State of Emergency / Corona Virus Crisis: What is a force majeure event?

In the commercial sector, due to corona crisis impact and amid nationwide state of emergency, we are receiving the following questions with reference to a transaction between two commercial entities. In our answers, we have not, however, considered any distinctions which might be necessary if the transaction involved consumers. Nevertheless, distinctions between the treatment of transactions which are principally for the sale of goods and those which are principally for provision of services have been taken into account.

Force Majeure in Serbia

a.) What is the legal definition of Force Majeure in your country?

There is no explicit definition of Force Majeure under the general contract and tort rules in Serbia.

However, the Serbian Law on Contracts and Torts (the “Contract Law”) provides that a party “Shall not be liable for damages if it can prove that it could not fulfill its obligation, or that it was late with the fulfillment of the obligations due to circumstances arising after the conclusion of the contract that could not be prevented, eliminated or avoided.

To apply the concept of force majeure to contractual relationship, the seller must not cause events defeating the performance, thus, such events must have occurred independent of its will and without its involvement, and were such that the seller could not prevent them, eliminate them or avoid them.

It is understood that the provision applies both to sellers and buyers. However, due to the specific nature of its performance, the provision protects sellers’ interests in most cases. As a result, for the purposes of this article we would refer to the “seller” further on in the text.

It is important to add that the Republic of Serbia is a member of UN Convention on Contracts for International Sale of Goods (CISG). In case contract falls within CISG sphere of application, definition stemming from Article 79 of the CISG would govern the question of Force Majeure.

b.) Absent any contractual provision, will relief be granted under the law of your jurisdiction if performance of contractual duties is delayed or prevented by events beyond the control of the affected party?  

Generally, yes.

Namely, the seller shall be relieved from a duty to perform if obligation have been “prevented” by an event that the seller cannot be held liable for under the Contract Law, including (but not limited to) events “arising after the conclusion of the contract that could not be prevented, eliminated or avoided.”

Other grounds for excused non-performance are liability of other party to the agreement, or third party liability, or any impediment for which a party cannot be held liable for.

Furthermore, as explained under the answer to the question (a), the seller shall not be liable for damages if it can prove that a “delay” of performance was (i) “due to circumstances arising after the conclusion of the contract”, (ii) “that could not be prevented, eliminated or avoided.

However, if the performance was not conditioned by the fix deadline, the contract remains valid even in the case of a delay, while the defaulting party is relieved only from the damages that arise in connection to the impediment beyond its control.  Therefore, depending on the circumstances of the case, it may be in the seller’s interest to specify within the contract how long an impediment should be permitted to last to qualify it as force majeure before the contract may be avoided.

In any case (e.g. prevented or delayed), if the qualifying event occurs following the seller’s default, the seller cannot claim relief from liability for performance of services.

Nevertheless, when it comes to the performance of contracts on sales of goods, the seller may claim relief under condition that it can show that contracted goods would be lost due to the events beyond its control even in case of a due performance.

If so, does the law take into account the reasonability or commercial practicability of the effort necessary to overcome these events, or is any possible effort required to have been expended before claiming relief?

Generally, no.

The Contract Law assumes a liability of a non-performing party to a contract. Therefore, it is upon the party claiming the relief from contractual obligation (and from liability) to prove existence of the circumstances that were beyond its control (events “that could not be prevented, eliminated or avoided”).

We underlie that that the Contract Law presumes only ordinary negligence of non-performing party. It is upon a non-breaching party to the agreement to prove gross negligence or wilful misconduct. Therefore, it is wise to consider excluding ordinary negligence from liability by means of contract.

However, the Contract Law and pertaining case law does not recognize and apply standard of “reasonability” or “commercial practicability of the effort necessary to overcome these events”.

Furthermore, although the Serbian case law is not steady on the matter, it suggests that so called “economic impediments” linked to the performance should not qualify as grounds for relief in terms of the force majeure but rather as grounds for right to terminate the contract under provisions governing change in circumstances (hardship).

Therefore, in order to qualify for relief from liability for non-performance, the standards such as “reasonability” or “commercial practicability of the effort” must be explicitly contracted as elements of the definition of force majeure agreed by parties.

c.) Can the relief afforded by the provisions described above be broadened or extended by agreement of the parties?

Generally, yes.

However, statutory limitations to freedom of contract shall apply as follows:

  • The liability based on willful misconduct or gross negligence (culpa lata, culpa magna) cannot be excluded nor capped by contract, and such provision would be void ipso iure.
  • The court may also annul the contractual provision on the exemption of liability for ordinary negligence (culpa levis), should such agreement result from dominant position of the debtor or, otherwise, of unequal mutual positions of the contracting parties.

Furthermore, in relation to the liquidated damages clauses, the specific safeguards apply, as follows:

  • A provision of a contract by which the maximum amount of compensation is determined shall be valid, unless such amount is in obvious disproportion to the actual harm and unless the law provides otherwise for the specific case;
  • In case of limiting the amount of compensation, the creditor shall be entitled to full redress if the impossibility of performance is caused by willful misconduct or gross negligence of the debtor.

In light of the above, the relief rule can be modified by a contract to include situations not covered by statutory formula for release of debtor from liability as well as limitation of maximum amount of compensation (liquidated damages).

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