The situation in the Czech Republic with respect to the coronavirus has changed dramatically in the past few days. As of 12 March 2020, 2 p.m., the Czech Government has declared a state of emergency for 30 days, which includes inter alia restriction on cross-border travel, closure of restaurants and prohibition of gatherings of over 30 persons. Subsequently, as of 16 March until 24 March 2020 the Czech Government has declared a nationwide “quarantine” the aim of which is to limit contact with others to an absolute minimum. Apart from everyday life, the current situation has also had a great impact on many businesses, especially ones that have a presence in the Czech Republic.
This alert will help you navigate through the most pressing questions you may have regarding the (possible) impact of coronavirus on your business under Czech law.
Q: Are my contractual obligations towards my business partners on standstill due to the current situation caused by coronavirus?
No. If the contract is valid and in effect, contractual parties need to comply with their contractual obligations. However, the current situation caused by the spread of the coronavirus could qualify as force majeure, i.e. an extraordinary and unforeseeable obstacle that prevents the defaulting party from fulfilling its contractual obligations. Thereby and under certain conditions, you may not be liable for damage caused by your default.
Furthermore, your contracts may include a change-in-law clause applicable to coronavirus controls imposed by law, which will allow you to claim additional time and unforeseen costs due to such controls. You may also wish to review your contract for any material adverse change clause allowing you to refuse to perform if the counterparty is subject to a material adverse change (e.g. when the coronavirus has a material effect on the ability of the counterparty to perform its obligations).
Q: In case I am not liable for damage due to force majeure, do I have to pay a contractual penalty?
Most likely yes. The liability for the breach of contract generally will not cease to exist due to the force majeure obstacle and, therefore, the party that breaches the contract would likely still be obliged to pay the agreed contractual penalty. In any case, an inadequate contractual penalty could be reduced by the court.
Q: I was already in default with my contractual obligations prior to the coronavirus outbreak. Can I still rely on the force majeure argumentation?
Generally no. The force majeure argumentation relieving the defaulting party from liability for damage caused by the default cannot be used in cases where the default took place prior to the circumstances establishing the force majeure obstacle.
Q: I want to fulfill my obligations arising out of an existing contract, but due to the conditions of the declared state of emergency, I am objectively unable to do so. What should I do?
A contract is automatically terminated if the performance of the respective obligation becomes impossible after the contractual relationship was established (e.g. if a new legal regulation prohibits the fulfillment of the obligation). However, the impossibility of performance must be permanent (it is not enough if the obligation becomes more difficult or cannot be performed on time) and objective (if the obligation may be performed by someone else or with increased costs, the contract is not terminated). We recommend notifying the other contractual party as soon as possible of the subsequent impossibility to perform; otherwise, you may be liable to the former for any damage arising out of the late notification of the same.
Q: Is the situation around the coronavirus a reason for unilateral termination of existing contracts?
Not necessarily. The reasons for unilateral termination are often specified in the respective contract. The unforeseeable serious circumstances, such as the coronavirus outbreak, could fall under the contractual definition of force majeure due to which a party could have a right (not an obligation) to unilaterally terminate the contract. We recommend closely reviewing the relevant provisions of the specific contract to ascertain whether this could be an option.
Q: Due to the significant change of circumstances, we would like to re-negotiate selected contractual obligations with our business partners. Is this possible?
Generally yes. The law provides for a hardship clause under which it could be possible for you to require the other contractual party to re-negotiate the respective contract and, if an agreement is not possible, request a court to change the contract. Such right is given only if (i) there is a significant change of circumstances, which caused a gross disproportion between rights and obligations of contractual parties, (ii) the affected party did not agree to bear the risk thereof, and (iii) the change was unforeseeable at the time of conclusion of the contract and the affected party could not influence it. Whereas, gross disproportion may be caused by excessive increase of costs or excessive decrease of value of the subject matter of the contract. The right should be exercised within reasonable time (generally two months) after the affected party became (or should have become) aware of the change.
Q: What if we undertake a commitment during the state of emergency contrary to the applicable governmental prohibitions (e. g. we want to organize an event where the number of attendees exceeds 30)?
This contractual arrangement will be deemed invalid.
Relative invalidity is a certainty, as this commitment would go directly against the sense and purpose of the statutory ban – to prevent the spread of the coronavirus epidemic. Hence, if the other contractual party refused to perform its duties and invoked invalidity, the respective obligation would be invalidated.
Moreover, such breach of the extraordinary governmental measures could, under the present circumstances, be viewed as a manifest disruption of the public order. This would automatically render any such agreement null and void from the very beginning.
Q: Under what circumstances is it obligatory to suspend or limit our business operations?
We recommend that you closely watch the current situation, as it is evolving quite rapidly. If your business falls under the explicit ban introduced by the Government, you need to comply with this and suspend the business operations without undue delay and/or as required. Otherwise, your actions must always be justifiable and appropriate given the current public health situation. You may try to mitigate any impact of the coronavirus outbreak on your business by either re-negotiating the existing contractual arrangements or employing tools implemented by specific contracts. In this regard, look for any force majeure, hardship or change-in-law clauses, specific notification obligations, or ultimately, termination options.
Q: Considering the current measures introduced by the Czech Government, I am forced to close my business. Can I claim reimbursement of damages from the Czech Government?
Under certain conditions, yes. Czech law contains a general obligation of the Czech Republic to reimburse to the affected natural persons and legal entities any damage that has arisen in connection with measures taken under the Crisis Act. However, each claim for reimbursement needs to be considered on a case-by-case basis.