Kategória: Corona

Revision of bankruptcy law: pre-pack bankruptcy

Posted on by Lisa Fortmüller


As the coronavirus epidemic upends Polish reality, the effective date of the bankruptcy law amendment, introduced on the basis of the act of August 30, 2019, remains unaffected. New laws enter into force today (March 24, 2020). Next to personal bankruptcy, which may now be sought by almost anybody, debt release procedure regarding sole proprietors and trustees’ duties connected with proof-of-debt submissions, pre-pack bankruptcy is also up for a makeover.

Pre-pack bankruptcy – how does it work?

Pre-pack bankruptcy is one of bankruptcy strategies provided by Polish law, which is meant to enable smooth transition of an insolvent business from one owner to another soon after bankruptcy is declared. Thanks to this solution the business carries on, workers keep their jobs and contracts with clients and suppliers remain intact. A successful pre-pack bankruptcy reduces the bankruptcy process and costs involved, as well as ensures fuller satisfaction of creditors. In this type of proceedings, the petition for bankruptcy is filed along with the petition for approval of the sale terms regarding the insolvent company’s assets. Pre-pack bankruptcy may cover the entire enterprise, its business unit or a major portion of its assets. The pre-pack petition also includes a description and an appraiser’s valuation of the assets in question, the proposed price and the name of the prospective buyer (who can be almost anybody).

If the court finds that it would be more beneficial to sell the assets in the course of a pre-pack procedure than a regular bankruptcy procedure, it will approve the sale terms in addition to declaring the debtor bankrupt. Following a pre-pack sale, the whole enterprise may be handed over to the buyer on the same day the court issues its decision.

Key changes introduced by the revision:

  1. The pre-pack bankruptcy petition may be filed at any stage of bankruptcy proceedings (before the amendment, the pre-pack bankruptcy petition and the regular bankruptcy petition were to be filed together);
  2. All the entities involved in bankruptcy proceedings will have standing to file for pre-pack sale; so, the pre-pack bankruptcy petition may now be filed by:
    – a creditor filing for debtor’s bankruptcy,
    – a debtor filing for bankruptcy,
    – a debtor whose bankruptcy was instigated upon a creditor’s petition, especially, in response to the creditor’s petition (also as an alternative petition filed in case the court declares the debtor bankrupt, against the debtor’s will);
  3. The petition for sale terms approval may cover more than one buyer;
  4. The buyer will be required to post a bond equal to 10% of the price. If the sale falls through due to reasons within the buyer’s control, the trustee keeps the bond;
  5. The protection of creditors with security over the debtor’s assets will be expanded – the petitioner will be required to submit a list of securities over the debtor’s assets, with copies of the petition for all identified secured creditors. The court will notify them about pending proceedings and serve them copies of the petition. Secured creditors will have the option to report comments about the petition to the court within 14 days of being served. They should remember to check if the petitioner’s valuation of the asset backing the relevant claim is accurate;
  6. A provisional court supervisor (or a court-imposed administrator) will be appointed as a matter of obligation. Their duties will include examining the debtor’s situation and preparing a report covering information relevant to the sale terms approval petition. The idea behind this change is to ensure that the pre-pack process runs smoothly and is transparent;
  7. The filing of a pre-pack bankruptcy petition will be advertised in the Court and Commercial Gazette (Monitor Sądowy i Gospodarczy). Advertising the petition is meant to reach out to other prospective buyers who may want to take part in the pre-pack bankruptcy procedure as well and protect those involved in the procedure against claims of acting against creditors’ interests by selling at an undervalue and neglecting to see if any other investors may be interested in purchasing the debtor’s assets;
  8. If two or more petitions for sale terms approval are filed, an auction between the prospective buyers will be held in order to select the best offer. Auction, designed to obtain the highest possible price, is surrounded by much debate. Some argue that the pre-pack process, the main advantage of which has been its speed, will be dragged out, especially since 30 days have to pass from advertising the petition for sale terms approval before it can be examined by the court. There are also concerns about the fact that the new law does not provide for a case where two pre-pack petitions cover different subject matter. How is an auction to work and what rules it should follow when one of the petitions concerns the enterprise as a whole, while the other covers only its business unit? Only by putting the new laws into practice can these and many other questions be answered.

The amendment dispelled many doubts surrounding pre-pack bankruptcy and, to some extent, legitimized the judicial practice spanning 4 years (i.e. the appointment of provisional court supervisor). The introduction of a bond, stronger secured creditor rights and increased transparency of the procedure are definitely an improvement. However, some of the new solutions have led to a new set of questions regarding the application of the revised law, with the obligatory auction in the case of two or more petitions being the most controversial of them. In the end, all the issues related to pre-pack bankruptcy will be worked out in practice by legal scholars and courts in the years to come.

Contact us in case of any questions.

Suggestions for performance of public contracts

Posted on by Lisa Fortmüller


The Ministry of Development is working on the so-called “Anti-Crisis Shield.” The draft act amending the Act on Special Solutions Related to Prevention and Combating of COVID-19, Other Infectious Diseases and Crisis Situations Arising from them,” as well as amending selected other acts (the “Draft Bill”), covers (among others) the public procurement law (“PPL”) and agreements executed on its basis.

The final part of this report includes our recommendations for contractors and contracting authorities, which may help complete the ongoing projects despite the current state of epidemic. In our opinion, the Draft Bill does not introduce any revolutionary changes to PPL. It revolves predominantly around flexibility in cooperation of the parties to public contracts in light of the current situation. Identified areas of PPL modifications:
(i) no penalties for contracting authorities on the basis of the Liability for Breach of Public Finance Discipline Act for introduction of changes to public contracts; refraining from the pursuit of claims against contractors, which arise from COVID-19 and its impact on the performance of a given agreement;
(ii) highlighting certain options that have existed thus far, e.g. with respect to amendments to PPL contracts;
(iii) ordering the parties to PPL contracts to exercise due diligence when it comes to notifying each other about the epidemic’s impact on the performance of a given contract.

Basically, the Draft Bill provides some “tips for the future” as regards the course of contractual relations in ongoing projects.

Below you will find a list of changes, along with out comments.

  1. PRECLUSION OF THE APPLICATION OF THE PPL ACT – article 6 section 1 of the Draft Bill
    1.1. The Draft Bill modifies article 6 of the existing act by clarifying that PPL will not apply to orders for services or deliveries which are necessary to prevent COVID-19 if the disease is highly likely to spread in a fast and uncontrollable manner, or if required for the purposes of public health protection. Compared to the current version of the act, the change concerns the scope of orders. The act now says “goods or services” – this phrase will be replaced with “services or deliveries.”
    We consider this change to be positive. First of all, in PPL, “goods” are not the same as “deliveries,” and the former term may limit the list of items that can be ordered outside of the PPL mode in case of an emergency. As a reminder, “deliveries” are defined in PPL as “acquisition of things and other commodities, especially on the basis of an agreement for sale, delivery, rental or leasing (with or without the purchase option), which can additionally include deployment or installation.”
    Example: following the modification, if an order covers the acquisition of reagents for laboratory tests, the contracting authority will be able to purchase them together with necessary installation services outside the PPL mode (as long as this is required for public health protection purposes or prevention of COVID-19).
    1.2. Please note that pursuant to article 46c of the Human Infections and Infectious Diseases Prevention Act (the “Epidemic Act”), “public procurement regulations do not apply to orders for services, deliveries or construction works, issued with the aim of preventing or combating the epidemic within the territory covered by the state of epidemic threat or the state of epidemic.”
    This provision specifies a clearly broader range of orders that are exempt from the application of PPL during the epidemic since it also includes construction works.
  2. BANK GOSPODARSTWA KRAJOWEGO (BGK) – article 6 section 2 of the Draft Bill
    2.1. On a side note, it is worth noting that most of the measures implemented by BGK (Polish national development bank) so far are based on the structure of the fund (managed by BGK) and financial intermediaries (e.g. loan funds) selected by BGK, usually in the public procurement procedure.
    2.2. PPL will not apply to the selection of new financial intermediaries whose task will be to support SMEs affected by the consequences of COVID-19. Nevertheless, the selection procedures have to be open, transparent and non-discriminatory; also, they cannot result in any conflict of interest.
  3. AWARDING CONTRACTS EXCLUDED FROM PPL – article 6 sections 1 and 2 of the Draft Bill
    3.1. When awarding contracts which are exempt on the basis of article 6 sections 1 and 2 of the Draft Bill, contracting authorities and BGK will be obliged:
    3.1.1. to ensure transparency of the procedure and equal treatment of potential contractors, taking into account any circumstances that might have an impact on the procedure;
    3.1.2. not to share any contract-related information that is regarded as a trade secret (as defined in unfair competition combating regulations) if the entity interested in performing the order specifies – before the agreement is executed – that such information cannot be disclosed;
    3.1.3. to publish information about the fact that the contract was awarded or not awarded at its sub-page in the Public Information Bulletin, indicating the name of the other party to the agreement (if the contract was awarded).
    3.2. In this case, the preclusion of PPL does not mean that contracting authorities can give the order to any contractor, e.g. on the basis of the single-source procurement procedure. In our opinion, it will still be required to conduct the procedure (without the application of PPL) in a manner that ensures participation of at least several potential contractors.
    3.3. In case of construction works, the application of similar rules might be disputable. Construction works are governed by the Epidemic Act.
  4. AMENDMENTS TO PUBLIC CONTRACTS
    4.1. The Draft Bill includes:
    4.1.1. the possibility to modify an agreement executed under PPL in terms of deadlines and remuneration;
    4.1.2. preclusion of liability of contracting authorities (incl. those that award utility contracts) for refraining from determination and pursuit of contractor’s financial obligations (e.g. contractual penalties), or for introduction of amendments to agreements – upon the conditions specified in the Draft Bill.

    RE: 4.2.1 – amendments to PPL contracts
    a. Each party to a PPL contract is obliged to notify the other party about the impact of circumstances related to COVID-19 on proper performance of the agreement, if such impact has occurred or might occur (a/the “Notification”). This obligation applies exclusively to circumstances which have or might (in the future) have an influence on the performance of a specific order.
    b. The Notification should be accompanied by a statement (issued by the party itself or third persons) or documents related to the following in particular (please note that the list below is non-exhaustive):
    (i) the number and job positions of employees or individuals performing work on any basis other than employment agreement, who participate or could participate in the order performance, and who:
    – are subject to mandatory hospitalization due to COVID-19 prevention, or to quarantine or epidemiological supervision as a result of contact with individuals whose health has been threatened by COVID-19;
    – are exempt from the obligation to perform work due to the need to personally take care of a child, a child with a significant or moderate degree of disability under the age of 18, or a disabled child – in case a nursery, children’s club, kindergarten, school or another similar facility attended by the child is closed, or due to the fact that care cannot be taken by a nanny or a daily caregiver because of the spread of COVID-19;
    (ii) a decision related to COVID-19 prevention, issued by the Chief Sanitary Inspector or a person acting on his behalf, obliging the contractor to apply specific prevention or control measures;
    (iii) instructions issued by heads of provinces, or decisions issued by the Prime Minister, related to COVID-19 prevention – waste management;
    (iv) suspension of deliveries of products, components or materials, or difficulties in access to equipment or performance of transport services.
    c. The contractor may invoke all the aforesaid circumstances to the extent in which they also apply to the subcontractor or further subcontractor.
    d. Each party to a PPL contract may request additional statements or documents confirming the impact of circumstances related to COVID-19 on proper performance of the agreement.
    e. Having received such information, a party to the agreement shall be obliged to make – on the basis of the statements and documents available to it – an assessment of the impact on agreement performance. It is not allowed to leave the received information without any analysis and response. The deadline to respond is 7 days of receipt of the Notification.
    f. The Draft Bill indicates that the scope of permitted changes includes the amendments specified in article 144 section 1 item 3) of the PPL Act; the Drat Bill allows amendments in three areas:
    (i) changes to the performance date of the agreement or its part, or temporary suspension of performance of the agreement or its part. In case of temporary problems with agreement performance, arising from circumstances related to COVID-19 (e.g. disrupted supply chains or an insufficient number of employees), the parties will be entitled to modify aspects related to completion of the PPL contract. For example, they can suspend it (in total or in party) (i.e. refrain from actions aimed at agreement performance until the reasons for suspension cease to exist), or continue its performance (in total or in part), taking into account the limitations resulting from COVID-19, and extending the deadline for its completion. In our view, this amendment could be accompanied by a request to make relevant modifications to the remuneration, and to stipulate that the contractor is not liable for untimely performance of the contract;
    (ii) changes to the method of delivery or performance of services / construction works. This can make it possible for parties to a PPL contract to adjust the original requirements related to the manner of order performance to limitations arising from COVID-19. Examples: in case there is no access to a specific technology, equipment or materials, it will be possible to perform the contract using another technology, equipment or materials (equivalent to the previous ones). A change to the performance method might be definite or indefinite in time. A change to the manner of performance might also be related to a change in the order of individual stages.
    (iii) changes to the scope of contract and remuneration. A modification of the scope of contract can be temporary in nature, i.e. it can apply to the period over which circumstances related to COVID-19 occur (e.g. in case of deliveries and ongoing or periodic services). It can also be definitive in nature, meaning that the new scope of the agreement (e.g. reduction of the scope of a one-time delivery or service) will be final. Changes to the scope of the contract require corresponding changes to remuneration.
    g. Limitations applicable to changes: a fee rise resulting from each change cannot exceed 50% of the value of the original agreement.
    h. If a PPL contract contains provisions related to contractual penalties or compensation for non-performance or improper performance due to specific circumstances, the Notification should include information about COVID-19’s impact on proper performance, and the impact of amendments to the agreement on the validity of determination and pursuit of such penalties/compensation or their value.
    i. In case of a confirmed impact of the state of epidemic on the performance of a PPL contract, the contracting authority may refrain from determining and pursuing the contractual penalties or compensation, or adjust them accordingly – in case the contractor has contributed to the delay / improper performance of the agreement.

    RE: 4.2.2 – preclusion of liability
    According to the Draft Bill, amendments to the agreement and refraining from determination and pursuit of claims arising from non-performance or improper performance as a result of specific circumstances will not constitute a breach of the public finance discipline. This means that if a contracting authority – acting on the basis of the Draft Bill – decides that non-performance or improper performance of a PPL contact results from COVID-19 and, consequently, refrains from the pursuit of contractual penalties or compensation, or amends the agreement, such contracting authority will not be liable for a violation of the public finance discipline.
    In our opinion, this solution should encourage contracting authorities to use the tools offered by the Draft Bill.

RECOMMENDED ACTIONS – CONTRACTORS:
1. Reviewing executed agreements in terms of deadlines, contractual obligations, schedules and liability (incl. contractual penalties).
2. Examining the current situation in terms of human/technical resources with respect to employees, associates, subcontractors, suppliers and supply chain.
3. Ongoing communication with the contracting authority to determine further steps, share information, and take actions aimed at amending the agreement (incl. with respect to the means/form of such communication).
4. Collecting documents that confirm the epidemic’s impact on agreement performance (such documents and statements can definitely be made in an electronic form).
5. If necessary: (i) preparing a detailed explanation of one’s position, covering all applicable circumstances that may affect proper performance of the agreement; (ii) suggesting the draft version of the amended agreement in order to facilitate communication with the contracting authority.

RECOMMENDED ACTIONS – CONTRACTING AUTHORITIES
1. Contracting authorities that are running a public procurement procedure should consider provisions permitting amendments to the agreement on the basis of the Draft Bill.
2. Contracting authorities that have entered into public contracts should: (i) conduct a detailed analysis of their provisions in terms of the possibility to introduce amendments on the basis of the Draft Bill; (ii) engage in discussions/negotiations with contractors; (iii) prepare its employees for an efficient assessment of Notifications; (iv) inform employees responsible for supervision and coordination of PPL agreements about changes covered by the Draft Bill, especially lack of liability for violation of the public finance discipline.

We are ready to assist you in evaluating your particular situation. Please feel free to contact us any time.

COVID-19: Employment Law – The Romanian state decided to grant support to companies for technical unemployment

Posted on by Ana Pandelea
  1. Per GEO no. 30/2020, during the state of emergency, for the period of suspension of the individual employment agreements initiated by the employers due to technical unemployment caused by the effects produced by COVID-19, the affected employees shall benefit from an indemnity of 75% of the basic salary corresponding to the occupied job, which will be borne from the unemployment insurance budget (but no more than 75% of the medium gross salary provided by Law no. 6/2020 on the state social security budget for 2020).
  2. The employers must meet the following conditions:
    • the employers decide the total or partial discontinuity of their activities based on decisions issued by the competent public authorities as per the applicable legislation, during the state of emergency (in this case, a certificate of emergency situations issued by the Minister of Economy, Energy and Business Environment is required); or
    • the employers reduce their activities due to the effects of COVID-19 epidemic and do not have the financial capacity to pay all the salaries to their employees, the indemnities being covered by the unemployment insurance budget for maximum 75% of the employees having individual employment agreements active at the date of entering into force of GEO no. 30/2020 (in this case, an affidavit given by the employer is required from which must result the decrease of incomes of minimum 25% in comparison to the average incomes afferent to the period January – February 2020 and the lack of financial capacity to pay all employees).
  3. The indemnity is subject to taxes and other mandatory social contributions that shall be calculated, retained and paid from the indemnities received from the unemployment insurance budget.
  4. In order to obtain the amounts representing indemnities, the employers shall submit a series of documents having the form and content provided by the annexes to GEO no. 30/2020.

Does the tour organiser have to pay compensation in the event of package tour cancellations due to the Corona crisis?

Posted on by Jessica Zenz-Spitzweg

According to § 2 (12) of the Austrian Package Travel Act, ‚unavoidable and extraordinary circumstances‘ are circumstances beyond the control of the person invoking them, provided that the consequences of these circumstances could not have been avoided even if all reasonable precautions had been taken and thus apply to the current corona crisis. If travellers have cancelled a package tour free of charge with the organiser due to unavoidable and exceptional circumstances (e.g. a package tour to an area for which a travel warning exists), the organiser must refund all payments made for the package tour in accordance with § 10 (2) of the Austrian Package Travel Act. In principle, the traveller is also entitled to compensation in accordance with § 12 Package Travel Act; however, not due to travel cancellations in connection with the corona crisis: In accordance with § 12 (3) number 3 Package Travel Act, the traveller is not entitled to compensation if the tour operator proves that the lack of conformity with the contract is due to unavoidable and exceptional circumstances.

The planned innovations in company law resulting from the ‚Act to mitigate the consequences of the COVID 19 pandemic‘.

Posted on by Lisa Fortmüller

The protective measures for the avoidance of the further spread of the COVID-19 pandemic do restrict the freedom to hold meetings; this also affects general / shareholder meetings of listed and private companies. This could have a significant negative effect as it will delay resolutions on important matters, such as approving annual accounts, capital measures, appointment of new boards.

The draft legislation for the law to mitigate the impact of the COVID 19 pandemic in civil-, insolvency and criminal procedural law provides for various simplifications for calling and holding such meetings and taking resolutions if such meetings are held still in 2020.

In case of stock corporations (Aktiengesellschaft – AG) and Societas Europaea (SE), for example,

  • the board of directors (Vorstand) can decide on the possibility to cast votes in the general meeting via electronic means even if this is not provided for in the articles of association;
  • the convening period can be reduced to below 21 days; and
  • the board of directors can decide to hold the general meeting within the business year (i.e. after the first 8 months)

The above changes are ‚safeguarded‘ by a limitation of the possibilities of shareholders to challenge resolutions by the general meeting.

In  case of a company with limited liability (GmbH) there will the possibility to take resolutions in writing even if not all shareholders agree are extended (currently this is only possible if all shareholders agree to this). Also, the law will introduce some provisions regarding cooperative (Genossenschaft), associations (Vereine) and foundations (Stiftungen) which will make it easier to hold meetings and pass resolutions and to keep the board of directors in office even though ordinary period of their office might have been terminated automatically due to time limiations.

And last but not least, in case of a merger, the German transformation act requires to submit a balance sheet of the company which transfers its assets to another entity, and that the effective date of such balance sheet is not older than 8 months. This period will be extended to 12 months in order to account for the fact that due to the Coronacrisis, the taking of the shareholder resolutions required for the merger might take longer than 8 months.

Corona crisis special features of lending law from the banks‘ perspective

Posted on by Jessica Zenz-Spitzweg

On the occasion of the drastic restrictions imposed by the corona virus, the German government today passed the law to mitigate the consequences of the COVID-19 pandemic in civil, insolvency and criminal proceedings, which is to be passed by the Bundestag this week.

Changes by law

In addition to other temporary special provisions, the Act also contains a provision on a deferral of payment of at least three months for consumer loan agreements. Customers who are consumers and have concluded a consumer loan agreement with you before 15 March 2020 may suspend interest or repayment of principal amounts due between 1 April 2020 and 30 June 2020 for a period of three months. This is subject to the condition that the borrower suffers a loss of income due to the Corona crisis, which means that ‚it is unreasonable to expect the borrower to perform its payments. After this three-month period has expired, the payment obligation resumes. The deferral of the repayment obligation thus leads to a postponement of the contractual end of the loan term.

What do you need to do?

We recommend that you carefully examine the reasons given by customers to justify a suspension of repayment. In addition, you should set out in writing the agreement with the customer on the deferral of payment and document it in a comprehensible manner, including the customer’s evidence provided.

To whom do these provisions apply?

So far, the above provision only applies to consumer loan agreements. The law also provides for the possibility of extending the regulations to micro enterprises (up to ten employees and annual turnover or annual balance sheet total of less than EUR 2 million each) in the short term. We will keep you informed of current developments in this regard and will be happy to assist you with individual questions.

No termination of loan agreements without compensation

Some resourceful borrowers in the area of real estate loans have already announced that they will extraordinarily terminate their interest-linked loans with reference to the Corona crisis and that they do not intend to pay an early repayment fee for this.
We would be pleased to support you in enforcing your claims against such customers that are not justified.

Rights for debtors to refuse performance in the Corona crisis planned – creditors can take countermeasures

Posted on by Lisa Fortmüller

What is at issue here?

The German government plans to introduce a law temporarily suspending the obligation to file for insolvency and limiting the liability of organs in the event of insolvency caused by the COVID 19 pandemic. The law is to be passed in the short term and provides, among other things, for rights of refusal of performance for consumers and small enterprises (fewer than 10 employees and annual turnover totalling a maximum of EUR 2 million). These are to be given the right to refuse the fulfilment of the obligation to satisfy a claim in connection with a continuing obligation until 30 June 2020 if the obligation cannot be fulfilled as a result of the corona crisis or if the fulfilment leads to a threat to the existence of the debtor. The prerequisite is that the relevant contract was concluded before 8 March 2020. Generally, all agreements with continuing obligations are affected, except for rental, lease, loan and employment contracts.

What is to be done from the creditor’s perspective when the law comes into force?

In practice, especially medium and large enterprises that have entered into continuing obligations with consumers and micro-enterprises before 8 March 2020 must therefore be prepared for defaults. Since the draft law does not differentiate according to which side the debtor is on, both payment defaults and default on performance can threaten companies. From the creditor’s perspective, there are now two options. Either the creditor accepts this fact and trusts that the debtor will fulfil its obligations properly. Or the creditor prefers an active approach. For example, it may make sense to renegotiate contracts that were concluded before 8 March 2020. In this way, one can evade the scope of application of the draft law. Especially as long as the debtor is still well off, he might be accept such renegotiation. After all, the parties are only renegotiating what both parties currently want.

Legal Consequences of the Coronavirus Epidemic for your Contractual Relationships

Posted on by Gabriela Fuchsová

Due to the COVID-19 disease, the government declared a state of emergency in the territory of the Czech Republic on March 12, 2020. In this context, the government also issued a series of crisis measures which are published as government resolutions in the Collection of Laws of the Czech Republic. Prohibitions, restrictions, and orders resulting from the state of emergency and crisis measures can have a major impact on individual parties in terms of meeting their contractual obligations. This will be particularly important in the case of long-term customer-supplier relationships, in projects in construction and energy sectors, or for investment projects.

However, the legal consequences of the current emergency situation may vary from case to case. An ongoing epidemic may be a reason to change the contract price, postpone deadlines, or waive the obligation to pay damages. In some cases, the contract may also be terminated. However, these legal consequences may not occur automatically in all cases. Each contractual relationship needs to be assessed individually.

In general, some of the following legal principles may apply in the context of an ongoing epidemic:

  • force majeure (applicable particularly in situations where the proper performance of the contract is hindered by extraordinary and unforeseeable external circumstances);
  • subsequent impossibility of performance (applicable in particular in situations where the contract objectively cannot be performed); and
  • a substantial change in circumstances (applicable particularly in situations where performance of the contract has become extremely disadvantageous to one of the parties).

A more detailed description of these legal principles and the prerequisites for the application thereof can be found in this newsletter. However, it can already be pointed out that the conditions or consequences of force majeure, a subsequent impossibility of performance, or a substantial change in circumstances may (and generally will be, in practice) be regulated individually in the relevant contracts. Therefore, when examining the legal implications of the COVID-19 outbreak to your supplier-customer relationships, it is not enough to only apply statutory rules, but primarily, it is vital to search for relevant arrangements in your contractual documentation.

1) Force Majeure

What is force majeure? There is no legal definition of force majeure in Czech law. Nevertheless, this expression is used in the Civil Code and can also be found in other Czech statutes. Generally, force majeure is considered to be an extraordinary, unforeseeable and insurmountable obstacle that arises independently of the will of the person concerned. In addition to the concept of force majeure, the Czech Civil Code also uses the words „unpredictable circumstance“ and „unpredictable and insurmountable cause / obstacle“. In our opinion, it is possible that in a number of legal relationships, the current epidemic of COVID-19 could be considered an event of force majeure. In this context, for the sake of completeness, we would like to point out that force majeure will not apply if a contract has already been concluded at the time of the outbreak or with the knowledge of the ongoing epidemic. In such a situation, it will no longer be possible to regard the COVID-19 epidemic as an unforeseeable event.

What is the result of force majeure? If a force majeure event occurs, it may bring about a number of different legal consequences, which usually take the form of (i) release from a specific obligation, (ii) change to the obligation or (iii) extension of deadlines. According to the Czech legislation, it may include, for example, the following consequences:

  • the obliged party may be released from the obligation to compensate for any damages incurred by the other party;
  • the limitation period may be suspended;
  • a court may decide to increase the price of the work in question if it was determined according to a budget, or to cancel the contract for work in which price was negotiated according to a budget;
  • an entrepreneur may change some of the information in a contract concluded with a consumer which it communicated to the consumer prior to the entering into the contract;
  • an eligible party to a contract may withdraw from the contract if it had the right to choose from several variants of the performance of such a contract, but the possibility of such a choice was frustrated as a result of a force majeure event;
  • the deadlines for submitting a promissory note (bill of exchange) may be extended, etc.

At the same time, it should be noted that a force majeure event does not automatically lead to a release from the obligation to pay liquidated damages (a contractual penalty) to the other party unless such an exemption is expressly agreed in the contract. Indeed, liability for liquidated damages (a contractual penalty) generally (unless expressly agreed otherwise) arises absolutely – i.e. irrespective of fault.

The contractual arrangements for force majeure events are essential. It is customary for the parties to negotiate force majeure clauses in their contracts which govern (i) what specific events are considered to be force majeure events under the given contract and/or (ii) what specific consequences the force majeure has regarding the rights and obligations of the parties. Such individual arrangements will generally take precedence over statutory regulation of force majeure. Each contract must therefore be subject to an individual legal analysis. In this context, please note that some contract templates (e.g. FIDIC) may contain specific clauses governing force majeure events.

Beware of any international element. In the case of contracts with an international element, it is first necessary to consider the law applicable to the contract in question. This is because force majeure legislation may differ substantially from one legal system to another. In addition, it should be noted that some international treaties (e.g. the Vienna Convention on the International Sale of Goods – CISG) may contain their own rules for force majeure events.

How to proceed in case of a force majeure event? As mentioned above, the specific procedure may depend on the contractual regulation of force majeure. In general, however, the following steps may be recommended to a party to a contract affected by a force majeure event:

  • notify the other party without delay that a force majeure event has occurred;
  • carry out a legal analysis of the relevant contract to determine what your course of action should be;
  • continually assess the impact of force majeure on your obligations and provide evidence to help you demonstrate the impact of the force majeure event on your obligations;
  • try to minimize the consequences of the force majeure event.

2) Subsequent Impossibility of Performance

What is the subsequent impossibility of performance? Under the expression “impossibility of performance”, the Czech Civil Code regulates a situation in which the payment of a certain debt or complying with an obligation becomes objectively impossible. In this context, the Civil Code states that performance is impossible if it cannot objectively be fulfilled, not even (i) under difficult conditions, (ii) at a higher cost, (iii) with the assistance of another person, or (iv) after a specified period elapses.

What is the consequence of subsequent impossibility of performance? In the event that a particular performance becomes objectively impossible, the relevant obligation to provide such performance ceases to exist by operation of law. According to the Civil Code, the obligation can also completely cease to exist even if the performance is impossible only partially, but due to the nature of the obligation or the purpose of the contract (which was known to the contracting parties at the date of the contract), the performance of the remaining portion of the obligation is pointless for the entitled party (the creditor).

Contractual clauses on subsequent impossibility of performance. The consequence that an obligation automatically ceases to exist if its fulfillment is objectively impossible cannot be excluded by contract. However, the contracting parties may agree to a wider range of situations when the obligation ceases to exist (e.g. where performance is objectively possible, but only at significantly higher costs). Likewise, the parties may contractually adjust the scope of the liability for damages in the event of subsequent impossibility of performance. Each contract must therefore be subject to an individual legal analysis.

Beware of any international element. In the case of contracts with an international element, it is first necessary to consider the law applicable to the contract in question. Indeed, the rules governing the subsequent impossibility of performance (and, where appropriate, the related compensation) may differ considerably from one legal system to another.

What to do in case of subsequent impossibility of performance? As mentioned above, the specific steps to take in the event of subsequent impossibility of performance may to some extent be regulated by the contract. In general, however, the party the performance by which has subsequently become impossible should immediately notify the same to the other party. In this context, we would like to point out that under the Czech Civil Code, a contracting party which has not notified the impossibility of performance in time is obliged to compensate the other party for any damage caused by such late notification of the subsequent impossibility of performance.

For completeness, we would like to mention that subsequent impossibility of performance may in some cases be caused by governmental measures in crisis or by the announcement of the state of emergency. In such a case, compensation for damages against the state under the Crisis Act can be requested if the statutory conditions are met. You can find more information on this topic in a newsletter of our law firm dealing with this issue.

3) Change of Circumstances

What is a substantial change in circumstances? The legal regulation of substantial change in circumstances primarily regulates a disparity in the rights and obligations of the parties that occurs as a result of a change in external circumstances. Typically, it is a change of circumstances caused by war, a coup, revolution, embargo, boycott or prohibition of certain goods. However, this legislation may be also applied to changes in circumstances caused by epidemics and quarantines.

Legal regulation of substantial change in circumstances relates in particular to longer-term liabilities and facilitates. It makes easier the path to the continuation thereof despite unexpected fluctuations in important external factors. In this context, it should be noted that not every change in circumstances is a reason for a change of the obligation (typically to a contract). The mere fact that, as a result of objective external causes, the performance of the contract becomes less favorable does not alter the continuation of the obligation to perform the contract, even under these difficult conditions. From the point of view of legal implications, only a change in circumstances that brings surprising (extreme) impacts on the partiesʼ position in the contractual relationship (one that does not correspond to any reasonable review and assessment of risks) is substantial.

The Czech Civil Code lays down the following defining features of a substantial change in circumstances that must be met simultaneously: (i) the existence of a change of circumstances; (ii) the unpredictability of the change; (iii) the uncontrollability of the change; (iv) absence of acceptance of a future risk of a change of circumstances; (v) the occurrence of a particularly gross disproportion in the rights and obligations; and (vi) causal link between the change and the emergence of a particularly gross disproportion.

What is the consequence of a substantial change in circumstances? If all the above statutory prerequisites are met, then the affected party has:

  1. primarily the right to pursue a renewal of the contract negotiation (thus, the law urges the parties to reopen the contract, to consider changes that have occurred and to restore the balance that the original distribution of rights and obligations in their original arrangement was aimed at); and
  2. in the event of unsuccessful negotiations of the parties to restore balance, the right to ask the court to modify the content of the obligation by its own decision or to cancel the obligation as of the date and under the conditions specified in the decision.

Contractual clauses on substantial change in circumstances. In the basic statutory regime, the legislation is based on the principle that each contract is concluded subject to a change in circumstances. However, the parties may deviate from this legal regime in their contract. The parties may assume the risk of a change in circumstances and, as a result, bear the costs resulting therefrom. This may include assuming all risks or only some of the risks (e.g. all currency risks, technical, legal, etc.) or risks specifically laid down by the parties. Each contract must therefore be subject to an individual legal analysis of whether and to what extent the risk of change of circumstances has been assumed by either party.

Beware of any international element. In the case of contracts with an international element, it is first necessary to consider the law applicable to the contract in question. The rules governing substantial change in circumstances may, in principle, differ from one legal system to another.

What steps to take in case of a substantial change in circumstances? The party concerned (i) must exercise its right to resume contract negotiations vis-à-vis the other party, (ii) shall state the reasons on which its right is based, and (iii) prove the facts that justify its claim. The said right should be exercised within a reasonable period of time, which – as the default – the Civil Code regulates to be no later than two months after the party must have ascertained the change in circumstances. The consequence of this deadline elapsing in vain is that the party concerned loses the right to demand the subsequent restoration of the contractual balance by a court.

Take steps to prevent worker exposure to COVID-19

Posted on by Stefano Balzola

One of the main concern of employers is, obviously, the measures required for the protection of the health and safety at work, regulated in Italy by the Legislative Decree 81/2008.

In fact, although the risk for workers to contract the COVID-19 does not directly derive from the type of job performed and is not exclusively related to the healthiness of the workplace – as the contagion can occur in the same way both in the workplace and outside of it – it is necessary for the employer, depending on the company’s specific structure and in accordance with the company’s safety delegates, to provide precise operational indications in line with the principles of precaution and proportionality aimed at increasing the effectiveness of the containment measures adopted in order to defeat the COVID-19 in non-healthcare work environments.

In this scenario, it has intervened the Prime Minister’s Decree dated 11 March 2020 which, in addition to the suspension of the non-productive activities, provides that the operating employers shall: (i) adopt anti-infection safety procedures and, where it is not possible to respect the interpersonal distance (1 meter, at least) as the main containment measure, give to the employees individual protection instruments (e.g. masks, goggles, gloves, etc.); and (ii) promote and carry out operations of workplaces sanitization, by also using social safety nets described above.

In this respect, on Saturday 14 march 2020, the Italian Government and the representatives of Trade Unions entered into a memorandum of understanding containing the measures to which the employers shall comply with in order to continue their working production activities by ensuring the maximum safety and protection to the involved workers among which, inter alia, the workers’ access controls to the workspaces (e.g. body temperature monitoring), cleaning and sanitization of work environments, contacts’ reduction with external suppliers, hands hygiene, closure of non-necessary business units and promotion of the smart working modalities, restricted access to common areas (e.g. canteens, locker rooms, etc.), temporary stop to business trips and meetings, different scheduled entry/exit times, etc.

Furthermore, the Prime Minister Decree dated 22 March 2020 has suspended all industrial production activities and commercial activities, except essential ones (indicated in the attachment to the decree), and provides that the activities not suspended shall comply with the above mentioned memorandum of understanding dated 14 march 2020.

Given the above, it would seem to be implicit the obligation for companies to carry out a new biological risk assessment (with the technical support of the persons in charge such as e.g. Head of the Prevention and Protection Service (Responsabile del Servizio Prevenzione e Protezione – RSPP), competent doctor and workers‘ safety representative (Responsabile dei lavoratori per la sicurezza – RLS), etc.), with consequent updating of the Risk Assessment Document (Documento di Valutazione dei Rischi – DVR) with the indication of all the safety measures implemented by the employer in order to prevent the risk of contagion.

In any case, it would seem necessary at least providing the workers in force with an information notice  containing the information on the biological risk and on the hygiene measures, the relevant instructions for the use of Individual Safety Devices provided (such as e.g. masks, goggles, gloves, etc.) and the methods for reporting to the competent authorities any suspicious cases of COVID-19.

In addition, we deem useful to point out that, hypothetically, if a contagion in the workplace would occur due to a violation of the employer’s obligations from which result the worker’s death or illness (lasting more than 40 days), the employer could be considered liable also from a criminal point of view.

Finally, for companies that have adopted an Organizational Model pursuant to Legislative Decree no. 231/2001, it is advisable to support an information of reporting to the Supervisory Body (Organismo di Vigilanza – OdV) in relation to: (i) the prevention and protection measures; and (ii) the adoption of specific prevention measures deemed appropriate. In such a way, the Supervisory Body could assess whether implement or modify the company’s Organizational Model.

Human resources management during the Coronavirus outbreak

Posted on by Stefano Balzola

During these days, one of the major business issues is the management of the human resources in order to balance the safeguard of the employees’ health and public health with the organizational/production needs.

Smart working

The Prime Minister’s Decree dated 9 March 2020 extend to the entire national territory the restriction of the movement of individuals “without prejudice to the work-related reasons motivated by proven needs or other situations of need or for health reasons”.

In this respect, workers seem to be free to move by completing and using a self-certification available at the following link https://www.interno.gov.it/sites/default/files/allegati/modulo-autodichiarazione-17.3.2020.pdf.

However, the Prime Minister’s Decree dated 11 March 2020 has suspend some activities (retails, restaurants, hairdressers, etc.) and provides that “with regard to the production activities and professional activities it is recommended that: 1) maximum implementation by companies of the smart working mode for activities that can be performed at home or in remote”.

Moreover, the Prime Minister Decree dated 22 March 2020 has suspended all industrial production activities and commercial activities, except essential ones (indicated in the attachment to the decree), and provides that the activities suspended „can in any case continue if organized with remote or smart working„.

Therefore, with the exception of activities not suspended that requiring the physical presence of the employees, the main instrument to be used is the so-called smart working, which – in our legal system – has been formally introduced by Articles 18-23 of Law 22 May 2017, no. 81 (Law no. 81/2017). In order to implement such a working modality, the Law no. 81/2017 provides that the employer must enter into an agreement with the worker (or with the Trade Unions) and make an arrangement on the minimum smart working requirements, such as e.g. duration, withdrawal, timing, modalities, controls, etc.).

As stated above, the Prime Minister’s Decree of 8 March 2020 – which provisions had been extended to the entire national territory by Prime Minister’s Decree dated 9 March 2020 – establishes that „the smart working mode governed by Articles 18 to 23 of Law No. 81 of 22 May 2017, may be applied, for the duration of the state of emergency […] by employers to all employment relationships, in compliance with the principles contained into the aforementioned provisions, even in lack of the individual agreements provided for therein; the [health & safety] obligations under Article 22 of Law no. 81 of 22 May 2017 are electronically fulfilled, also by using the documentation made available on the website of the National Institute for Occupational Accident Insurance [(INAIL)]”.

In few words, this provision allows the simplified smart working activation without prior agreement with the worker (or Trade Unions) and consequently without his consent, with the following obligation for the employees to comply to the employers’ directives.

Therefore, the employer who intends to implement smart working shall provide:

  1. the communication to the workers, fulfilling the health and safety information obligations by sending electronically to them (also via e-mail) the related information on health and safety during the smart working period, according to the ones published on the INAIL website (https://www.inail.it/cs/internet/comunicazione/avvisi-e-scadenze/avviso-coronavirus-informativa.html);
  2. the telematics communication according to the procedure indicated at the following link https://servizi.lavoro.gov.it/ModalitaSemplificataComunicazioneSmartWorking/, uploading – instead of the agreement with the worker – a self-certification that the smart working refers to a person belonging to a risk areas.

Despite the provisions of the Prime Ministry Decree 8 March 2020 exempt the employers from the obligation to enter into an agreement with the employees, it is still required to fulfill the other provisions contained into Articles 18-23 of Law no. 81 of 22 May 2017: therefore, the employers must provide to the employees a communication containing the indication of the working hours, the right to disconnection, the operating procedures, the IT tools to be used and the employer’s control powers.

Without prejudice to the foregoing, in order to be able to quickly implement this working modality, in our opinion it should be appropriate, in any case, for a better protection of both the employers and the employees, to proceed – as soon as possible – with the drafting of the above mentioned agreement.

Holidays and paid leave

The economic situation may, on the other hand, give rise to the need for the employer not to use all the available human resources. In this respect, the Prime Minister’s Decree dated 8 March 2020 merely states that “where possible, employers are recommended to encourage the use of periods of paid leave or holidays” and the Prime Ministerial Decree dated 11 March 2020 that „holidays and paid leave as well as other collective instruments shall be encouraged„.

In relation to the accrued holidays, the employer can freely determine the period during which they should be used by the employee, considering the interests of the latter. In any case, please note that a forced allocation of them with short notice could be challenged by the employees. On the other hand, accrued and unused paid leave cannot be allocated unilaterally (under any circumstance) to the employees, but a mutual agreement could be reached by the parties.

Income and labour market support instruments

In case of deeper crisis, income and labour market support instruments such as ordinary redundancy funds and solidarity funds can be used.

On this point, it should be highlighted that the Law Decree 17 March 2020, no. 18, introduced extraordinary “Measures to reinforce the National Health System and economic support for families, workers and business related to the epidemiological COVID-19 emergency” adopting, inter alia, some economic measures in the labour field, as by way of example:

  • extension of Cassa Integrazione Guadagni Ordinaria (Ordinary Wages Guarantee Fund) and Assegno Ordinario (ordinary allowance): the eligible employers, who suspended or reduced their business activities during the year 2020 due to the epidemiological COVID-19 emergency, can access to the Cassa Integrazione Guadagni Ordinaria (Ordinary Wages Guarantee Fund) or to the Assegno Ordinario (ordinary allowance) measures, by indicating in the request cause “COVID-19 emergency”, for a period starting from February 23, 2020 for a maximum duration of 9 (nine) weeks and, in any case, within the term of August 2020 (art. 19);
  • extension to every employer of Cassa Integrazione Guadagni in deroga (Layoff Wages Guarantee Fund): all of the employers, who do not meet the requirements for accessing to the Cassa Integrazione Guadagni Ordinaria (Ordinary Wages Guarantee Fund) or to the Assegno Ordinario (ordinary allowance) measures, can access to the Cassa Integrazione Guadagni in deroga (Layoff Wages Guarantee Fund), subject to the recognition by the Regions and Autonomous Provinces of the state of emergency and according to an agreement entered into with the most comparative Trade Unions at national level (which can also be concluded in an electronic way), for the duration of the suspension of the employment relationship and, in any case, for a maximum period not exceeding 9 (nine) weeks (art. 22).

In addition, the above mentioned Law Decree provides also for some additional benefits and allowances for the professionals, VAT holders, tourism and agricultural sectors and introduces some extraordinary measures on parental leave, babysitting, etc.

Last, it should be noted that, for a period of 60 (sixty) days, all of the collective dismissals and the ones due to objective economic reasons (Giustificato Motivo Oggettivo) are not allowed and all the pending collective proceedings started after February 23, 2020 are suspended for the same period of time (art. 46). Therefore, only disciplinary dismissals for just cause (Giusta Causa) or for justified subjective reasons (Giustificato Motivo Soggettivo) seem to be allowed.