Magazine: Crisis management: Who is responsible for cancelled contracts?

After 11 March 2020 the economic and legal environment changed considerably, therefore many companies decided to review their trade relationships, sometimes cancelling long-term contracts in part or in full. The big question is: which of these cancellations were lawful?

Dr. László Szűcs
lawyer, partner
Réti, Várszegi and Co Law Office
PwC Legal

It is characteristic of the FMCG sector that suppliers and retailers enter into long-term agreements. There are often differences of opinion between the parties and the contents of these qualify as a proposal for modifying the contract, but contracts can only be modified in writing. These proposals are rarely accepted in full. It is important to emphasise these facts in the current situation when the ‘automatic’ termination of contracts and the application of ‘force majeure’-related exemption rules are frequent.

Force majeure vs. not force majeure

After the government announced the emergency situation because of the coronavirus pandemic, contracting parties often claimed the force majeure situation as a reason for cancelling orders or terminating contracts. Hungary’s Civil Code doesn’t contain the term ‘force majeure’, but courts do use it. However, contracts often contain a ‘force majeure’ clause that covers pandemics too, so if a contract is cancelled due to this reason, neither of the parties shall be held liable for the damages arising from the termination or non-performance of the contract. Still, even if there is a ‘force majeure’ clause in the contract, the retailer or the supplier aren’t freed from their contractual obligations automatically if a pandemic emergency situation enters into force. In cases like this, it must be examined which measures or market processes (conditions) render the performance of the contract impossible. The parties are only freed from their contractual obligations if conditions that are unforeseeable at the time of signing the contract justify the termination of the agreement, e.g. it is impossible to import raw material from a foreign country as the borders are closed, order or service is cancelled because the law forbids organising a specific event, etc.

Bases of reference

Having studied the government measures, we can say that none of the decisions forced a commercial unit to close in full, but there were measures that did make the offline operation of certain store types impossible. In the last few months, some companies cited ‘impossibility of performance’ as the reason for cancelling their contracts. This impossibility of performance can be both legal and financial, and it can be used to terminate an agreement automatically – about which the other party must be informed instantly, plus it can be expected to explain what led to the impossibility of performing the contract. Another question is: is it possible for a court to modify certain conditions of a long-term contract due to considerable changes in the economic or regulatory environment? Well, the court isn’t entitled to change the clauses of a contract retroactively. In practice, the agreement can only be modified if the changing of the given condition doesn’t qualify as a risk that must be carried by the party requesting the modification and if the changing of the condition wasn’t predictable when the contract was signed. As a conclusion, we can say that long-term contracts must be settled using the relevant laws and regulations valid before the announcement of the emergency situation, and the parties must find solutions to their contractual problems relying on these norms. //