COVID-19 – State of Emergency and Force Majeure

19.03.2020

The state of emergency declared in Bulgaria on 13.03.2020 further expanded the range of issues facing the business as a result of the outbreak of COVID-19 pandemic. The imposed large-scale quarantine, travel restrictions and social distancing measures may lead to an expected drop in the consumption expenditure and to certain difficulties or inability for companies to fulfil their obligations under already concluded contracts leading to consequential negatives, such as penalty interests, compensations and defaults.

In certain cases, the Bulgarian law provides for liability exemption for failure to perform in emergency situations, such as the present one, by resorting to the institute of force majeure (also called vis majeure or casus fortuitus) envisaged in Art. 306 of the Commerce Act. Although parties quite often stipulate a special force majeure clause in their contracts specifying the events and actions that can  trigger force majeure, they can still invoke force majeure even in the absence of such a clause, so long as the contract is subject to the Bulgarian applicable law.

Can COVID-19 and/or the state of emergency, however, qualify as circumstances that enable claiming relief for force majeure and in which cases do they enable a contracting party not to suffer the consequences of non-performance?

I. Can COVID-19 and/or the state of emergency qualify as force majeure?

The law defines force majeure as an unforeseen or unavoidable event of an extraordinary nature which has occurred after the contract is concluded and prevents a contracting party from performing its obligations under the contract. Both COVID-19 pandemic and the state of emergency declared in Bulgaria may fall into the above definition of force majeure under already concluded contracts.

Both are, on their own grounds, unpredictable and extraordinary by nature, and given the rapid spread of the epidemic and the dynamics of its worldwide response, it cannot be expected that businesses have had the opportunity to prepare for their occurrence. The uniform case law of the Supreme Court states that typically the notion of force majeure includes circumstances beyond the human control, such as natural disasters (acts of God), among which the Disaster Protection Act counts epidemics as well.  However, measures and acts of public authorities, such as the declared state of emergency in Bulgaria, can be qualified as force majeure too.  

More questions arise in determining whether COVID-19 and/or the state of emergency are directly related to the inability of a contracting party to perform under the contract. This causal link must be specific and important enough to prevent the debtor from finding another solution enabling him to fulfil the contract. 

II. When can one invoke COVID-19 and/or the state of emergency as force majeure?

  • Contracts for delivery of goods. COVID-19 can be a ground for invoking force majeure, provided that the goods are specified (e.g. by their manufacturer, brand or  model) and will be delivered either from, or to a place that is under quarantine (or are to be be bought from a manufacturer who has lawfully suspended its activity due to COVID-19). When the goods are generic /goods of a certain class/ (for instance – 10 tons of grain), the invoking of force majeure will not be accepted.
  • Service agreements. The state of emergencymay give grounds for invoking force majeurewhen the nature of the provided services is incompatible with the undertaken measures. This would be the case with private kindergartens and schools, gyms and spa centres and mass events (concerts, seminars, etc.), since these activities are prohibited for the duration of the state of emergency. COVID-19, in turn, can be a force majeure event when a particular service must be provided by a specific person or a professional, and by a group of such individuals that cannot be replaced (i.e. the contract is concluded with regard to a specific person/s that shall perform it) and these people are quarantined, or nationals  of restricted countries temporarily banned from entering Bulgaria.
  • Contracts providing for payments – i.e. rental agreements, loan agreements, leasing agreements, etc. Both legal theory and practice in Bulgaria agree on non-applicability of force majeure to payment obligations (i.e. in these cases the debtor cannot refuse payment on this ground). It is undisputed that many businesses will face difficulties because, despite of the reduced activity, they will still have to continue paying their loans and rents for rented premises, even if these remain unused, with all employees working from a distance. In the absence of explicit agreement on such cases in the contracts, there are two available solutions in long-term perspective: (i) a state moratorium on the payment of such debts, as already discussed in Italy and some other countries, or, in case the state of emergency is extended for a longer or even indefinite period (ii) invoking of the business frustration institute under Art. 307 of the Commerce Act which allows a contracting party to request from the court amendment or termination of the agreement due to the occurrence of such unforeseeable circumstances that put the preservation of the contract in contradiction with fairness and good faith.  

 III. What actions the party invoking force majeure should take and what is the effect of such invocation?

If the contract itself does not provide for a specific procedure to invoke force majeure, the one envisaged in the law should be followed. The invoking party must notify the other party in writing of the circumstances and the anticipated consequences thereof for the contract, or otherwise it will be liable for compensation for damages resulting from the failure to duly notify that party.

Contractual performance will be suspended for both parties for the duration of the force majeure. After the extraordinary circumstance is no longer present, the parties may continue to perform under the contract, unless some of them is no longer interested to receive performance. In this case, both parties may choose to terminate it.

IV. Obtaining a force majeure certificate by the Bulgarian Chamber of Commerce and Industry

A common practice in facilitating the proof of force majeure is to obtain a force majeure certificate by the Bulgarian Chamber of Commerce and Industry (“BCCI”). The force majeure certificate is issued based on a written application ,  supported by documents proving the connection between the force majeure event and the existence of particular impediments for performance of the obligations under the contract. These are necessary, since the mere declaration of a state of emergency as a separate event is not perceived as force majeure by the BCCI.  

Applicants may consider providing documentary evidence that (for instance):

  • the contract is to be performed by foreign personnel on the territory of Bulgaria, while the foreign citizens in question cannot arrive in Bulgaria due to the imposed travel restrictions and cannot be replaced by equal Bulgarian professionals, or
  • An Occupational Health Service have prescribed to suspend specific activities that pose a source of increased risk to employees (in the cases when certain work is carried out by a group of employees, among whom there is an infected with COVID-19 employee or an employee subject to mandatory quarantine).

The force majeure certificate facilitates proving force majeure but does not release the court (in the event of a dispute over the existence of a fault in non-performing the obligation) to verify that all of the circumstances for invoking force majeure have been present, as declared.

In conclusion: force majeure is not a legal phenomenon of the category of obvious or implied ones, even in cases when a state of emergency is declared. It is therefore important to make a careful analysis of the facts and contractual clauses, in order to secure a sound and reasoned legal position, before one decides to resort to that tool to excuse its inability to perform under a contract…

For more information you may contact:

Dimitar Grozdanov, Attorney-at-law, Senior Legal Counsel
Dimitar.Grozdanov@tbk.bg

Martina Dimitrova, Legal  Counsel
Martina.Dimitrova@tbk.bg