a higher price.
A court decision whether Force majeure occurred will depend on several factors, such as the wording of the Force majeure clause, the circumstances and the effects the pandemic (including governmental restrictive measures) had on the affected party and its ability to perform contractual obligations. Businesses should therefore accurately document any and all problems the pandemic caused them as it may not assist only in invoking the Force majeure clause or in legal proceedings but also in government business recovery programmes.
Scope of Force majeure
Since Force majeure is an exception, Force majeure clauses are interpreted narrowly by Slovenian legal theory and Slovenian courts, and the affecting party would have to prove that the pandemic and governmental restrictive measures fall within the scope of contractual provision. Force majeure clauses are not standardized; therefore, it is important to assess whether Force majeure is limited only to an exhaustive list of exceptional events, which are explicitly listed in the contract, or Force majeure clause refers to a non-exhaustive list of exceptional events or is more general referring only to exceptional events beyond the party’s control. Some Force majeure clauses refer explicitly to “epidemic”, “pandemic” or “governmental measures”. COVID-19 was declared as a pandemic by the World Health Organization and as an epidemic by the Slovenian Government, and would fall within the Force majeure clause that explicitly includes “pandemic” or “epidemic”. If the Force majeure clause does not include “pandemic” or “epidemic”, it is important whether the list of exceptional events is exhaustive or non-exhaustive.
Contracts concluded after December 2019
It is questionable whether COVID-19 and governmental restrictive measures could give rise to Force majeure if contracts were negotiated and concluded after December 2019 (i.e. after the coronavirus outbreak in China), since the pandemic or epidemic in Europe could have been foreseen and anticipated as of December 2019.
Slovenian statutory provisions
If the contract does not include a Force majeure clause, and Slovenian law governs it, provisions of the Slovenian Obligations Code apply. In this case affected party may consider alternative options that are provided for by the Slovenian Obligations Code such as:
- Rescission or amendment of contract due to changed circumstances (Article 112 of Obligations Code)
Under the changed circumstances, the contract can be either rescinded by the court on the request of the affected party or be amended on the request of the non-affected party so that the pandemic (including governmental restrictive measures) are considered. Changed circumstances must occur after the contract was signed, and before the default or a breach, and must be of such nature that the affected party could not have anticipated, overcome or avoided them. On the request of the non-affected party, the court can order the affected party to pay the fair share of the damage occurred to the non-affected party due to the rescission.
- The inability of performance of contractual obligations (Article 116 of Obligations Code)
The affected party can claim the inability to perform contractual obligations, which causes the obligation to expire, however, the parties must return anything they received under the contract. In the event of partial inability, another party may withdraw from the contract if the partial fulfilment of contractual obligations does not meet the party’s needs, otherwise, the contract remains in force and the affected party has the right to request a proportional reduction of its contractual obligations.
- Exemption of liability for failure to perform a contract (Article 240 Obligations Code)
In this case, the contract is not automatically terminated, but the affected party is not liable for damage occurred due to the breach of contractual obligations if it proves that it was unable to fulfil contractual obligations or that it failed to fulfil contractual obligations due to circumstances arising after the conclusion of the contract, which could not be prevented, mitigated or avoided.
To summarize: Force majeure clauses should be invoked only after a thorough legal analysis of the definition and scope of the applicable Force majeure provision since such clauses are not standardized. The affected party should carefully consider all facts and consequences of breach or default under the contractual provisions, mitigation steps and alternative means for the performance of contractual provisions, as these can vary from case to case.
If you have any questions related to this newsletter, please do not hesitate to contact:
→ slovenia@karanovicpartners.com
