Performing contractual obligations in Czech Republic in light of COVID-19

Czech Republic

In response to the global rise in confirmed cases of COVID-19, the disease linked to the Coronavirus, the Czech Republic – in line with travel restrictions, quarantine orders and states of emergency imposed by governments around the world – declared a state of emergency on 12 March 2020, effective from 2 pm for the next 30 days. With COVID-19 now a pandemic, individuals and businesses everywhere must consider its potential impact on their ability to perform contractual obligations. In terms of the Czech situation, we have drafted a brief assessment on how this pandemic might interrupt business and how subsequent contractual breaches might be viewed under Czech law. 

Under Czech law, a breach of contract in light of these circumstances is likely to fall within the scope of force majeure as defined in Section 2913 (2) of the Act No. 89/2012 Coll, Civil Code as an extraordinary, unforeseeable and insurmountable event occurring independently of the will of the parties. 

Such an event, however, can only count as force majeure if it happens before the breach or non-performance occurs. Additionally, COVID-19 will likely no longer be considered as unforeseeable in relation to a contract if its presence in an area has been known for a while. The biggest obstacle for a party applying force majeure will be to prove that there was no alternative. We expect that creditors will argue that the pandemic made the fulfilment of an obligation more difficult, but not impossible.

COVID-19 and its consequences may also fulfil the definition of substantial change in circumstances pursuant to Section 1765 of the Civil Code. If such a substantial change results in a gross disproportion in the rights and duties of the parties either by disproportionately increasing the cost of the performance or disproportionately reducing the value of the subject of the performance, the affected party has the right to request renegotiation or even rescission of the contract. This request could be deemed justified if it is proven that the party could neither have expected nor affected the change, and that the change occurred only after the conclusion of the contract (or the party only became aware of the situation after the conclusion of the contract). 

Alternatively, the epidemic may also be considered a root of subsequent impossibility of performance pursuant to Section 2006. This provision, however, requires complete impossibility of performance, which in relation to Covid-19 becomes “delayed” performance.

In light of the above, each situation will likely be assessed on a case-by-case basis. In any event, parties must make every effort to fulfil a contract. The mere fact that performance has become more difficult does not relieve responsibility to perform and follow the maxim pacta sunt servanda – "agreements must be kept". 

If the performance of a commercial contract is insured, the terms of the contract should be read in conjunction with the terms of the insurance contract with particular focus on any possible insurance exclusions. We may expect each insurer to carefully review the insured’s behaviour in the light of the current situation, including compliance with terms of the state of emergency, travel plans, preliminary measures taken in order to mitigate risks, etc.

For more information on how to mitigate the effects of COVID-19 on your Czech business, contact your regular CMS advisor or local CMS experts: Tomas Matejovsky, Helen Rodwell and Petr Benes.