skupina

Contractual obligations

Among other things, the current state of crisis has serious repercussions on contractual obligations, which have been made in completely different circumstances, and now seem too ambitious, can only be met with extreme difficulties, or became completely impossible. Similarly, there is already considerable damage from breaches of contracts and the related claims for damages. Significant damage to entrepreneurs also arises as a result of government extraordinary measures.

However, Czech law does provide solutions for such situations. We have prepared an overview of the most debated topics for you. We have divided the text into the following sections:

  1. What to do if you or your contractual partner cannot fulfill contractual obligations?
  2. What are the legal options for amending contracts?
  3. Does the crisis have any effect on the obligation to pay for damage caused by non-performance of contracts?
  4. Can entrepreneurs seek compensation from the state for damage caused by governmental measures?

 

  1. What to do if you or your contractual partner cannot fulfill contractual obligations?

In general, parties to a contract should always try to resolve the matter amicably.  As a general rule, the parties to a contract may in any circumstances amend or cancel any previous contract.

So if you are in a situation where you (or your contractual partner) are having troubles meeting the contractual obligations, you should always discuss the matter with the business partner first. It is customary to call or write to the partner and try to solve the problem together with the necessary amount of understanding and solidarity (corresponding to the current crisis).

Being prepared is crucial for such negotiations. It is therefore necessary to thoroughly check the concluded contracts (options in the given situation, contractual penalties, etc.), general terms and conditions, and assess what is the worst and best alternative that can occur in the situation between the parties.

If you duly prepare, you enter into negotiations with a realistic idea of ​​what the worst and best negotiation outcome can be. If both sides have considered this, there is certainly an intersection of their interests and thus an acceptable compromise.

We cannot fully emphasize how important it is to maximize the willingness to compromise at a times like these. However, the contracting Party in a better position will probably not always want to amend the contracts, which are now highly beneficial. So what to do next?

  1. What are the legal options for amending contracts?

If an attempt at an amicable negotiation of a contract change is unsuccessful, it is important to know that the Czech Civil Code lays down basic rules for contract change in the event of a substantial change of circumstances.

Specifically, the Civil Code states that (quote): If circumstances change so substantially that the change creates a gross disproportion in the rights and obligations of the parties by disadvantaging one of them either by disproportionately increasing the cost of performance or disproportionately reducing the value of the subject matter, the party has the right to seek the renewal of the contract negotiations against the other party. In other words, in the event of an unexpected, particularly unfair disadvantage detrimental to one of the parties, that party has a right to demand the renewal of negotiations on the contractual terms. Such a situation could occur, for example, when the price of the material needed to produce the product rises several times in connection with the trade restrictions.

As always, it is necessary to assess each situation individually and consider whether your situation falls within the range of the situations in which the law grants the right to seek renewal of the contract negotiations against the other party (ie whether the change in circumstances is so substantial that its effect is an extreme disproportion in rights and obligations of the parties).

Furthermore, the party seeking to renew negotiations must prove that it could not reasonably have expected or influenced the change and that the change in circumstances occurred only after the contract was concluded. We believe that the current crisis situation fulfills this condition.

All these arguments need to be thoroughly prepared and presented to the other. If you are in this situation, do not hesitate to contact us, we will be happy to help with the evaluation.

If the parties cannot reach an agreement on how the contract should be altered, any party can ask the court to change the unjust contract, or even to cancel it.

In the process of negotiating a contract change, it is absolutely crucial to request a renewal of negotiations as soon as possible, but no later than 2 months after the disadvantaged party becomes aware of the change in conditions. We recommend not delaying with the request to re-negotiate contracts.

In the most extreme case, it is also possible that the contractual obligation cannot be effectively fulfilled in the new circumstances. In this case, the contract expires due to impossibility of performance. However, it is necessary to realize that the fulfilment is not impossible if the obligation can be fulfilled with difficulties, with higher costs, with the help of another person or after a specified time. Thus, the Civil Code places emphasis on the obligation to perform contracts and considers the termination of the contract as a last resort.

 

  1. Does the crisis have any effect on the obligation to pay for damage caused by non-performance of contracts?

 

If you or your contractual partner suffered damage as a result of the failure to perform the contract, it is reasonable to consider whether the injured party is entitled to damages.

In general, if a party breaches the contract, it must compensate the loss suffered by the other party. However, it is possible that the contract itself regulates certain situations where no claim for damages arises.

Therefore, a thorough review of the contract should be the first step in assessing the claim for damages. Some contracts may provide for or exclude the reasons for exclusion of liability for damages. One such reason is typically so-called force majeure - an extraordinary circumstance that caused the damage and which the parties to the contract could not have anticipated or influenced.

If there is no such clause in the contracts, the parties should turn to the provision of the Czech Civil Code (if the contract is governed by Czech law), which stipulates that (quote): A tortfeasor is released from the duty to provide compensation if he proves that he was temporarily or permanently prevented from fulfilling his contractual duty due to an extraordinary, unforeseeable and insurmountable obstacle created independently of his will. In other words, where force majeure is proven (unforeseeable, insurmountable and uncontrollable obstacle), there is no obligation to compensate loss resulting from the failure to fulfill a contractual obligation.

In our opinion, the government emergency measures and their impact on the economy are precisely the extraordinary unpredictable and insurmountable obstacle in the contract performance that arises irrespective of the will of businessmen which the law predicts. In the event that an entrepreneur finds himself in a situation when he is objectively unable to fulfill his obligations due to force majeure, he is entitled to notify his contractual partner of this fact.

However, it is important to point out that it is not possible to excuse every failure to perform the contract by turning to force majeure. The second sentence of Section 2913 (2) of the Civil Code provides that (quote): However, an obstacle arising from the tortfeasor’s personal circumstances or arising when the tortfeasor was in default of performing his contractual duty, or an obstacle which the tortfeasor was contractually required to overcome shall not release him from the duty to provide compensation.

 

  1. Can entrepreneurs seek compensation from the state for damage caused by governmental measures?

t is already clear that many entrepreneurs will suffer significant losses due to the declared state of emergency and government measures. The Act on Crisis Management foresees such situations and regulates the state's liability for losses incurred as a result of government measures.

The law states that (quote): The state is obliged to compensate for the damage caused to legal and natural persons as a result of emergency measures (…) carried out under this law. Such liability may be exempted only if it is established that the injured party has caused the damage himself. This responsibility of the state is so-called objective, meaning it is not decisive whether the state caused the damage - It is sufficient that the damage occurred as a result of the state´s crisis measures.

 

For example, under this rule, the state should compensate the organizers of cancelled social events for the loss they suffered as a result of a ban on social events during the coronavirus epidemic.

At present, discussions are taking place among the professional public as to whether the lost damages would include lost profits. In our opinion, this is indeed the case and it will be possible to demand compensation from the state for lost profit. However, it will undoubtedly be difficult to quantify it.

From a practical point of view, it is crucial that the claim for compensation is filed with the relevant crisis management authority within 6 months of the entrepreneur becoming aware of the damage. If the claim is not lodged with the correct authority within this period, the right to compensation will expire. It is therefore necessary to act with caution and without undue delay. We are ready to assist our with these claims.

We are already advising clients to collect any documents or other evidence proving the damage. Be thorough and collect all documents that can prove the damage.

 

If you have any additional questions, requests for assessment of your situation or processing of relevant documents, do not hesitate to contact attorneys and partners of KODAP legal law office, who are ready to deal with crisis situations:


Kodap skupina - daňové poradenství

mini mapa ČR Vybrat kancelář

Specializované kanceláře

+420 485 228 471

info@kodap.cz

cs en de 

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