Both the COVID-19 pandemic and the Ukraine-Russia conflict have had or continue to have a serious impact on different segments of the economy. Both phenomena affected the production, distribution and delivery of various products to business partners or consumers. It is needless to stress that both events have fundamentally affected our economic life, and that both events were events unforeseeable for people and businesses.
Our days are influenced by conflicts in the Middle East: the price of crude oil has already risen, which will sooner or later affect European fuel prices, the Hungarian forint exchange rate has fallen, and we can expect many more negative economic consequences due to these events.
What is a force majeure
Unforeseeable, unpredictable events that are beyond the control of the parties are called force majeure. Curia, (the Supreme Court of Hungary), defined force majeure in its judgement No. BH2014. 147 as follows: “[…] irresistible force, which means a force or event of such magnitude that no man can resist, that no one can avert. These include certain natural disasters, but also human movements that act irresistibly and with elemental force (force majeure of human origin can be considered, for example, war, revolution or the dissolution of a currency without a new currency replacing it). Events qualifying as force majeure are absolute, so it is not important whether the person can defend themselves against them, but whether there is a person who could avert the given event.”
Effects of force majeure on the performance of contracts and contractual liability
The first and most important question for economic operators is how force majeure affects or may affect the performance of their contracts or the exercise of their rights under contracts. The most important legal consequence of force majeure is that it extinguishes liability for non-performing a contractual obligation if the performance of that obligation becomes impossible due to force majeure. The respective contracting party shall not be liable for breach of contract if force majeure prevented its performance. In addition, if force majeure has excluded the performance of the given obligation, the party affected shall not be liable for any damage resulting from the breach of contract or for any penalty stipulated.
However, it is important to bear in mind that force majeure does not usually terminate the performance of contractual obligations: it depends on both force majeure and the specific contractual obligation. Hungarian judicial practice is strict in that it does not consider the difficulty or burdensome performance itself as force majeure, but treats it as a risk for the contracting party concerned.
Some cases dealing with force majeure
In connection with the repayment of a 16-year Swiss franc-based loan, Curia accepted in its decision (No. BH2014. 147), that the 2008 financial crisis made it extremely difficult to perform, but not impossible, and thus the court did not accept the financial crisis as a force majeure event affecting the repayment of the loan. The official store closure ordered due to the COVID-19 pandemic was regarded by the Budapest Court of Appeal (10.Gf.40.417/2021/5.) as a circumstance which precluded the operation of a shoe shop run in a rental property and thus the intended use of the lease as well. That circumstance was beyond the tenant’s control, for which the tenant was obviously not responsible, so that the tenant could lawfully exercise his extraordinary right of termination stipulated in the lease agreement.
In another case, the courts examined a contractual provision relating to force majeure, which was a contractual condition employed by a hotel. In the present case, a defendant company operating hotels undertook in a contract concluded with the plaintiff on 7 February 2020 to make 86 rooms available to the plaintiff between 7 and 9 May 2020. According to the force majeure clause of the contract: “The Agreement may be terminated without obligation in the event of causes beyond the control of the parties, such as unavoidable events, war, acts of terrorism, disasters, strikes, (…), civil disobedience, traffic restrictions, as long as the provision of services by the Hotel or the use of hotel services by the group or anyone else is unlawful due to these circumstances, or impossible. The Agreement may be terminated under this paragraph by written notice to the other party as soon as possible, but no later than ten (10) days after becoming aware of the circumstance giving rise to the termination.“
On 13 March 2020, immediately after becoming aware that the Hungarian part of the Giro d’Italia cycling race had been cancelled due to the COVID pandemic, the plaintiff making the hotel reservation notified the hotel that terminated the contract on the basis of force majeure and requested the refund of the reservation fee paid in advance. The hotel returned only a fraction of the advance payment to the plaintiff, therefore the plaintiff brought an action to the court.
Highlighting the substance of the grounds of its judgment, the Curia summed up the following: “In connection with the case before litigation, it is necessary to emphasize that force majeure did not lead to the impossibility of the contract, i.e. to breach of contract (Section 6:179 (1) of the Civil Code), but made the performance of the contract impossible, which may give rise to its termination by unilateral statement on the basis of the relevant clause of the contract (Section 6:213 (1) of the Civil Code). The contracting parties agreed to regard force majeure as a circumstance preventing the performance of the contract, defined by a list of examples only, to prescribe a procedure for themselves in the event of force majeure and to determine its effect on the contractual obligation undertaken. The date of group booking, the number of rooms booked and the name of the event giving rise to the reservation leave no doubt that the reason for concluding the contract is the Giro d’Italia, a cycling tour, scheduled to start from Hungary on 9 May 2020. […] In the present case, it was the epidemic itself, its worldwide spread, and, on the other hand, the government action taken as a result of it, which resulted in a force majeure situation for the plaintiff and made it impossible to use the services of the hotel. […] On the basis of the information available to him, the plaintiff acted contractually by cancelling his reservation ‘as soon as possible’ on the same day. The serious epidemiological situation in Europe, which also caused the postponement of the Hungarian stages of the Giro d’Italia, is an extraordinary, exceptional and unforeseeable external circumstance arising after the conclusion of the contract, which does not fall within the scope of the plaintiff’s normal commercial risk alleging force majeure.“
In short, the applicant who booked 86 hotel rooms lawfully terminated the contract and lawfully claimed the full advance payment, because his termination was permitted by the force majeure clause laid down in the contract and exercised his right of termination in accordance with that contractual provision.
Mitigation and assessment of the effects of force majeure on the performance of contracts
It should be examined whether the effects of force majeure can be avoided or mitigated. The Russian-Ukrainian conflict affects the production and distribution of raw materials of countless products, and there is no question that the war should be considered as a force majeure event. In such cases, however, it is not possible to sit back and not to perform a given contract on the grounds of war, but to examine whether it is possible to purchase the given product from another state, or whether the production process (e.g. in Ukraine or Russia) can be even partially reorganized or transferred to another country. Whether the workforce lost due to COVID-19 illnesses or official quarantine can be replaced by other workforce, or to what extent production losses can be reduced by work reorganization. At the same time, however, unrealistic proof cannot be expected from the party affected by force majeure, since the force majeure event may make it difficult or impossible to find evidence from the outset.
Such issues, or similar issues depending on the contractual obligation, must be examined when a contracting party invokes force majeure in the course of non-performance or late performance of its contractual obligation.
Accordingly, when assessing force majeure, four main circumstances must be taken into account: (i) the contractual obligation in question; (ii) whether force majeure effectively prevented the performance of that contractual obligation; (iii) examination of the causal link between force majeure and non-performance or delay in performance; and (iv) whether the contracting party concerned has made every effort to mitigate the negative effects of force majeure.
It can be seen how many circumstances arise when assessing a seemingly simple question (force majeure). Therefore, already during the drafting and negotiation of contracts, it is important for the parties to specify how and to what extent they expect the other party to prove that their performance was impeded by force majeure. The case related to hotel reservation cited above also perfectly reflects that the stipulation of contractual terms on force majeure is both possible and unavoidable.
You are always advised to address these issues to a proactive lawyer, since lengthy litigation can be avoided with well-thought-out contractual provisions regulating multiple options.
If you have any questions about the above or are facing a similar situation and need legal support, please do not hesitate to contact me.
