How might businesses in your jurisdiction be impacted by the Covid-19 pandemic?
In response to the COVID-19, the Lithuanian Government has imposed a nationwide quarantine and adopted various preventive measures. Based on the decision of the Lithuanian Government, the following main restrictions affecting business have been implemented:
- visits to and provision of physical contact services in culture, leisure, entertainment, and sports establishments are prohibited
- all mass gatherings in both open and closed spaces are prohibited
- activities in health service centers, sanatoria, and recreation centers, except individualized rehabilitation services related to treatment, are prohibited
- activities of public catering establishments, restaurants, cafes, bars, night clubs, and other entertainment places, except when food is taken away or delivered to customers in other ways, is prohibited
- activities of (a) shops, except supermarkets and other shops selling food, (b) trading and entertainment centers, except spaces where food, veterinary, pharmaceutical, and optical products are sold, (c) market places, except food stalls, are prohibited. Exceptions are available for Internet trade and cases when goods are delivered to customers
- activities of gambling and slot machine saloons (casinos) are prohibited
- provision of beauty services is prohibited
- The Lithuanian Government also approved work from home in state and municipal institutions of the public sector, in state-owned and municipal enterprises, except cases where certain functions must be fulfilled in working places. It is recommended that businesses in the private sector organize work in the same manner.
Taking into account the wide scale of Governmental preventive measures, Lithuanian businesses will be definitely negatively affected. The imposed restriction creates a great risk of significant losses due to the distracted supply chain and decreased demand.
In your jurisdiction, if it becomes impossible for a party to perform its contractual obligations because of an external event beyond its control (such as the Covid-19 pandemic), can that party cancel its contract?
According to Lithuanian law, external events that are beyond the control of a party can serve as a ground to amend, suspend performance, or even terminate an agreement in the following cases:
Force majeure circumstances
- Material change of circumstances (clausula rebus sic stantibus principle)
- Both of these options are described in more detail below.
Force majeure circumstances
Force majeure events are unavoidable, uncontrolled, and irremovable circumstances that were not or could not have been foreseen. According to Lithuanian and prevailing case law, in order to invoke force majeure, the circumstances must meet the following requirements:
- the circumstances did not exist at the time of conclusion of the agreement and they could not have been reasonably foreseen
- due to the circumstances, it is not possible to perform the agreement objectively
- the party could not control or prevent the occurrence of those circumstances
- the circumstances were beyond the control of the party
- the party did not assume the risk of such circumstances or their consequences
It should be also noted that force majeure does include such circumstances as absence in the market of goods needed for the performance of the obligation. Lack of the necessary financial resources or failure to perform obligations by other counter-parties (e.g., suppliers) will also not serve as a ground to invoke force majeure.
In practice agreements usually contain a force majeure clause. It might be drafted in different ways, including by providing exhaustive or non-exhaustive list of force majeure events (strike, fire, flood, etc.). However, Lithuanian law allows for the invocation of force majeure even if no such clause is established in the agreement.
The party may invoke force majeure only when it informs the other party about the occurrence of force majeure circumstance and its consequences for the performance of obligations under the agreement. Such notification should be provided within reasonable time after the non-performing party became or should have become aware of force majeure circumstances.
If the situation is considered to be force majeure, the party relying on force majeure is exempted from liability for failure to perform the agreement. This does not deprive the other party of the right to terminate the agreement, suspend its performance, or request payment of interest.
Governmental preventive measures adopted in the light of COVID-19 do not qualify as force majeure per se. It is the obligation of the party to prove that due to those currently-adopted preventive measures it is unable to perform its obligations to its counter-party. The assessment of whether or not force majeure can be invoked due to the impact of the COVID-19 must be made on a case by case basis.
Material change of circumstances (clausula rebus sic stantibus principle)
According to Lithuanian law, the aggrieved party has a right to initiate an amendment of the agreement when performance of the agreement becomes obstructed. In particular, this right may be invoked when the balance of contractual obligations is materially (fundamentally) altered, i.e., either the cost of performance has essentially increased or the value thereof has essentially diminished. However, this amendment may be initiated only if:
- the circumstances occur or become known to the aggrieved party after the conclusion of the agreement
- the circumstances could not reasonably have been foreseen by the aggrieved party at the time of the conclusion of the agreement
- the circumstances are beyond the control of the aggrieved party
- the risk that the circumstances would occur was not assumed by the aggrieved party
If these conditions are met and the parties fail to reach an agreement on the amendment of the contractual obligations within a reasonable time, any party may bring an action in court. The court may either (a) terminate the agreement and establish the date and terms of its termination, or (ii) amend the conditions of the agreement with a view to restoring the balance of the contractual obligations of the parties.
In Lithuanian case law it is emphasized that in order to rely on a change of circumstances, such change should be “fundamental.”
Also, it is important to keep in mind that:
- despite the fact that it becomes difficult for the party to continue performance of its contractual obligations, the party must continue performing the agreement until it is amended or terminated
- request to amend the agreement has to be submitted to the counter-party immediately after a change of the circumstances
the agreement may be amended or terminated only by mutual agreement of the parties or by the court. It is not possible to refuse to perform contractual obligations unilaterally
- Similarly as in cases of force majeure, assessment whether the preventive measures adopted in the light of COVID-19 form a basis to initiate amendment of the agreement on the basis of change of circumstances must be assessed on a case by case basis.
In your jurisdiction, if a party’s performance of its contractual obligations is adversely affected by an external event beyond its control (an “FM Event”) but does not become completely impossible, can that party typically seek relief from compliance with its obligations?
Please see our answers to Question (II) under Section “Material change of circumstances (clausula rebus sic stantibus principle)”.
If yes, what considerations should be borne in mind by such parties, in particular in relation to:
Any notification obligations (Is the affected party typically required to notify any counterparties of the FM Event within a specific time period?)
Yes, as mentioned in our answers to Question (ii), the affected party is required to notify the counter-party about the force majeure circumstances or material change of circumstances. There are no specific terms. The law, however, requires the provision of relevant notice within a reasonable period after occurrence of force majeure circumstances and immediately upon a material change of circumstances.
Any causation requirements (Is the affected party typically required to demonstrate that it would have performed its contractual obligations but for the FM Event?)
No such particular requirement exists. However, the party relying on force majeure circumstances or material change of circumstances must prove that the relevant requirements set under the law and court practice are met. Please see our answers to Question (II) under Section “Material change of circumstances (clausula rebus sic stantibus principle)” for further information.
Any mitigation obligations (Is he affected party typically required to demonstrate that it took specific steps to avoid the impact of the FM Event as far as possible?)
Yes, the affected party should demonstrate that force majeure circumstances or a material change of circumstances or the consequences thereof could not be prevented.
Eva Suduiko, Partner and Artūras Kojala, Partner at COBALT Lithuania