17 March, 2020
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Covid-19 as rebus sic stantibus – change of circumstance

Will there be anyone to terminate commercial contracts?  We urge caution with unilateral terminations.

As the Covid-19 pandemic progresses and increasingly stringent measures are introduced in both Serbia and the EU, this pandemic is gradually morphing into an event of force majeure owing to which commercial contracts simply cannot be executed for reasons beyond the control of the parties. However, a pandemic affects certain contracting parties in commercial contracts in a way that their performance remains in the control of the contracting parties, but the performance of which could practically scuttle their business. What then? How do you withdraw from a contract? A key question is how to withdraw from a contract if your contractual partner has not breached the contract, if you do not have a unilateral termination clause? Any hasty moves or haphazard withdrawal from a contract could leave you liable to claims for damages from your contractual partner!

In these situations, termination of the contract should be sought on the grounds of a change of circumstances because the Covid-19 pandemic is a change of circumstance that may lead to the collapse of a contracting party’s business.

Termination of a contract on grounds of a change of circumstances is regulated in Article 133 of the Contracts and Torts Act, which provides: “Should after concluding the contract circumstances emerge which hinder the performance of the obligation of one party, or if due to them the purpose of the contract cannot be realized, while in both cases this is expressed to such a degree that it become evident that the contract meets no more the expectations of contracting parties, and that, generally speaking, it would be unjust to maintain its validity as it stands – the party having difficulties in performing the obligation, namely the party being unable, due to changed circumstances, to realize the purpose of contract, may request its repudiation”.

However, a contract may only be terminated on these grounds by way of court judgment, and only on foot of an action filed by the contracting party seeking to withdraw from the contract.

Considering the state of emergency measures introduced in Serbia do not yet include the suspension of the courts, a measure which is likely to make an appearance, this raises the question of whether and until when will it be possible to file actions seeking termination of contracts due to a change of circumstances.

Therefore, the advice to businesses affected by the Covid-19 pandemic is not to terminate contracts off-hand, to try to agree with their contractual partners as to what course their contractual relations will take going forward, at least until more information is available about how the courts in Serbia are to operate during the pandemic, which alone has the authority to terminate contracts due to a change of circumstances, something the Covid-19 pandemic most certainly qualifies as.

 

For more information, please contact us via covid19@geciclaw.com