NEWSLETTER COVID-19 FROM THE PERSPECTIVE OF BUSINESS CONSUMER-SUPPLIER RELATIONS.

8.dubna 2020

Reading time: 9 minutes

The purpose of this Newsletter is to clarify the basic issues related to the situation of COVID-19 in customer-supplier relations.

In the first part of this Newsletter, we will list possible ways to reduce, resp. distribution of COVID-19 risks between customers and suppliers in the future by adjusting the contractual relationship between customer and supplier (eg in the form of a clause, supplement, etc.), by clarifying the 3 most used COVID-19 clauses (it is of course possible to use other clauses):

COVID-19 transport clause
Price clause COVID-19
Clause COVID-19 in the GTC

In the second part of this Newsletter, we will present a basic analysis of legal instruments that most often appear in practice when solving existing customer-supplier contractual relationships with regard to COVID-19, the possibilities, but also the limitations of their practical application, ie:

Risk of change of circumstances - § 1765 et seq. OZ
Subsequent impossibility of performance - § 2006 et seq. OZ
Force majeure - § 2913 para. 2 of the Civil Code
Binding nature of agreed prices
Possibilities of termination of contractual relations with regard to COVID-19 - withdrawal from the contract § 2001 of the Civil Code and later
International customer-supplier contractual relations and COVID-19

Solution of new (future) customer-supplier contractual relations resp. adaptation of existing ones with regard to COVID-19

Before a brief analysis of the most common clauses used to address COVID-19 in terms of new contractual relationships (or modification of existing relationships, such as an addendum or clause), it is necessary to point out that the COVID-19 pandemic is no longer a new, unpredictable fact or obstacle and therefore it is not possible for new (future) business contractual relationships to rely on legal institutes such as the risk of change of circumstances, subsequent impossibility of performance, vis-maior, etc. and when negotiating new contractual relationships it is necessary to be very careful and set them correctly . Attention must also be drawn to the principle of contractual freedom, ie the specific wording of any clause or amendment addressing COVID-19 is a matter of contractual agreement of the parties (unless it is in conflict with mandatory standards). It should also be recalled that, from the point of view of the COVID-19 solution , it is irrelevant in the opinion of VARGA Legal whether it is ultimately a clause on a contractual relationship, an addendum to a contract or another legal form .

VARGA Legal sets out below the basic areas and content covered by the COVID-19 clauses, the final form of which may be different in each ad hoc case, taking into account the contractual freedom of the parties:

1. COVID-19 transport clause

Its purpose is to address and distribute the COVID-19 risks arising from the transport of goods .
It can be used both in the customer-supplier relationship and in the customer-transport company relationship .
It can be used for both domestic and international transport .
Addresses the responsibilities and risks of both parties related to transport, inability to transport, late delivery, increased transport costs, related claims for failure to deliver (transport) goods properly and on time (contractual penalties, damages, etc.), insurance issues, customs transport issues etc.
In the case of international trade, the INCOTERMS 2010 or INCOTERMS 2020, which addresses various settings of handover of goods, transport, insurance, customs issues, transfer of risk of damage, etc. Transport clause COVID-19 can set the distribution of risks arising from COVID-19 differently than INCOTERMS 2010 or 2020 according to client needs.

2. Price clause COVID-19

Its purpose is to solve and distribute the risks of COVID-19 with regard to prices in customer-supplier relations.
It is typically used mainly in the case of long-term contracts based on framework contracts and specific orders, where individual future performances may be disadvantageous for one of the contracting parties (typically for suppliers) with respect to COVID-19.
It addresses, for example, changes in prices of input materials and services and their impact on the final price for the customer, price changes in late delivery caused by COVID-19, price changes in so-called market volatility caused by COVID-19, price changes in commodity volatility caused by COVID-19, exchange rate changes caused by COVID-19 etc.

3. COVID-19 clauses to the GTC (General Terms and Conditions)

These clauses (more precisely, modification or change of the GTC) can solve various issues in the relationship COVID-19 according to the current needs of the company
Adjustment of the limitation of the company's contractual liability for damages
The contractual definition of so-called force majeure (vis-maior) in the sense of COVID-19 and the legal consequences associated with it - force majeure according to § 2913 para. 2 of the Civil Code is only the so-called liberation reason for exemption from strict liability for damage, but does not affect fulfill the obligation, resp. pay a contractual penalty.
Adjustment of cancellation fees associated with the circumstances of COVID-19
Modification of the so-called salvator clause with regard to COVID-19

It should be noted that the approval of changes to the GTC (eg unilateral changes to the GTC) has in some cases a special legal regime - the issue of the GTC is regulated by law, eg in § 1751 et seq. OZ

Solution of existing customer-supplier contractual relations with regard to COVID-19

Below is basic information on these individual issues:

§ 1765 OZ - Risk of change of circumstances

First of all, it should be noted that if the existing contractual relationship between the customer and the supplier contractually excluded the risk of a change in circumstances (application of § 1765 paragraph 2 of the Civil Code), then the following cannot be applied . Such a relationship could also preclude the protection of only one or the other party, by assuming the so-called risk of changing circumstances.

According to § 1765 par. 1 of the Civil Code, it applies that

“... If there is a change in circumstances so material that the change creates a particularly gross disproportion in the rights and obligations of the parties by disadvantaging one of them either by a disproportionate increase in the cost of performance or by a disproportionate reduction in the value of the subject matter, the party concerned has a right to seek resumption of negotiations on the contract, if he proves that he could not reasonably have anticipated or influenced the change and that the fact occurred only after the conclusion of the contract, or became known to the party concerned only after the conclusion of the contract. The exercise of this right does not entitle the party concerned to defer performance ... '

It is therefore necessary to draw attention to several facts regarding the so-called risk of changing circumstances:

(i) under § 1765 para. 2 of the Civil Code , the so-called danger of a change of circumstances can be contractually excluded , resp. this risk can be contractually borne by, for example, only one party to the contract

ii) according to § 1766 par. 2, the affected party must exercise the right to resume negotiations within 2 months of having to find out about the change of circumstances (here we remind you that a state of emergency was declared on 12.03.2020)

iii) according to § 1765 par. 1, the party concerned has the right only to demand the resumption of negotiations on the contract

iv) according to § 1765 and § 1766 there are no obligations for the other party, in principle it is sufficient if the resumption of negotiations takes place

v) according to § 1766 par. 1 of the Civil Code, it is not strictly determined by when the contracting parties are to agree on the content of the new contract , it is only stated that the agreement must be reached within a reasonable time

vi) according to § 1765 par. 1 of the Civil Code, the burden of proof lies with the party concerned

vii) according to § 1766 par. 1 of the Civil Code, the court is not bound by the proposal of the parties

viii) according to § 1765 par. 1 of the Civil Code, the change of circumstances had to occur only after the conclusion of the contract or to become known to the affected party only after the conclusion of the contract. The risk of a change in circumstances cannot therefore be argued in new contractual relationships .

2. § 2006 Trademark - Impossibility of performance

According to § 2006, 2007 and 2008 of the Civil Code, it applies that

§ 2006

(1) If the debt becomes unsatisfiable after the obligation arises, the obligation expires due to the impossibility of performance. Fulfillment is not impossible if the debt can be settled under difficult conditions, at higher costs, with the help of another person or only after a specified time.

(2) The impossibility of performance shall be proved by the debtor.

§ 2007

If only part of the performance is impossible, the obligation shall lapse in its entirety if it follows from the nature of the obligation or the purpose of the contract, which was known to the parties at the time of concluding the contract, that the performance of the remainder is irrelevant to creditors. If this is not the case, the obligation expires only in this part.

§ 2008

If the debtor does not notify the creditor that the fulfillment of the debt has become impossible, without undue delay after he has learned or had to know, he shall compensate the creditor for the damage caused by the creditor not being notified of the impossibility of fulfillment in time.

VARGA Legal makes a few remarks on the consequent impossibility of performance:

Whether COVID-19 caused a so-called subsequent impossibility of performance to a specific customer-supplier relationship will logically depend on the assessment of each ad-hoc situation separately.
The impossibility of performance will logically be invoked by the debtor. In doing so, however, it must take into account the following facts:

Pursuant to Section 2006, Paragraph 2 of the Civil Code, the burden of proof shall be on the debtor to prove the subsequent impossibility of performance
According to § 2006 par. 1 of the Civil Code, performance is not impossible if the debt can be fulfilled under difficult conditions, with higher costs, with the help of another person or only after a specified period.
Pursuant to Section 2008 of the Civil Code, with regard to the elimination of the risk of liability for damage, the debtor may be advised to immediately notify the creditor of the impossibility of performance.

3. It follows from the foregoing that defending the consequent impossibility of performance will require very precise factual and legal arguments.

3. § 2913 para. 2 of the Civil Code - Force majeure

First of all, it should be noted that the existing contractual relationship between the customer and the supplier could define force majeure and especially the legal consequences associated with it differently (usually to a greater extent) than the legal consequences associated with the application of § 2913 paragraph 2 of the Civil Code. By law, force majeure is only the so-called liberation reason for getting rid of strict liability for damage. Below, therefore, VARGA Legal briefly sets out the basic remarks on force majeure applied on the basis of Paragraph 2913 (2) of the Civil Code and force majeure defined contractually:

Pursuant to § 2913 para. 2 of the Civil Code, it applies that

“.... The pest shall be released from the obligation to compensate if he proves that he was temporarily or permanently prevented from fulfilling the obligation under the contract by an extraordinary unforeseeable and insurmountable obstacle created independently of his will. An obstacle arising from the pest's personal circumstances or which arose only at a time when the pest was in arrears with the fulfillment of the agreed obligation, nor an obstacle which the pest was obliged to overcome under the contract, shall not release him from the obligation to compensate .... "

With regard to the application of force majeure by law, VARGA Legal draws attention to the following:

Vis maior according to § 2913 paragraph 2 of the Civil Code is the so-called liberation reason for exemption from strict liability for damage, so it does not apply

Obligations to fulfill the original obligation (this remains)
Obligation to pay a contractual penalty , if it has been contractually agreed (here, however , at least a reduction of the contractual penalty to the amount of damage for the application of the so-called moderation right of the court according to § 2051 O

2. The burden of proof lies with the contracting party, which invokes the application of vis-maior pursuant to § 2913 para. 2 of the Civil Code

3. There are exceptions to the vis-maior application , in particular the following:

Vis-maior, the party will not be able to appeal in new contractual relations - COVID-19 will no longer be an unpredictable obstacle, the situation of COVID-19 is already publicly known worldwide
Vis-maior cannot be invoked if the obstacle COVID-19 arose only at a time when the party was in arrears with the fulfillment of contractual obligations

With regard to the application of force majeure under the contract, VARGA Legal draws attention to the following:

In each particular contractual relationship, it will logically depend on the exact text and the definition of the vis-maior obstacle. In a specific contractual relationship, this may not only be the so-called liberation reason for acquittal of strict liability for damage, but also, for example, the reason for non-fulfillment of a contractual obligation or non-fulfillment of a contractual penalty.
In new contractual relationships, it will be important to properly address the situation of COVID-19, as this is no longer a new, unpredictable obstacle at this time.

4. Binding nature of agreed prices

The situation of COVID-19 is not in itself a legal reason that could affect, change or even cancel the price agreement of the contracting parties, if the price agreement is valid. Logically, it is possible to try to argue a substantial change in circumstances under § 1765 of the Civil Code, but here VARGA Legal refers to the analysis and conclusions given in point 1 above - § 1765 of the Civil Code - Risk of change of circumstances.

5. Possibilities of termination of contractual relations with regard to COVID-19 - withdrawal from the contract § 2001 of the Civil Code and following

With regard to the time effectiveness of VARGA Legal, this Newsletter does not mention or analyze other options for termination of the contract as withdrawal, because in the opinion of VARGA Legal other legal institutes of termination of the contract are not related to COVID-19.

Pursuant to Section 2001 of the Civil Code, the contract may be withdrawn if the parties so agree or if the law so provides. In the following text, VARGA Legal does not analyze the so-called contractual reasons for withdrawal from the contract, as they can be logically set differently in each contractual relationship. Furthermore, we present the so-called legal reasons for withdrawal from the contract and their relationship with COVID-19.

According to § 2002 of the Civil Code, the trademark applies

(1) If a party breaches the contract in a material way, the other party may withdraw from the contract without undue delay. A breach of duty is substantial which the party to the breach already knew or should have known at the time the contract was concluded that the other party would not have entered into the contract if it had foreseen the breach; in other cases, the breach is considered not to be material.

(2) A party may withdraw from the contract without undue delay after the conduct of the other party undoubtedly shows that it has breached the contract in a material way, and if it does not provide reasonable assurance at the request of the entitled party.

This is a so-called breach of contract in a substantial way. It will naturally depend on the specific situation whether COVID-19 can be subsumed under the application of § 2002 of the Civil Code or not. E.g. in the situation of a shopping center as a lessor of business premises to a tenant who pays rent, this could (depending on the specific situation) come into consideration, as the tenant based on the fact that the shopping center is a busy place with a large number of potential customers. COVID-19 clearly does not apply. In this context, it is necessary to draw attention in particular to § 2005 para. 2 of the Civil Code, according to which withdrawal from the contract does not affect the right to payment of contractual penalty or interest on arrears, if already mature, the right to compensation for damages arising from breach of contract. by its nature to bind the parties even after withdrawal from the contract, in particular the agreement on the method of resolving disputes. If the debt has been secured, the withdrawal from the contract does not affect the security. It should also be noted that the individual types of contract have their own legal regulation of withdrawal from the contract. In general, the issue of withdrawal is relatively extensive, complicated, and any ad hoc situation requires a well-chosen procedure.

6. International customer-supplier contractual relations and COVID-19

A large number of Czech corporations enter into contractual relationships with an international element, whether with foreign suppliers or customers. Before the COVID-19 pandemic, not all managers necessarily had to be aware of the importance and relevance of the so-called applicable substantive law (simply the legal order of which state is applicable to the contract) and the so-called applicable procedural law (simply put, the court or arbitration of which state will be competent for dispute resolution).

The above-mentioned institutes point 1 to 5 above concern the legal order of the Czech Republic. If the chosen law was different, the Czech legislation cannot be applied and it is necessary to resolve the situation of COVID-19 with regard to which legal order was chosen.

VARGA Legal has years of legal experience in international trade and international disputes, including international arbitrations, and can therefore assist clients.

Conclusion:

VARGA Legal points out that in the Czech Republic the principle of so-called "contractual freedom" applies in the field of commercial customer-supplier relations , and if it is not in conflict with mandatory norms, participants in contractual relations can negotiate their rights and obligations differently from the law, it is important always assess the specific contractual relationship and what was agreed in the relationship. The situation is naturally complicated by the fact that COVID-19 is a completely new phenomenon and therefore settled case law in this area cannot logically exist at this time.