CEELM Covid-19 Comparative Legal Guide: Contracts in Serbia

CEELM Covid-19 Comparative Legal Guide: Contracts in Serbia

Covid-19 and Contracts in Serbia
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Contributed by JPM Jankovic Popovic Mitic

How might businesses in your jurisdiction be impacted by the Covid-19 pandemic?

The rapid outbreak of Covid-19 (the coronavirus) hit not only our businesses, but also our daily lives. The disruption of the financial markets was reflected in our daily lives, which in turn affects businesses, particularly the travel industry, airliners, and supply chains. The first confirmed case of Covid-19 in Serbia was registered on March 6, 2020, while Serbian authorities declared a state of emergency on March 15, 2020 and imposed various measures to fight the outbreak.

Even though the country has not been in a lockdown, the recommendations of the Government to stay home and switch to remote work have affected the liquidity. On the one hand, there is high demand for basic needs and consumer goods, while there is significant drop of sales in tourism industry – the Ministry of Trade, Tourism and Telecommunications announced on March 10, 2020 that 80% of travel arrangements in February and March 2020 were cancelled due to the spread of the coronavirus.

It should be noted that authorities adopt measures in real time. One of the latest (adopted on March 17, 2020) measures was adopted by the National Bank of Serbia, which announced at least a 90-day moratorium on all debts and finance leases. However, debtors may opt to continue to repay loans and finance leases.

The NBS previously lowered the reference rate for 50 base points, to 1.75%, March 11, 2020. According to the NBS, this decision was made as a reaction to uncertainty in the international environment and it is line with activities other central banking authorities worldwide undertook.

In your jurisdiction, if it becomes impossible for a party to perform its contractual obligations because of an external event beyond its control (such as the Covid-19 pandemic), can that party cancel its contract?

As a general rule, if a party does not perform its contractual obligations, it would be liable for non-performance. So the question would be whether a party could be exempted from liability if the non-performance is caused by an external event beyond its control.

Pursuant to the Serbian Law on Obligations (133-136), a party affected by an external event (e.g., the Covid-19 pandemic) could seek an order from a court canceling the contract due to changed circumstances occurred after the execution of the contract (rebus sic stantibus institute). However, this option of a debtor may be enforced only subject to conditions set out by the law and not automatically. One of the main conditions is that the occurred event must have been unforeseeable at the time the contract was concluded.

Additionally, where a debtor requests that the court cancel the agreement due to changed circumstances, the court would cancel the contract if a creditor does not accept to amend or offer to amend the contract fairly.

Moreover, pursuant to the Law on Obligations, an obligation shall terminate if its performance is made impossible due to circumstances for which a debtor is not responsible. However, it is up to the debtor to prove the circumstances which exclude its liability.

In other words, there is no automatic option for a debtor under the Serbian Law on Obligations to terminate a contract due to an event which could be deemed force majeure.

Additionally, with regards to pre-contractual obligations, the Law on Obligations (45) expressly provides that a pre-contract does not bind parties if circumstances after its conclusion are changed to such an extent that it would not have been concluded if they had existed at the time of conclusion.

For these reasons, it is common for commercial agreements to contain provisions on force majeure outlining the reasons for termination or suspension of the agreement, as well as potential remedies. A contractual definition of force majeure could include “epidemic, pandemic,” as well as a time requirement (e.g., duration over 90 days).

In any case, we strongly recommend that all commercial agreements, including finance agreements, if relevant, be reviewed by legal experts, particularly as some specific rules could be applicable to different contracts (lease contracts, transportation contracts, etc.) and circumstances (e.g. hell and high water clause).

In your jurisdiction, if a party’s performance of its contractual obligations is adversely affected by an external event beyond its control (an “FM Event”) but does not become completely impossible, can that party typically seek relief from compliance with its obligations?

The Serbian Law on Obligations provides for that a debtor could ask the court to cancel a contract in case of changed circumstances, subject to the mandatory requirements (Articles 133-136) mentioned above. However, the agreement would not be cancelled where a creditor accepts or offers fair amendments to the agreement.

Certainly, parties may agree/could have agreed such right to seek relief from compliance with their respective obligations to a certain extent in case of FM event in their agreements.

If yes, what considerations should be borne in mind by such parties, in particular in relation to:

Any notification obligations (Is the affected party typically required to notify any counterparties of the FM Event within a specific time period?)

A debtor must notify a creditor about the force majeure event. Pursuant to Article 268 of the Law on Obligations, a contracting party is obliged to inform the other contracting party on any event which might affect their mutual relations – otherwise, it could be liable for damages caused by delayed delivery of the notice.

In case a debtor wishes to enforce its rights to cancel the agreement due to changed circumstances, it must notify the creditor of such event the moment it became aware of the force majeure event – otherwise it is liable for damages caused by delayed delivery of the notice.

Any causation requirements (Is the affected party typically required to demonstrate that it would have performed its contractual obligations but for the FM Event?)

A debtor must demonstrate circumstances which lead to its inability to perform its obligations. It is not up to a creditor to demonstrate that a debtor is liable, but to debtor to demonstrate that it is not liable.

Any mitigation obligations (Is he affected party typically required to demonstrate that it took specific steps to avoid the impact of the FM Event as far as possible?)

A debtor must perform everything to mitigate damages, particularly if the debtor wishes to be released from damages caused by non-performance of its contractual obligations due to an event that occurred after the conclusion of contract which could not be prevented, eliminated, or avoided.