On 11th of March 2020 the Chairman of the World Health Organization (WHO) – Tedros Adhanom, has declared the Covid-19 outbreak to be a pandemic. In this regard, the Bulgarian Parliament voted on and adopted a decision to declare one-month long state of emergency – from 13th of March to 13th of April, and the health minister introduced anti-epidemic measures to be followed in Republic of Bulgaria until 29th March 2020, described in Order No RD-01-124 dated 13.03.2020 (the Order) [1].
Distinction between force majeure and hardship
Due to the restrictions imposed and bans most of the traders are forced and will be forced to cease their business activity for the period of declared state of emergency, which puts them into a temporary impossibility to perform their obligations under already concluded commercial agreements. On the other hand, the closed borders of most of the affected countries made the delivery of goods and materials impossible. This measure also affected the performance of commercial contracts. In this case, to avoid paying damages for loss caused by the non-performance or stipulated penalties, the affected traders shall refer to the force majeure/vis major. It is incontrovertible that the pandemic declared and the introduced anti-epidemic measures fall within the scope of the force majeure (you can find more about your rights in case of force majeure in our article ‘What to do if you are unable to perform your contractual obligations due to COVID-19? ‘ [2])
The force majeure, however, is applicable only in case of non-pecuniary obligations. Аccording to the law the debtor, who has pecuniary obligation bears the risk of subsequent economic difficulties which affect his ability to perform his obligation (Art. 81, par. 2 from the Obligations and Contracts Act).
However, the cessation of business activity for the period of the declared state of emergency will affect the trader`s revenue from this activity, which can make the performance of his pecuniary obligations unduly onerous. In this event the trader may refer to the institute of hardship.
When the continuation of the normal business of the trader does not fall within the scope of the restrictions and bans imposed by the state and is not affected by measures taken by other countries (for instance closed borders) there won`t be an obstacle for him to perform his obligations under commercial transactions. In this case the trader can`t rely on force majeure, insofar as there are no bans referring to his business, which can impede him to generate revenue. Nevertheless, if there is a change in the economic circumstances due to reduced consumption/demand, this will decrease the trading revenue and will make the performance of the trader`s obligations under commercial transactions unduly onerous. This will be an event of hardship.
The main distinction between hardship and force majeure is whether the performance of the obligation is still possible or not. In case of hardship, despite the occurrence of an unforeseen and unforeseeable change of circumstances, the performance is objectively feasible, while in the case of force majeure the performance is always infeasible either temporary or permanent. That`s why the hardship is not applicable when there is a force majeure event or circumstance.
Hardship
The hardship represents unforeseen and unforeseeable change of circumstances that have occurred after the conclusion of the agreement and render its preservation in its original form and content incompatible with the principles of justice and good faith in private relations.
Therefore, the required prerequisites of hardship are as follows:
- Valid agreement, from which the rights and obligations of the parties originated (for instance rent agreement);
- Occurrence of certain circumstances after the conclusion of the agreement, which affects the economic conditions (for instance an economic crisis caused by the declared pandemic);
- The performance of the obligation is feasible (for instance payment of rent due under concluded rent agreement);
- The parties could not and should not have been obliged to foresee these circumstances when concluding the contract (the criteria is the informed person with average business experience);
- The unduly onerousness of the performance should be caused by the material change of circumstances;
- The preservation of the agreement in the context of the changed circumstances should conflict with both justice, equity and good faith;
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- The performance is unjust, when the equivalence is breached, i.e. when the performance is ruinous or unduly onerous for the party;
- The breach of equivalence should be an act of bad faith, in conflict with broadly excepted criteria for honesty and decency, socially unjustified.[1]
Example:
A trader, whose business activity does not fall within the scope of the bans under the Order, has concluded a rent agreement for premises in a shopping center (MALL). Due to the declared pandemic and the closure of most of the retail establishments, the number of the MALL visitors dramatically decreases, as well as the consumption and the demand of the goods offered by the trader. Consequently, the trader doesn’t generate revenue from his business activity, whereat the performance of his obligation to pay the agreed rent has become unduly onerous and almost ruinous for him.
What does the law envisage in case of hardship?
If the party reckons that due to the changed economic conditions the performance of its obligation has become unduly onerous, it may lodge an application requesting the Court to amend or to terminate the agreement entirely or partially. In our example, if the trader wishes to retain the rent agreement`s effect, considering his intention to continue his business activity, he can ask the Court to amend the agreement in the section concerning the agreed remuneration. In this case the Court shall determine the fair amount of the rent.
Which is the competent jurisdiction to hear a claim for hardship in case of an included arbitration clause in the agreement?
When assessing whether the Court or the envisaged arbitrator/arbitral tribunal has the jurisdiction to hear a claim for hardship, the exact content of the arbitration clause is of essence. Following this, the Bulgarian Supreme Cassation Court has held that the general wording ‘all disputes arising out of or in connection with the present contract shall be finally settled by certain arbitration’ is not enough to be argued that the arbitrator/arbitral tribunal has jurisdiction to settle disputes on adjusting the agreement to the new circumstances. For the arbitration to have jurisdiction to rule on this issue, this must be explicitly stated in the arbitration clause.[2]
What if the applicable law is not the Bulgarian?
Most of the member-states legislations of the European Union envisage the doctrine of hardship – Germany, France, Netherlands etc. If the parties have chosen an applicable law, which regulates the hardship, the party may refer to the latter, only in case that all required prerequisites are met. The hardship is also regulated in Art. 6:111 ‘Change of circumstances’ from the Principles of European Contract Law, PECL). These Principles are intended to be applied as general rules of contract law in the EU when the national law of the member-state does not regulate certain issues or regulates them very broadly (Art. 1:101, par. 1 и 4 from PECL).
There is similar regulation in Art. 6.2.2. from the Principles of International Commercial Contracts, PICC. In order for the rules of both codifications to be applicable, the parties should have agreed to incorporate them into their agreement as applicable law.
The approach will be different if the parties have agreed that the English law will be applicable. In this case they should have included a MAC (material adverse change) clause. The MAC clause entitles the party to amend or terminate the agreement if there are material adverse changes, which reflect the value of the performance. This clause is often included in M&A (merger and acquisition) deals, sale of goods, financial or other commercial deals.
The article above is intended for information purposes only by drawing your attention to some of the features of hardship. It should not be construed as (binding) legal advice. For a thorough understanding of the subjects covered and prior acting on any issue discussed, we kindly recommend Readers consult Ilieva, Voutcheva & Co. Law Firm attorneys at law.
[1] Judgement dated 17.07.2009, case No 91 dated 2009 of the Court of Arbitration at the BCCI
[2] Judgement No 189/09.11.2017, 1st panel of commercial division of the Supreme Cassation Court, court case No 1675/2017