The COVID-19 debate: Are contracting parties released from liability?
This Article shall contrast the different opinions that are being put forward in relation to contractual obligations in light of the COVID-19 outbreak; namely the arguments favouring either the strict interpretation of the responsibility of the parties’ to a contract to perform their obligations towards one another, versus the debate advocating for the application of the legal Latin maxim ‘ad impossibilia nemo tenetur’, meaning that nobody should be held to do the impossible. This Article shall also delve into whether the current pandemic should trigger force majeure clauses in contracts, and discuss whether the current provisions in Maltese law address the matter at hand.
People enter into contracts on a daily basis regarding the most mundane matters and although one presumes that they would have considered the consequences of their actions and what could go wrong, nobody would have ever anticipated the global spread of COVID-19 and its ability to disrupt everyday life and wreak havoc on their plans and aspirations. Prior to the global outbreak of the COVID-19 pandemic, many had pre-booked holidays or bought tickets to upcoming events, and some had taken important decisions such as contracting bank loans, organising weddings, buying property, or even entering into ambitious commercial agreements – yet neither the parties nor the contracts themselves contemplate the spread of COVID-19 and its vicious effect on ordinary life. Be that as it may, the entire world ground to a halt in a heartbeat - with the coronavirus pandemic reaching our shores on the 7th of March 2020, it being the date of the first reported case in Malta.
The outbreak of the pandemic has meant that people are facing the prospect of either being unable to perform their legal obligations or of having to consider what action to take once a contract cannot be executed.
Many individuals and businesses are totally insecure due to the current situation and indeed, everyday life has come to standstill, leading many to predict that would not be able to execute contracts even though they are still lawfully binding. The argument is being made of the impossibility to fulfil those obligations undertaken in terms of the contracts, and it is being argued that the parties should not be obliged to do what is impossible in the current scenario which was totally unforeseeable. Conversely, the counterparty in whose favour such an obligation is contracted may insist that, regardless of the current scenario, the obligation to perform an obligation is still valid and executable, and that they are not at fault nor to blame and should not suffer the consequences. In legal terms, we are witnessing a clash between the maxims of ‘Pacta Sunt Servanda’ and ‘Ad Impossibilia Nemo Tenetur’. Furthermore, it is also anticipated that contracting parties will also be relying on ‘Force Majeure’ clauses included in contracts in defence of their failure to perform their obligations. Hence the purpose of this article.
COVID-19 vs. Maltese Law: Exemption from or Liability for non-performance?
It must be stressed, that the current global circumstances are unprecedented, and thus there can be no clear-cut understanding or interpretation of the law in this regard. Every agreement and commitment must be dealt with on a case-by-case basis, and the appraisal of the facts, drafting of the clauses to a contract and interpretation of local and foreign jurisprudence reflecting the law in force, would ultimately be the determining factor.
Maltese law requires four essential conditions for the validity of a contract: the capacity of the parties to contract, the consent of the parties who are bound, a lawful consideration, and a certain thing which constitutes the subject matter of the contract. Therefore, anyone seeking to invalidate or no liability for non-performance a contractual undertaking must base his or her argument on the lack of one or more of these requisites.
Furthermore, and in a somewhat consistent attempt at trying to justify an exemption from liability, one can argue that this COVID-19 pandemic is to be considered a fortuitous event or an irresistible force – and thus triggering the Force Majeure exemption. In this respect, reference must be made to article 1134 of the Civil Code which provides that the person who is liable to perform an obligation “shall not be liable for damages if he was prevented from giving or doing the thing he undertook to give or to do, or he did the thing he was forbidden to do, in consequence of an irresistible force or a fortuitous event”.
At the other end of the spectrum, one must make reference to the maxim Pacta Sunt Servanda principle which is stated in article 992(1) of the Civil Code which reads that: “Contracts legally entered into shall have the force of law for contracting parties”. This principle embodies the strict interpretation that the parties are free to negotiate and conclude a contract, and therefore must observe and execute their respective obligations. This argument therefore supports the idea that a party to a contract is limited only to what was agreed upon, and cannot find a way out of the contractual obligations entered into – regardless of the current circumstances.
The Thought-provoking Doctrine: ‘No one is bound to perform an impossibility’
The doctrine advocating for Ad Impossibilia Nemo Tenetur, has its origin in Roman law and it has found its way into our Civil Code as explained in the preceding section. In fact, such principle has been repetitively invoked by our Courts. Even if the Courts have not yet interpreted this article of the law in light of the COVID-19 outbreak, it would be prudent to analyse the reasoning adopted in case law throughout the years where such pleas were accepted, even if under different circumstances.
In 2015, the Court of Appeal had occasion to examine this plea in a judgment in the names ‘Id-Dipartiment tal-Kuntratti et v. Anthony Borg’. The case consisted of a claim by the Department of Contracts for extra costs incurred after the defendant had failed to provide beef and other food items to be used in hospitals, despite a number of agreements signed between the parties. Defendant cited the principle of Ad Impossibilia Nemo Tenetur, pleading that, owing to the outbreak of mad cow disease, beef products were scarce and he therefore was unable to perform his obligations.
In its judgment, the Court explained that: “il-prinċipju huwa li nemo tenetur ad impossibilia, li jfisser li biex debitur ta’ obbligazzjoni jiġi meħlus mill-konsegwenzi tal-inadempjenza tiegħu, irid jirriżulta li kien impossibbli għalih li jwettaq l-obbligazzjoni. Il-fatt li l-esekuzzjoni tal-kuntratt saret aktar diffiċli jew aktar spedjuża ma jeżonerax lid-debitur tal-obligazzjoni”.
In the same judgement, the Court of Appeal referred to the Italian Supreme Court of Cassation’s definition of the principle, given in a judgment given in 1973: “l’impossibilità totale che estingue l’obbligazione deve essere obiettiva ed assoluta e non si può far consistere in una semplice difficoltà”. It further propounded the fact that a difficulty in performance is not tantamount to an absolute and objective impossibility: “Le semplici difficoltà, il maggior disagio o il maggior dispendio nell’adempimento dell’obbligazione non integrano gli estremi dell’impossibilità assoluta ed obiettiva insita nel concetto di forza maggiore”.
Intriguingly, and whilst linking the COVID-19 pandemic’s effects with that of transnational contractual disputes, the Court also made reference to another case of the Court of Milan of 1974 relating to the non-performance of a party to a contract in the procurement of crude oil. In this case, a plea of impossibility was raised by the respondent arguing that he could not fulfil his contractual obligations since oil was nationalised in Libya and the consequential effects felt by the war in Kippur. In this case, the Supreme Italian Court threw out the plea, contending that there were alternative sources from where defendant could procure crude oil.
Does COVID-19 trigger the application of the Force Majeure exemption?
As consistently propounded by our Courts in Maltese case-law, an irresistible force is considered to be a force which is impossible to resist, whilst a fortuitous event is one which could not be foreseen by an ordinarily diligent person. In such instances, the damages caused by irresistible forces or fortuitous events are to be burdened by the party sustaining such damages.
Therefore, one should not take Force Majeure to be separate and distinct from the maxim of Ad Impossibilia Nemo Tenetur when arguing in favour of an exemption from liability for the non-performance of a contractual obligation. Rather, they complement each other and work in tandem – as it must be shown that it is that irresistible force or that fortuitous event that has resulted in the party not being able to perform his or her contractual obligation due to an absolute and objective impossibility.
The Arguments for ‘Agreements must be Honoured’
The Pacta Sunt Servanda argument emphasises the importance of interpreting the will of the parties at the time of signing to honour the obligations entered into at the time of conclusion of the agreement. Therefore, the question which arises is the extent to which the Maltese courts may override an agreement and decide that there is a case for non-performance, despite the obligations contracted by the parties, owing to the COVID-19 outbreak.
In this regard, reference is made to a judgment decided by the Court of Appeal in 1998 in the names ‘Gloria Beacom et vs L-Arkitett Anthony Spiteri Staines’, which denotes the Court’s firm stand in preserving that contracts are law between the parties and that any nonfulfillment would result in a breach: “il-prinċipju kardinali li jirregola l-istatut tal-kuntratti jibqa’ dejjem li l-vinkolu kontrattwali għandu jiġi rispettat u li hi l-volontà tal-kontraenti kif espress fil-konvenzjoni li għandha tipprevali u trid tiġi osservata Pacta sunt servanda”.
Additionally, the Courts have also deemed it unjust for it to give a different meaning to the clauses of an agreement contrary to the intention and will of the contracting parties, as stated in ‘John Zammit et vs. Michael Zammit Tabona noe’ decided in 1997: “Fejn is-sinifikat tal-konvenzjoni jkun ċar u fejn il-fatti li jkunu wasslu għal dak il-ftehim kif ukoll fatti sussegwenti ma jpoġġux fid-dubbju l-volontà tal-kontraenti, mhux leċitu għall-ġudikant illi jagħti lil dik l-iskrittura sinifikat divers minn dak liberalment espress mill-kontraenti”. In a somewhat stronger statement, in ‘Baggit Enterprises Limited vs. Jeffrey Chetcuti et’ decided in 2002, the Court stated that no court should interfere in contracts unless there is a defect which deems it null: “… u l-ebda qorti m’għandha tindaħal fi ftehim bħal dan jekk ma jkunx milqut b’xi difett li ġġibu ma jiswiex”.
Ultimately, which prevails?
In the end, if one had to interpret the above doctrines and apply them to the current local scenario, would COVID-19 be deemed as a legitimate excuse to exempt a party to a contract from his or her obligations? In the near future, onerous legal disputes might arise before the Courts. We anticipate that litigation will ensue either for specific performance or for the Court to sanction non-performance owing to the COVID-19 outbreak. For example, individuals caught up abroad may plead the impossibility of performing their obligations in Malta due to the imposition of the travel ban by the Maltese government. Concert organisers may face lawsuits for cancelling public gathering events due to the recent legal notice suspending organised events whilst lessees may face eviction for failing to pay their rent and non-custodial parents may face criminal action for failing to keep up their maintenance payments in respect of their children.
In such instances, the Courts would be faced with the unenviable task of deciding whether to condemn the debtor to specific performance of legal obligations undertaken, or to declare COVID-19 to be a fortuitous event which would release the debtor from liability for failure to perform. At the outset, it must be stated that there is no definitive answer but one would have to examine the particular circumstances of the case and whether and to what extent has the pandemic rendered it absolutely and objectively impossible for a person to perform. Furthermore, it depends on the relevant contractual drafting. Prudence requires a case-by-case approach, rather than a blanket statement or a one-size-fits all approach.
It would be interesting to understand whether our courts would favour a strict interpretation of the contract, insisting in favour of the principle of Pacta Sunt Servanda, or whether the Courts would take a more equitable approach by taking into consideration the repercussions of both the pandemic and the measures taken by the authorities in containing the spread of COVID-19 deciding that non-performance does not carry any liability.
The information provided does not constitute legal advice.
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