What to write in the contract regarding the war?
In the current situation, a large number of manufacturers and suppliers may find themselves in difficulty in properly and, above all, timely performance of their contracts with customers due to unforeseen circumstances such as war or pandemics.
This article was written in 2022. If you are looking for up-to-date information on this topic, please do not hesitate to contact us at office@arws.cz or by phone on +420 245 007 740. We will be happy to advise you.
Are you also addressing the fears and uncertainty arising from the state of war in your business? In this article, you will learn how a well-designed contract can minimize penalties and your contractual liability.
War as a force majeure clause?
Force majeure (called vis maior) is a circumstance that can exempt you from liability to pay damages for failure to meet contractual obligations.
For example, force majeure can stop the running of the limitation period (section 651 of the Civil Code (CC)) or, if you are the customer, entitle you to carry out an additional inspection of the goods (section 2626(2) CC).
The inclusion of a force majeure clause is appropriate for the contracting parties by increasing legal protection and strengthening legal certainty.
So what is force majeure and how can you turn it to your advantage in the contract?
In order to constitute force majeure, it must be an external event that cannot be avoided even with every effort due to its extraordinary and unforeseeable nature. A typical example of a force majeure is a pandemic or a war conflict.
Conversely, events of a personal or economic nature, which are internal circumstances, cannot be regarded as force majeure. For example, a strike by employees or predictable adverse weather conditions such as snow in the winter months of the yearare not considered force majeure.
To be unforeseeable, a military conflict must arise unexpectedly. Unforeseeability must be assessed in terms of time relative to the moment of conclusion of the contract. Therefore, if you enter into a contract in the current situation where a war conflict is ongoing, it is assumed that you are taking increased risks into account.
Otherwise, where the conflict has unexpectedly interfered with a contract concluded before the war, we can speak of the application of the force majeure principle. However, the contracting party must make every effort to remove the contractual obstacle.
The surmountability of the obstacle must be assessed objectively - that is to say, it must be surmountable by any properly behaving person who would be in a similar situation. The law also implies a higher standard of care for the professional's performance. Thus, if you enter into a contract as a member of a particular profession, you are indicating that you are capable of acting with the knowledge and care associated with that profession.
As an example of an obstacle being averted, a logistics company is thus required to make an effort to reroute goods through territory not affected by the conflict, all the more so if the state of war has been in place for a long time.
Another example is a construction company in default which has labour contracts with citizens of a state affected by the conflict. If a company falls into default in fulfilling its obligation to terminate workers responding to a state of war, we can again speak of the application of force majeure. However, the construction company must make every effort to avert the effects, for example by trying to find replacement workers for timely compliance.
However, if the impacts cannot be averted even with all efforts, the contractor is exempted from liability for damages.
So how do you set up the contract in your best interests?
In view of the invasion of Ukraine by the troops of the Russian Federation and general contractual prudence, it is advisable to agree on foreseeable risks in the contract with the counterparty.
For example, it is advisable to agree on the amount and conditions of application of contractual penalties in case of force majeure, as force majeure is generally not applicable.
It is also advisable to regulate situations where only part of the obligation can be fulfilled. An example is a complex construction supply of goods which has two components - the supply of concrete from the Czech Republic and the supply of iron from Ukraine. Will the party be obliged to perform at least the part of the obligation that can be performed? Or will it be exempt from performance for the duration of the force majeure.
We also recommend that alternative performance be negotiated , or the amount of costs that the parties consider reasonable to overcome the consequences be defined. It is adequate to articulate as precisely as possible the risks that each party will bear. Who will be liable for the extraordinary costs incurred? To what extent should damages be limited?
It is also possible to set up the contract in such a way that it is automatically cancelled in the event of force majeure. The cases that the parties associate with force majeure can also be limited exhaustively - it is even possible to exclude force majeure altogether by contract.
It is also recommended to include other types of clauses in contracts in these uncertain times
A currency clause will help you cover yourself in the face of great currency instability, when it is very difficult to predict the development of exchange rates.
A price clause allows you, as the seller, to increase the purchase price if there is an unexpected increase in the cost price.
Through a fuel clause , it is possible to negotiate that if the price of fuel rises, the price of the entire shipment will increase proportionately.
It is also possible, for example in the construction industry, to negotiate an inflation clause which adjusts the price of construction work in line with inflation.
Due to the contractual freedom intersecting the private law, the form of the contractual clause can be shaped into various forms and according to the needs of the client it can be best adapted to the given contractual relationship with the help of our attorneys from Arrows Law Firm.
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