The outbreak of the COVID-19 pandemic during the first quarter of 2020 has wreaked havoc globally. Medical resources have been, and are, stretched to their limits, social norms have been turned upside down, and businesses around the world are counting their losses.
It is inevitable that, in extraordinary times like these, a spotlight is cast on legal and contractual issues that, in the normal course of events do not arise or are rarely invoked. These issues – such as force majeure, exclusions and limitations of liability, and changes in law – have now become crucial. This note seeks to provide an overview of the relevant legal principles and how these may be relevant in the context of analysing the impact of COVID-19 on commercial contracts.
Sometimes, on account of a change in circumstances, it becomes impossible, very difficult or very onerous to perform a contract. Does the change mean that one is freed from the obligation?
Some contracts are silent on the issue; other deal with it. Where a contract is silent, our Civil Code provides that a person is not liable for non-performance of an obligation if the non-performance is due to an ‘irresistible force’ or a ‘fortuitous event’. 1
Our courts have held that the general rule applies if the following conditions are satisfied:
- The event in question is inevitable, extraordinary, not imputable to the party citing force majeure and is unforeseeable;
- The force cited must be absolute and objective;
- The party invoking force majeure must prove that it took all necessary measures and demonstrated all diligence required in attempting to satisfy its contractual obligations.
Typically, a situation in which a person finds it very, perhaps even extremely difficult, but not impossible, to perform his obligation would not qualify as force majeure.
In light of the above, whether the COVID-19 pandemic and its knock-on effects would, as a matter of law, qualify as force majeure, would need to be determined on a case-by-case basis.
Where, on the other hand, a contract contains a force majeure clause, the clause must be applied in accordance with its terms. Our courts have generally held that such clauses are to be interpreted strictly, invoked in exceptional cases and given their literal meaning. Once again, the application of any such clause would need to made on a case-by-case basis, and along the lines of the principles mentioned previously, to determine whether, should pandemics or global health emergencies not be expressly included in the force majeure clause, an outbreak such as COVID-19 may trigger the clause in question and relieve one or both parties from their contractual obligations.
Limitation or exclusion of liability
Commercial contracts may also feature a limitation of liability, or even an exclusion of liability, clause. Depending on the terms of such clause, there may be scope for contracting parties to invoke it, especially if the contract contains no force majeure clause or if the rule in the general law does not apply.
Change of law
Likewise, certain commercial contracts may feature a clause which permits one or more contracting parties to terminate or renegotiate a particular contract in the event of any change to the applicable law governing that contract which makes it impracticable or impossible for a party to discharge its contractual obligations.
The onset of COVID-19 has brought about a number of legislative changes under Maltese law, including for example, the mandatory closure of certain commercial outlets. This change may have an impact on the lessees of certain types of immovable properties who are obliged, in terms of the relevant lease agreement, to keep their property open for business for a minimum number of days and hours per week, yet are now prohibited by law from doing so.
While it would need to be assessed whether any of these changes are of a nature which would render performance under a contract impossible, depending on the nature of the contract in question and the terms of the applicable provision, this may be another option for a party seeking to terminate or renegotiate a commercial contract in light of COVID-19.
From a practical perspective, any party seeking to invoke any of the above clauses or legal provisions as a result of the outbreak of COVID-19 would do well to: (i) assess what the resulting effect of invoking any of the above will be on the contract in question – whether this be an extension of deadlines; a mitigation of damages or penalties for delay, or a termination of the contract itself; and (ii) ensure that it adheres to any procedural requirements set out in the contract so as to enable it to invoke such provisions, such as any formalities relating to the provision of notices. In all instances however, a case-by-case analysis of the contract in question and the prevailing circumstances would need to be carried out.
1 Art. 1134, Civil Code
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.