Coronavirus and Contracts

It should be stressed that, in general, the coronavirus SARS-CoV-2 situation on its own does not constitute grounds for an interruption of contracts, meaning that contractual parties, unless otherwise agreed, are obliged to continue discharging their duties as required by the contracts. It can be discussed, to what extent coronavirus can potentially be classified as force majeure, i.e. a circumstance that prevents the performance of a contract which was not known at the time the contract was entered into.

In contractual relationships, coronavirus and related measures can have especially the following consequences:

Re-opening contract negotiations

If, as a result of the epidemic, there is a change in circumstances that creates a gross disproportion between the value of the performance by both parties, it is possible to demand the re-opening of contract negotiations. This is particularly applicable in those cases where performance by one party becomes disproportionately more difficult or costly.

This seems to us to the most practical solution, especially in cases of lease contracts (please also note further comments on postponement of the rent payments).

If, on the other hand, the other party is unwilling to accept an acceptable compromise, it is possible to bring an action before a court that will change the contractual terms through its own decision. However, such an action is only admissible if the contract does not exclude such a right.

A disclaimer of liability for damage

If a contracting party is prevented from performing its obligations due to an “extraordinary unforeseeable and insurmountable obstacle arising independently of its will”, it is not liable for any damage suffered by the other contracting party as a result of its non-performance.

However, the first party will have to prove that the obstacle was actually insurmountable. This is not the case if the performance under a contract merely requires higher costs or is otherwise more difficult, but still possible. For example, if a contracting party cannot use its own employees because they have forced to enter quarantine, it may still be able to outsource some of its work or use agency workers.

Subsequent inability to perform

These are situations when contract performance becomes impossible due to extraordinary circumstances. This is an objective impossibility, i.e. the condition is not met if the obligation can be fulfilled at a later date or at a higher cost. These are rather rare cases as the impossibility would have to last for a very long time – for example, if as a result of the COVID-19 epidemic, the farming of certain animals were prohibited or some establishments permanently closed due to future measures being adopted.

However, it always depends on how the contract was formulated. Many contracts that are typically entered into preclude the possibility of invoking exceptional circumstances.

To a large extent, it also depends on the overall context of the contractual performance. For example, a delay that had occurred prior to the COVID-19 outbreak would generally not allow a contracting party to invoke this circumstance. Communication with the contractual partner is also important, and it is always advisable to notify the other party of the circumstances as soon as possible so that the other party can be prepared for the lack of the agreed-to performance and take appropriate measures.

Amendment to the Insolvency Act

Performance of contracts will also be affected by an amendment to the Insolvency Act that has been adopted. The common denominator of all changes is to favour conditions for debtors, such as postponing statutory deadlines; the lawmakers have also introduced a debt moratorium. This applies  to both debtors – entrepreneurs and individuals.

To support entrepreneurs, especially the following measures are being considered:

  1. A postponement of the debtor’s duty to file an insolvency petition if the insolvency conditions were fulfilled after the declaration of the emergency status and in connection with the COVID-19 pandemic. This will also positively influence the liability of statutory body members, who, should they default on such duty, may find themselves liable for company debts.
  2. Insolvency petitions filed by creditors before 31 August will not be taken into account.
  3. Easier option of declaring a “debt moratorium” – for example, the consent of creditors will not be required.
  4. Possibility of interrupting the fulfilment of a reorganisation plan for 6 months.

Natural persons undergoing a debt relief process will benefit from the following measures:

  1. Even if the debtor fails to pay up more than 30 % of his debts, he may still be granted debt liberation during the debt relief process (regardless whether the debt relief was approved under previous insolvency regulation)
  2. The debt relief process will not be terminated if the debtor fails to follow the instalment schedule,
  3. The change of instalment amount will not require the debtor to discharge the debts of at least 50 % of creditors.

In connection with the Amendment to the Insolvency Act based on which the companies cannot be declared insolvent, thus preventing the employees from claiming the reimbursement of the due salaries, an Act on some measures to mitigate the results of SARS CoV-2 epidemy in the area of employees' protection in case of employer's insolvency has been adopted.  From May 19th, 2020, it is once again possible to claim settlement of salary related claims of the employees via the Labor Office under the conditions before the coming into force of the Lex Covid.  

Moreover, the obligation of the employer towards the Labor Office to pay the amount which has been paid to the employee by the Labor Office as well as the amount corresponding to the mandatory contributions and deductions under the Act on the Protection of the Employees in Case of Insolvency of an Employer will be renewed.  

Lessee Protection​

The Act has been approved that protects lessees – entrepreneurs, whose activity has been made impossible or significantly more difficult by governmental measures - from a lease termination due to default in rent payment.

According to the law, should the lessee default on a rent payment in the period from 12 March 2020 through 30 June 2020 (“relevant period”), it will not constitute grounds for  termination of the lease agreement. The lessee shall be entitled to pay up his debt accrued during the “relevant period” by 31 March 2022 (“protection period”).

Once the circumstances that prevent the timely payment will have passed (i.e. the state measures are no longer in effect), but not earlier than after the emergency status has ended, the lessor may request that the lease be terminated, provided that it can no longer be “reasonably expected” to tolerate the non-payment of rent - such as in cases where the rent income would form a primary means of support.

The lessor may, however, terminate the lease for another reason than the non-payment of rent.

Due to the fact that the due dates of rent payments are not changed, we are of the opinion that (despite the ban on termination of the lease)  the lessee will still be in default with its obligation and can face all related consequences, such as the accrual of default interest or other sanctions (in particular contractual penalty) for the late payment of rent, including the right of the lessor to satisfy his claim from a collateral or bank guarantee securing the due payment of rent.

Furthermore, it will be up to the lessee to document to the lessor the existence of circumstances that affect his ability to pay the rent, and that such circumstances are based on a governmental regulation – given the rather vague legal wording, it can be expected that the lessor will not share lessee’s view, which might open the doors to court disputes regarding the validity of the termination.

We advise our clients to try resolving the potential inability to pay the rent by opening negotiations on the rent conditions with the lessor, especially with regard to the sum of payable rent or its due date.

Furthermore, another act has been approved that introduces similar legal mechanism as above for natural persons as tenants of apartments.

For the duration of the extraordinary measure, a moratorium prohibits an increase of the rent for apartment lease. This restriction also applies in cases of lease extension by means of an amendment or a new lease agreement.

Credit

A bill has been adopted that has significant consequences for the credit payments. A person obliged to repay credit (debtor), whether a consumer or entrepreneur, has a right to defer payment of individual instalments for the length of a protection period. The debtor needs to  EXERCISE THIS RIGHT towards the creditor, by means of a letter or e-mail. The protection period shall begin to run from the following calendar month after the debtor’s application till either 31 July 2020 or 31 October 2020, according to the choice of the debtor. 

During this protection period the credit recipient shall not be in default with credit payments and no contractual sanctions will accrue. For the creditor to obtain any remuneration for having provided the finances at all, he will be entitled to an interest for the whole duration of the protection period. The interest will be capped in relation to the rate set by the Czech National Bank (for consumers); for entrepreneurs, its amount will be governed by the credit agreement. The entrepreneurs have to pay interest in the original due dates, while consumers are able to repay them after the protection period has ended – to prevent a shocking jump in the future instalment amounts, the instalment amount shall remain unchanged – only the duration of the credit shall be extended.

The law only applies to credits agreed upon and drawn before 26 March 2020; it is not to be applied for credits where the debtor has been in default for more than 30 days by the same date. With such debts, it is clear that their cause cannot be attributed to the epidemic, but to other reasons on part of the debtor.

The entrepreneurs are also be prohibited from disposal with the assets during the protection period in a way that could negatively impact the settlement of the debt.

Sole traders will also benefit from another approved law that limits the maximal interest rate in cases of credit payment default, even after the current epidemic has passed.

Enforcement Proceedings

In order to support persons facing a financial crisis, a law has been adopted, which orders "unsuccessful" enforcement proceedings to be terminated. An "unsuccessful" enforcement is deemed when no payments against the enforced receivable have been made in the last 3 years. The creditor can prevent a termination of the enforcement procedure by lodging a deposit on enforcement costs. The law became effective on April 24th, 2020.