Hungarians are not (yet) widely affected by the coronavirus, but the Hungarian economy is. The affected companies are primarily those engaged in the international trade and tourism, but not exclusively. Insurance companies and companies engaged in the medical sector are other examples of those heavily affected.
The coronavirus raises privacy, employment, commercial and insurance issues as well. Experts from Baker & McKenzie Budapest have already covered privacy and employment aspects. In this article we look into commercial aspects.
The main commercial issue businesses face is whether the coronavirus may serve as an adequate ground for non-performance of their contracts, and if they face damages claims (or on the other end, can claim damages) from their business partners for such non-performance. Many will also want to know if their insurance policies cover coronavirus related business disruptions.
The coronavirus is widely discussed in the context of force majeure or vis maior. Hungarian private law does not specify or regulate vis maior as such. Judicial practice sees vis maior as an absolutely irresistible natural or human force that cannot be prevented by human means and typically leads to frustration of contracts (see, for instance, case No. BH2014. 147.). However, coronavirus related business disruptions will not necessarily result in the frustration of a contract, but may simply lead to a breach, e.g. a delay or partial performance. Accordingly, coronavirus related commercial issues need to be distinguished from the question whether the coronavirus qualifies as vis maior, and need to be assessed both within the framework of frustration and breach of contract.
As always, individual contract terms will be key in answering those questions. In this article we look at rules applicable in the absence of applicable contractual provisions.
A contract is frustrated if the performance thereof becomes impossible. Performance may become impossible either physically or legally. If an area is under a quarantine or certain activities are restricted due to the coronavirus, then it might result in legal impossibility and frustration of related contracts. Examples would include supplies from areas under quarantine, travel related contracts, export bans such as those introduced by Germany or France, etc. The coronavirus is far less likely to result in physical impossibility, but it is not entirely unimaginable. Examples would include services performed by specific persons who might be unable to perform contractually due to a coronavirus infection, e.g. a performance by a singer of the Milanese Scala who got the virus.
The party who first becomes aware of the frustration of the contract must notify the other party without delay.
The legal consequence of frustration of a contract is the termination of that contract under Hungarian law. Partial termination of the contract can also come into play. This may be the case for contracts governed both by the old and the new Hungarian Civil Code.
Further consequences depend on whether either party can be held liable for the frustration of the contract. If not, then the parties basically need to come to a settlement for performances and payments already made without further liability to each other. If, however, a party is liable for the frustration of the contract, then the other party may claim damages. If both parties are liable for the frustration of the contract, both of them may claim damages from the other party in proportion to their contribution to the frustration of the contract. In respect of how liability is assessed and what damages may be claimed, the rules of liability for breach of contract discussed below apply.
As already mentioned, the coronavirus may not frustrate the performance of a contract, but might simply delay the performance, result in partial performance or render the performance unviable, for instance, for reasons of protection of employees and/or parts of the business operations not affected by the virus. These instances are handled within the framework of breach of contract.
Under Hungarian law, different liability regimes apply to contracts entered into before March 15, 2014 governed by the old Hungarian Civil Code, and contracts entered into after that date governed by the new Hungarian Civil Code. These two liability regimes are distinctly different.
The liability regime under the old Hungarian Civil Code grounds liability on the concept attributability. Accordingly, a company that breaches a contract governed by the old Hungarian Civil Code in connection with the coronavirus could relieve its liability by proving that it acted in the manner reasonably expected in the given circumstances. What is reasonably expected in specific circumstances may be variable from case to case. However, generally speaking this liability regime is far less strict than that under the new Hungarian Civil Code. The latter allows for relieving one’s liability only if the breach of contract has been caused by (i) a circumstance being out of the scope of control of that party, (ii) that was unforeseeable at the time the contract was concluded, (iii) provided that the party could not be expected to avoid such circumstance or prevent the damage. This rule creates a rather onerous, almost strict liability regime.
It is quite likely that in respect of contracts entered into before 2020 a coronavirus related breach will in many instances be relievable even under the stricter liability regime of the new Hungarian Civil Code. This is because the virus is out of the scope of control of most businesses and it was hardly foreseeable before 2020. The turning point for contracts entered into before 2020 seems to be whether a party could be expected to avoid a coronavirus related breach and prevent the coronavirus related damage. This is not too dissimilar from the liability regime applicable to contracts governed by the old Hungarian Civil Code. The key issues could be whether reasonable measures have been taken to protect personnel, whether there are alternative means to perform contractually and how feasible such alternative measures are. If you are a wholesale supplier of Parma ham buying directly from the producers, you can hardly be expected to substitute your supplies with products bought from other traders, but most cases are hardly that simple. All these factors need to be assessed on a case-by-case basis.
In case of contracts entered into in 2020 it can be argued that a coronavirus related breach of contract was foreseeable at the time of entering into the contract, consequently, a business breaching such a contract may not be able to relieve its liability by reference to the coronavirus. Again, a lot depends on the individual circumstances. A coronavirus related disruption is possibly foreseeable with respect to a contract related to China or Italy. But would the same hold true in respect of contracts related to areas that remain unaffected?
In addition to the differences in the liability regimes, different damages regimes also apply to contracts governed by the old and new Hungarian Civil Code. The stricter liability regime comes with a less strict damages regime and vice versa. While under contracts governed by the old Hungarian Civil Code full damages are payable for breach of contract, including actual damages, loss of profits and costs, damages payable under the new Hungarian Civil Code are limited to damages to the subject matter of the contract, while other actual damages and loss of profits are payable only to the extent such damages were foreseeable as potential consequences of breach of contract at the time the contract was concluded. Nevertheless, in case of intentional breach of contract, full damages are payable even under the liability regime of the new Hungarian Civil Code. This might be of particular importance with regards to the coronavirus, as many companies might contemplate breaching their contracts for the sake of protecting their personnel and their business operations not affected by the coronavirus. Examples could include suspending supplies to high risk areas or rejecting to serve high risk customers. Any such measure requires careful consideration, as it could have not only private law, but also competition law and other aspects. Baker & McKenzie is well placed to provide clients with a multi-disciplinary and multi-jurisdictional legal advice in relation to such challenges raised by the coronavirus.
The coronavirus is not only relevant with respect to contracts already entered into, but businesses are well advised to take it (and potential future viruses as well) into account when entering into new contracts. Will the usual force majeure clauses found in most contract templates do the trick? We believe not necessarily, and in particular, not under legal systems other than under which they were originally drafted.