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Contract Termination Due to a Hardship Caused by COVID-19 Pandemic – A Brief Overview of Domestic Regulation and Court Practice

Contract Termination Due to a Hardship Caused by COVID-19 Pandemic

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COVID-19 pandemic caused different market distortions that imposed economic entities to various challenges, both in terms of their relations with the clients, i.e., consumers, and their mutual relations.

In this context, provisions of the Law on Contracts and Torts (Official Gazette of SFRY no. 29/78, 39/85, 45/89 – decision of CCY and 57/89, Off. Gazette of FRY no. 31/93, Off. Gazette of SCG no. 1/2003 – Constitutional Charter and Official Gazette of RS no. 18/2020) (“the Law”) are of particular importance, as they regulate the issue of termination (or amendment) of agreements due to the hardship, as well as the judgment enacted in 2021 by the Commercial Court of Appeals in relation thereto.

Provisions of the Law

In accordance with Article 133 of the Law, should after conclusion of 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 achieved, in both cases to the extent that it becomes obvious that the contract no longer meets the expectations of the contracting parties, and that, in general, it would be unjust to maintain its validity as it stands – a party having difficulties in performing its obligation, i.e., being unable to achieve the purpose of contract because of such circumstances, may request the contract to be terminated.

Contract termination under the previously stated article of the Law cannot be requested in case the party referring to the hardship was obliged, at the time of conclusion of the contract, to take into account such circumstances, or if it could have avoided or surpassed them, nor can the party requesting the termination refer to the hardship upon the expiry of the deadline for fulfilment of its contractual obligations. Also, the contract will not be terminated provided that the other party offers or accepts a fair change of the relevant terms, while in case the court terminates the contract, it will, at the request of the other party, oblige the party requesting the termination to reimburse the other party a fair share of damage endured therefore.

The court will decide on contract termination, i.e., amendment, based on the principles of fair trade, particularly taking into account the purpose of contract, normal risk related to such type of contracts, general interest and interests of both parties thereto.

The Law also prescribes that the parties to the contract can stipulate in advance that they will waive from referring to the hardship, unless this is in contravention to the principle of diligence and fairness, as well as that the party authorised to request contract termination due to the respective circumstances shall be obliged to notify the other party on its intention to request termination as soon as it learns of such event. Otherwise, it shall be liable for damage caused to the other party because the aforesaid request was not timely provided.

Judgment of the Commercial Court of Appeal

In relation to the previously mentioned provisions of the Law, on June 24, 2021, the Commercial Court of Appeal passed the judgement Pz 832/21, pursuant to which the distortion in business operations of the retail store, due to the market distortions caused by COVID-19 epidemic, represents grounds for termination of the business premises lease contract because of the hardship.

Namely, the rationale of this judgment reads that the first instance court has properly decided on overall termination of the contract on lease of business premises in a shopping centre, given that the decision of the Government of Republic of Serbia as of March 21, 2020, according to the previously imposed state of emergency, prohibited the work of shopping centres, including the one where the premises subject to lease and the claim were located, while the prevailing business activity of the plaintiff, registered in the Business Entities Register, was a wholesale (of certain products). In other words, since the proclamation of the state of emergency caused by COVID-19 pandemic resulted in market distortions, which caused – inter alia – a significant reduction of the plaintiff’s turnover, the first instance court has properly established that the new circumstances prevented the attainment of the purpose of the contract to such an extent that it no longer met the expectations of the parties, thus it would be unfair for it to remain in force as it is. This judgment also notes that, with respect to the termination or amendment to the contract due to the hardship, the only circumstances to be considered are those leading to a difficulty in realising one’s obligations, and not those leading to the lost profit (that might be collected); therefore the court established that the payment of the rent as envisaged and agreed by the parties would question the capacity of the plaintiff to perform its business activity.

Additionally, in accordance with the stated judgment, and pursuant to the Law, termination of the contract due to the hardship cannot be achieved by the sole expression of one’s will to the other party, but by a court’s decision whose validity actually introduces legal consequences of termination. Namely, claim for termination of the contract for the hardship is, by its legal nature, a constitutive claim, so the contract is in such case terminated by the respective decision, as it transforms certain legal relationship.

This article is to be considered as exclusively informative, with no intention to provide legal advice. If you should need additional information, please contact us directly.

By Lara Maksimovic, Senior Associate, PR Legal

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