Date: 05/06/2020

Impact of Covid-19 on changed circumstances and acts of God in contract law

Wolf Theiss lawyers hold online briefing for AmCham members on how changed circumstances and acts of God affect contractual liability during the Covid-19 pandemic.

AmCham hosted lawyers Nataša Lalović Marić, Marko Tešanović, and Katarina Stojaković of the Wolf Theiss law office, who spoke with officers of member companies about how changed circumstances and acts of God affect lease and construction contracts, scope of Covid-19 clauses in contracts, impact of the pandemic on loan agreements and mergers and acquisitions, changes to due diligence procedures, and how the outbreak has affected negotiating and signing contracts.

The pandemic has had implications for commercial contracts, particularly impacting due diligence tasks and transfer agreements concerning stock and equity shares. Use of state aid, issuance of debt securities, corporate governance, and threat of insolvency were all issues that legal due diligence had to take into account. Warranties and representations must cover a range of characteristics of the target company that may have been affected by the outbreak between the time they were made and the moment the transaction is closed. Material adverse changes (MAC) clauses, it was said, served a purpose highly similar to that of changed circumstances provisions, but the question remained of whether Covid-19 could be seen as a MAC. The panellists opined that the answer would largely be determined by the wording of the MAC clauses in each particular case and the position taken by the court in any dispute.

The webinar heard that commercial lease contracts, which generally lacked act of God clauses, could be grouped into three categories depending on how affected they have been by the state of emergency: 1) contracts where the lessee was completely prohibited from using the leased item; 2) those where the lessee were mainly prevented from trading; and 3) contracts where the use of the leased item was subject to significant restrictions. The issue of changed circumstances and non-performance was much more significant in construction contracts than in lease agreements, the legal experts said. The FIDIC suite of contracts contains a definition of force majeure and clauses that govern its consequences, but also allows extension of time due to unforeseen unavailability of manpower or goods due to government-mandated measures.

Covid-19 has affected loan agreements insofar as the Central Bank declared a 90-day standstill on bank loan repayments. The standstill also directly extends to loan agreements that stipulate the application of foreign law. Finally, the panellists answered questions on loan disbursement during the standstill, which has also proven to be a contentious issue.

Click here to watch the entire event