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COVID -19 and CONTRACTS

Wednesday, April 1, 2020

THE PANDEMIC AND CONTRACTS

The Greek government labors under an ongoing attempt to provide for the adverse effects of a situation which the World Health Organization characterized as a pandemic. The measures have as primary target the public health and the Greek economy at large.

Measures affecting the private sector: Governmental measures encroaching on the private sector are taken incrementally to include relief for the effects οn individual business transactions. Indicative areas include employment contracts, direct and indirect assistance to employees and affected businesses, extending credit, compulsory reduction of business rents and post-dating cheques.

Otherwise, performance of private and public sector contracts remains largely unaffected by specific legislative enactments.

The effects on contracts are to be dealt with through (a) the contractual terms agreed by the parties (Art. 361 CC on freedom of contract and Art. 173 and 200 CC on interpretation and construction of contracts), and (b) the Greek law general principles, force majeure (concerning liability for non-performance, Article 330 CC) and the principle of good faith – an overriding public policy principle) (Articles 288/388 CC). Notably, even interpretation of contractual clauses according to Art.173, 200 CC is to be conducted with the objective of arriving at the parties’ true intention by applying good faith and commercial usage without being restricted by the literal meaning of the text.

These principles are tools of assessing individual cases and may provide relief to a party in need, depending on the circumstances and severity of the individual repercussions. Relief is an exception to the basic rule of pacta sunt servanda (i.e. of performing your obligation as agreed). The mere invocation of a crisis, in a general and vague fashion, will not justify setting aside the basic rule. Courts applying the relevant legal principles will judge the need for relief on a case-by-case basis and allocate relief as appropriate and to the extent necessary. The pandemic crisis affects businesses/business sectors in different ways and to different degrees. The pandemic is not to be taken as a general excuse, a carte blanche for non-performance or adjustment of obligations.

Common with other jurisdictions, Greek law recognizes the concepts of Force Majeure, substantial hardship, change-in-circumstances and non-foreseeability thereof.

The basic concepts:

Article 330 CC (on fault-based liability) is the source of the concept of Force Majeure. It provides that the party obliged to perform is liable for any breach of obligation due that party’s negligence or intent. Hence events preventing performance not attributable to negligence or intent are in principle excuses for no performance.

Specific tools based on the overriding distinct principle of good faith, are (a) Article 288 CC  which by setting the rule that obligations are to be performed as required by good faith, deals with the effect of (substantial) “hardship” in performance and (b) Article 388 CC as a more specific manifestation of good faith allows for courts to intervene and adjust obligations, even to terminate contracts where an “ irregular and unforeseeable event” has, subsequent to the agreement, “changed the circumstances” on which the parties had grounded their agreement, in such a manner that the performance of an obligation is now  ”unduly onerous” for the affected party.

Articles 288/388 CC seek to redress the overturned balance / foundation upon which the contracting parties entered into their agreement and to duly adjust their obligations accordingly.

Culpability/fault as a factor affecting application of the legal protection:

 Article 330 CC may be invoked even where there is fault on the side of the party affected by FM. On the other hand, fault excludes the application of Article 388 CC. Article 288 CC relief may be invoked even by a party at fault (but only negligence will be excused, not intent).

The pandemic crisis could be (a) an FM event and/or (b) a change in circumstances.

Force Majeure leading to Impossibility of Performance: An FM event is considered to be any unforeseen and exceptional event, either objective/external or internal/party-specific, which renders performance impossible in the sense that said event and its effect on performance could not be averted even by measures of extreme care and prudence on the part of the party affected by it.

 Within the definition of “exceptional events” fall natural disasters, such as an earthquake, war and the disorder emanating from that, as well as mass socio-political or financial events (revolution, coup).

The pandemic coronavirus crisis may be said to fall within the notion of an “exceptional” event, only if it prevents performance. It should be distinguished from that it may in turn set in motion a series of “unforeseen” events, including acts of government imposing various obligations and/or prohibitions as well as the consequent economic meltdown. In such a case the pandemic itself has not, in all cases, prevented performance. Rather the governmental measures have had that effect.

Adherence/compliance with governmental measures is obligatory for a contractual party and may provide a lawful excuse from performance in itself.

Contractual FM clause: It is usual practice in Greece for contracts to include a Force Majeure clause. It is not standard practice for such a clause to include/list “pandemic” as a relief event. FM clauses vary in content and it is then a matter of contractual interpretation (Art. 173, 200 CC) to see whether the parties actually intended or not for such an event to be included in the general description of instances covered by the clause.

Unforeseen Change in Circumstances leading to Hardship in performance – 388 CC: An event may not render performance impossible, however through unforeseen/exceptional circumstances the basis/foundation of the contract changed and through no fault of the party performance now becomes unduly onerous for the affected party. Thus, the (unforeseen) change in circumstances must be shown to have a causal link with the substantial hardship.

Other factors taken into account by courts before relief is provided: Before relief is given, at least through Article 388 CC, the crisis must be evaluated also in view of the other circumstances of the case and in particular the expected profit from the contract/the respective financial position of both parties/the need served through the particular contract/whether the risk envisaged/taken by each party in usual conditions for a contract to be performed in the future is exceeded.

Change in Circumstances leading to Hardship in performance – 288 CC: An event may be foreseeable and the party may be at fault for not predicting it, however performance may cause substantial hardship to a party.

General: Articles 288/388 CC are mandatory law provisions. The parties cannot usually waive their effect/relief ab initio. However, Article 388 CC protection can be indirectly waived wholly or partly in specific instances, by excluding certain circumstances from the scope of unforeseeable events. On the other hand, parties may waive their right to invoke Force Majeure.

Interplay between Articles 288 and 388 CC: The former is a general provision based on good faith and the latter a specific manifestation of the former/good faith. The first step would be to inquire whether the given situation can fall under Article 388 CC. If it does not, Article 288 CC may provide relief depending on the circumstances.

Relief: Relief may include suspension of obligations, amendment of contractual provisions or even termination of the contract in extreme circumstances in view also of the potential deepening of the crisis (termination for cause may be provided under Article 288 CC).

Business continuity/disaster recovery plans: Business continuity (BC) and disaster recovery plans (DRP) are practical business measures implemented by a party in an attempt to mitigate the impact of an event. These may be measures put in place by the business internally without reference to a particular contractual obligation on a voluntary basis. BC/DRC clauses can be included in service and other contracts. They are common in software and systems contracts and provide that the service provider will have in place a Plan B (based for example on back-ups, remote locations etc.) to continue performance and support in the event of a disaster either on customer or provider’s location. Such clauses would normally reduce the scope of hardship relief afforded by the law. If the intent of the parties clearly is that the affected party will at all times perform, this would amount to a waiver of a Force Majeure claim and even preempt any “unforeseeable event” or (foreseeable) “change of circumstance” causing undue hardship and perhaps void a defence against the demand of the other party to perform otherwise available on the basis of Articles 288/388 CC as above.

This communication merely represents the state of the law and is not intended as legal advice on any specific matter. For advice please contact Gregory Pelecanos, Senior Partner at [email protected] and/or Panayiotes Yiannakis, Senior Associate at [email protected]