The restrictions and other emergency measures enacted in Georgia and worldwide, as well as the legal, economic and social consequences of the COVID-19 outbreak, can affect commercial contracts in almost every industry. The impact of these consequences may lead to permanent or temporary impossibility to perform a contract, or may make it extremely onerous for a party to comply with its contractual obligations.

Whether a party can be excused from its contractual obligation or liability arising for non-performance (excuse of performance for force majeure circumstances) will depend on the underlying circumstances of each case, the nature of the obligation in question, the provisions of the contract and the law applicable to it. The analysis in this note focuses on contracts governed by Georgian law. 

Contracts often include a clause in the agreement – a force majeure clause - which offers certain relief to the parties in case of impossibility or impracticability of performance due to events beyond the parties’ control. Therefore, the first step is to review if and how the contract regulates force majeure events. 

Does your contract include a force-majeure clause? 

A force majeure clause is a common clause in contracts relieving the party from liability and temporarily or permanently excusing performance when certain events or circumstances (i.e. force-majeure events) beyond their control arise, making performance significantly burdensome, illegal or impossible.

Determining whether the consequences of the COVID-19 outbreak would qualify as force majeure events depend on the wording of the force majeure clause itself. The clause will often be worded to include a specific list of events triggering force majeure. Parties may not have specifically included “pandemic” or “epidemic” in the list, but the triggering events such as, for example, “government action”, “national emergency”, “disease”, “quarantines”, “disruption of supply chain”, “disruption of labor” or similar, if included in the list, may be implicated by the current events. More generic references to causes beyond the reasonable control of the parties or “Acts of God” would also be relevant. 

It is important to analyze carefully which triggering events are listed in a particular force majeure clause, and whether the specific difficulties and interruptions your business is facing in fact were caused by any of the force majeure events, or general conditions (“events outside the control of the parties”) listed in the clause. The party invoking force majeure must make sure that the force majeure circumstances it claims to have occurred are covered by the force majeure clause (e.g., “quarantine,” or “circumstances outside the parties’ control”). In addition, the party invoking force majeure must comply with any specific requirements that are included in the clause, such as e.g., notification of the force majeure event and its consequences to the other party, provision of evidence of the occurrence of the event, and an explanation of why it has made performance impossible. Failure to comply with these kinds of specific requirements regarding notice, evidence and explanation may potentially completely deprive the non-performing party – the party invoking force majeure - from the benefit of a legal excuse for non-performance. 

What if the force majeure clause does not cover consequences of the COVID-19 epidemic or there is no force majeure clause in the contract?

If the force majeure clause in the contract is too narrow to encompass the pandemic and its consequences (which is why force majeure clauses should always be written to include generally any event outside the parties control), or the contract includes no force majeure clause at all, the contracting parties would normally still be able to seek excuse for non-performance based on general provisions of Georgian law. The available remedies under Georgian law vary depending on whether the performance of the contract is either (i) permanently or temporarily impossible, or (ii) extremely onerous due to the legal, economic or social consequences of the COVID-19 outbreak. The non-performing party’s ability to invoke such background provisions of Georgian law may be more difficult if the contract contains a narrow force majeure clause that clearly doesn’t cover the pandemic and its consequences, because the other party may argue that the parties contracted to exclude circumstances not covered by the force majeure clause (i.e., the pandemic). In contrast, if the contract lacks a force majeure clause entirely, or it has a force majeure clause but the clause is ambiguous on the subject of a pandemic and its consequences, then the non-performing party claiming force majeure has a better argument that the parties had no agreement on the issue (of force majeure generally, or the pandemic issue specifically), and therefore it is appropriate to refer to the background Georgian law to “fill the gap” in the contract.

Excuse for non-performance due to impossibility 

Normally, the failure of a party to perform an obligation under a contract constitutes a breach of contract, entitling the other party to enforce contractual or statuary remedies against the non-performing party (e.g. claim damages, contractually fixed penalties, early termination of the contract, restitution, etc.). However, a non-performing party would normally not be considered in breach and be liable for damages if performance has become impossible due to events or circumstances beyond the controlof the party . This provision of Georgian law can apply even if the contract has no force majeure clause, or the force majeure clause does not clearly include a pandemic and its consequences.

Whether the legal and economic consequences of the COVID-19 outbreak give a party a valid excuse for non-performance of a contractual obligation depends on the factual circumstances of the case as well as the language of the contract, but the two key questions that you will need to address are:

1. Have the consequences of the Coronavirus pandemic made a party’s performance of an obligation objectively impossible?

In order for a party to rely on an impossibility defense, it must demonstrate that performance has become not merely difficult or unexpectedly costly, but objectively impossible. Further: there must be a causal link between the “event” and the inability of the party to perform the obligation in question. Whether the Coronavirus pandemic made a particular party’s performance objectively impossible requires a fact-based analysis. For example, where the performance is closely connected to an activity that has been expressly prohibited by the emergency measures taken in Georgia, it should be possible to establish and prove legal impossibility as well as the direct causal connection between the event (the legal prohibition) and the performance (an activity banned by the legal prohibition). 

2. Was the occurrence of the events giving rise to impossibility objectively foreseeable (predictable) and avoidable? 

A party will not be able to rely on the impossibility defense if at the time of execution of the contract the circumstances giving rise to such impossibility were foreseen or reasonably foreseeable. If the contract were signed before the first episodes of COVID-19 in China, or even in Europe, then depending on the circumstances of each case, the pandemic and its legal consequences in Georgia would more likely be considered unforeseeable. On the other hand, if the contract were entered into when COVID-19 was already spreading in other countries and governments were taking quarantine and similar emergency actions, then it is unlikely that a party could successfully claim that such government measures in Georgia (making its performance impossible) was unforeseeable. In this case, the party would not be able to rely on the impossibility defense. Another important factor that a party invoking impossibility defense must also address is whether it is reasonably possible for the party to avoid or mitigate the harmful effects of the circumstances on its ability to perform a contractual obligation.

Legal consequences of invoking impossibility defense 

Under Georgian law, when a party invokes the impossibility defense as an excuse for non-performance, the obligation of the party to perform is not normally extinguished, but rather its performance is temporarily suspended or delayed until the circumstances giving rise to impossibility cease to exist. This is analogous to contractual force majeure doctrines. The non-performing party will be exempted from any liability for damages linked to the delay or suspension of performance. The creditor of the obligation will nevertheless be entitled to terminate the contract if it has no material interest in receiving the delayed performance. 

In cases when performance of a contract has become permanently (definitively) impossible, the contract would normally be deemed terminated without any liability of the non-performing party to pay damages for early termination. 

If the contract is terminated, and the counterparty has already fulfilled its obligations to the party that claimed impossibility, then the counter-party is normally entitled to restitution of its performance or a refund of prepaid amounts from the non-performing party that terminated the agreement.

What if the performance has become “extremely onerous”

The restrictive measures of the Georgian government may not necessarily render the performance of existing contracts impossible, but extremely onerous for one or all of the parties. 

The provisions of the Georgian Civil Code allow the amendment or justified repudiation of contracts, if the circumstances that were the grounds for the conclusion of a contract have evidently changed after the conclusion of the contract, and the parties, had they been able to foresee such changes at the time they executed the contract, would not have executed it or would have executed it with different contents . Adaptation (amendment) of the contract usually takes place when, taking into account individual circumstances, one of the parties to the contract may not be reasonably expected to strictly follow the contract without alteration.

The party affected by the changed circumstances may claim for “renegotiation” of the contract if the following conditions are met: 

• the changed circumstances rendered performance of the obligation extremely onerous;
• the circumstances evidently changed after the contract has been concluded;
• the affected party could not have foreseen the changed circumstances at the moment of concluding the contract; and
• the onerousness of the contract performance (to the affected party) is caused precisely by the changed circumstances.

In performing this analysis, the parties or judge must assess whether the contract itself already regulates the risk of changing circumstances (so that the parties or the judge should look to the contract itself for resolution of the problem, rather than intervening to change its terms and conditions). Many contracts contain a clause allowing termination or adjustment of obligations in the event of a “material adverse change” or a “material adverse effect”. Therefore, the opportunity to claim adaptation of a contract for changed circumstances due to the COVID-19 situation must be assessed on a case-by-case basis, according to the language of the contract and the factual circumstances.

The law requires that the parties themselves first try to adapt the contract to the changed circumstances. If such adaptation is impossible or the parties cannot agree on an amendment to the contract, then the party who claims its interest has been harmed by the changed circumstances may repudiate the contract. Such a repudiation always runs the risk that the other party may prove in court that the repudiation was not justified (e.g., because the requirements for adaptation of the contract set forth above were not met). The procedure for repudiation and its legal consequences are regulated under the Georgian Civil Code and/or the contract itself. 

A party can invoke economic cost as a ground for claiming amendment (adaptation) of the contract, but cannot use it as a basis for an “impossibility” defense. Under the current circumstances of the COVID -19 pandemic, adaptation of the contract may remain an adequate solution if, after the end of the state of emergency, the performance of the contract that one may have thought simply suspended, becomes too costly due to, for example, the new economic situation subsequent to the pandemic. 

The content of this alert is purely informative and does not replace the necessary legal advice for each specific and particular case. In this sense, we are at the full disposal of our clients to assist them during this period of enormous legal uncertainty and constant legislative developments, regarding any legal issue that may affect their companies and businesses.