313 views

Shortage of money – waiving pecuniary liability in Covid-19`s context

Casiana Dusa
Casiana Dusa
Sebastian Ilie
Sebastian Ilie

PREAMBLE

In COVID-19[1]’s context, the Debtors are often in the situation where they cannot perform their monetary obligations due to lack of money. One of the contractual relations where such an unfortunate scenario takes place are related to lease contracts.

On the one side, we see that the Tenants’ business income has registered a dramatic decrease due to governmental restrictions and, on the other side, we see the compliant Landlords that have faced considerable losses due to Tenants` lack of payment. At the end of the day, who is right?

It is necessary to examine possible mechanisms aimed at legally classifying shortage of money in order to produce legal effects in one way or another. For the avoidance of doubt, our presentation is neither dedicated to Debtors, nor to Creditors, but rather has the goal to objectively observe a much-disputed issue and to offer efficient solutions of approach, that can be legally substantiated.

In order to answer the question whether lack of money can lead to an exoneration of liability in COVID-19’s context, it is necessary to clarify firstly if, in principle, the force majeure protects the Debtor from pecuniary liability even when it regards fungible goods (such as money) and secondly, if a specific factual situation related to COVID-19 fulfills the conditions of force majeure.

Our analysis regards the situation where the contractual obligations that cannot be performed consist of fungible goods, namely money (i.e. rent).

I. Does the force majeure protect the Debtor from pecuniary liability?

The vast majority of opinions and analysis concludes that shortage of money cannot substantiate the exoneration of pecuniary liability, for instance in case of fortuitous impossibility of performance, as money are fungible goods and the Debtor can always find an alternative to perform its obligations. However, can we go as far as to consider that money is an endless resource merely due to the reason that they are fungible? Our presentation is not going to re-examine this argument, but rather to go beyond the apparent conclusion, by analyzing the matter in essence. Our endeavor is aimed at leading to potential solutions to the existing problems caused by COVID-19 that can be adapted to the current business market conditions.

To begin with, it is important to analyze the New Romanian Civil Code (“NCC”)[2] legislator’s intention with regard to this issue. After carefully examining the circumstances where the force majeure is applicable, we selected the most relevant scenario considering the issue in question.

In fact, interpreting the provisions on the liability of the hotel keeper, we can apply the following reasoning:

On the one side, Article 2128 NCC provides the limitation of the pecuniary liability of the hotel-keeper and on the other side, according to Article 2130 NCC corroborated with Article 2131 NCC, the hotel-keeper is exonerated from liability when the goods (including money) of its clients are stolen, damaged or destroyed due to a force majeure cause. These provisions were also subject of an insightful analysis in the doctrine, which we acquiesce to[3]. Therefore, the legislator has admitted ab initio that the exoneration of liability may be feasible, in certain force-majeure cases, even if the object of the non-performed obligation consists of fungible goods, such as money. Moreover, despite the fact that the legislator has made a clear difference between the Debtor’s protection and release from liability, in practice the two concepts are often wrongly interpreted.

According to Article 1351 NCC, the Debtor is protected from liability when the prejudice is due to a force majeure cause and not due to the Debtor’s fault. Indeed, if the Debtor causes a prejudice to the Creditor by not performing its monetary obligation (i.e. rent payment) and such non-performance is due to a force majeure cause (i.e. related to COVID-19, for instance certain governmental measures that expressly blocked business activities causing the impossibility of making any money in the blocked period, which automatically led to a dramatic decrease of income), the Debtor can be protected from the liability of non-performing its valid obligation (to pay the money).

How long is such protection going to operate? In our opinion, the Debtor can be protected as long as the event blocked the run of the business plus a reasonable period of “convalescence”. During this time, its obligation will still remain valid, however its non-performance will be waived from penalties. After the convalescence period, we consider that the Debtor shall notify the other party as soon as the impediment ceases to impede performance of its contractual obligations.

According to Article 1634 NCC, the Debtor is released when its obligation cannot be performed due to a force majeure cause if the object of the obligation disappears. Such release does not operate when the obligation is monetary, as the money is a fungible good. For instance, if due to a force majeure cause, the Debtor lacks the money due to the Creditor, it cannot be released from its obligation which does not consist of a good with specific and unique features, but of a changeable good.

Therefore, from our point of view, shortage of money registered due to a confirmed force majeure cause related to COVID-19 can substantiate the protection of the Debtor’s against pecuniary liability, but not the complete and absolute release of obligation. In these conditions, a temporary exemption of payment can be feasible, whereas a total release of responsibility is in principle out of question.

This approach is reflected to a certain extent in the foreign doctrine and jurisdiction.

For instance, in the well-known case Hits Restaurant Group vs Kass Management, in regards to invoking the force majeure clause by reason of COVID-19-related governmental restrictions, the court rejected the landlord’s attempt to reframe the tenant’s argument as an inability to pay rent due to lack of money, which would have been excluded as a viable excuse pursuant to the force majeure provision. In doing so, the court embraced the tenant’s argument that the proximate cause of its inability to pay rent stemmed from the executive order regarding the governmental restrictions and its effects on the business.

In fact, the landlord argued that the force majeure clause did not apply because the tenant’s failure to pay rent was due to a shortage of money, and thus outside the scope of the force majeure clause. The court rejected this argument, holding that the governmental restrictions were the proximate cause of tenant’s inability to generate revenue and pay rent. The landlord also argued that the tenant could have mitigated its inability to pay rent by applying for a Small Business Administration Loan, but failed to do so.  The court also rejected this argument, holding that nothing in the lease or law required the tenant to borrow money to reduce the impact of adverse governmental actions.

However, the court concluded that the force majeure clause only partially excused the tenant’s performance. The court found that government restrictions “did not prohibit the Tenant from performing delivery services. The court further found that 75 percent of the square footage of the restaurant was rendered unusable by the executive order, but the remaining 25 percent “could have been used for carry-out, curbside pick-up, and delivery purposes.” Although the court reserved final decision pending an evidentiary hearing, the court held that, in light of the foregoing, the tenant “still owes at least 25 percent of the rent amount to the Landlord, even after application of the force majeure clause.

This should give tenants confidence in making arguments based on force majeure provisions. That said, it will be interesting to see if other courts will follow the court’s reasoning in minimizing the impact of the “lack of money” exception[4].

In Belgium, practitioners are of the opinion that while the mere existence of the virus could not constitute a force majeure event, there is no doubt that the pandemic and the binding administrative decisions taken in that period to counter its spread and the resulting suspension or significant hindrance to the activity of economic stakeholders could be recognized as constituting force majeure, due to their exceptional (and therefore unforeseeable) and imperative (and therefore irresistible) nature. It goes without saying that whilst the anti-COVID-19 measures can be considered “unforeseeable and insurmountable” for current contracts[5].

II. Does COVID-19 fulfill the conditions of force majeure?

In order for COVID-19 to be considered a force majeure event, certain conditions shall be fulfilled. The first step shall be to check whether the contract includes a force majeure clause, as the Civil Code`s provisions regarding force majeure establish a certain conduct which is binding on the parties only if they have not provided, by their will, for another conduct  . If so, it is important to examine the contract`s provisions before any other demarche.

While lacking a force majeure clause in the contract, it is necessary to apply Article 1351 NCC which sets forth certain conditions to comply with: the event shall be external, unforeseeable, absolutely invincible and unavoidable.  In other words, the event allegedly considered force majeure shall not be due to the Debtor’s actions (external) and the Debtor could not have foreseen it (with the prudence and diligence of a person who takes all the care he is capable of in his work – bonus pater familias). Moreover, the event could not have been avoided and stopped in any way.

Applying the above rules to our specific situation COVID-19, we provide the reader with some food for thought. Even though the existence of the pandemic itself may not pe considered unforeseeable, the dramatic spread and its effects do. Also, it is questionable whether the COVID-19 event is absolutely invincible, hence we point out that the existence of a difficult financial situation due to the virus effects is not sufficient to classify COVID-19 as force majeure. In these circumstances, the affected part shall demonstrate that it had no alternative to perform its obligations and took all possible measures to mitigate the effects of the phenomena.

III. What other remedies are available for Debtors if the force majeure argument cannot be used?

If force majeure has been expressly excluded from the lease contract or it is difficult to prove, the parties to a lease agreement may rely on other available remedies under Romanian law. As these alternative remedies have been already much debated in the doctrine, we will just highlight the main aspects.

Given the interdiction established by art. 2 para. (2) of Ordinance no. 2/2020, the lessor can no longer fully comply with the obligations assumed (ensuring the quiet and useful premises to the lessee) due to government restrictions, in which case article 1557 NCC, regarding the exception of non-performance may be applicable. In this case, the lessee does not have to perform his obligations (to pay the rent) if the other lessor does not perform its own obligation (to ensure that the lessee has quiet enjoyment of the premises).

Art. 1818 para. (2) NCC would be applicable. Following the same reasoning, the tenant will be able to request the suspension of his own obligation (to pay the rent) for the duration and to the extent of the impossibility of ensuring the use by the lessor.

However, while some courts agree that the impossibility of the lessor of ensuring the quiet and useful premises to the lessee is a consequence of the legal restrictions imposed by the Government, other courts consider that the restrictions are not considered to be a fortuitous impossibility of fulfilling the lessor`s obligations.

CONCLUSION

In the event that COVID-19 is confirmed in a particular case as a force majeure cause, the Debtor shall be protected from liability against non-performance of its monetary obligation, which will still remain valid irrespective of the force majeure effects. The protection will cease when force majeure effects will fade away, thus the Debtor will lose its legal grounds underlying exonerations.


[1] The disease caused by the virus SARS-CoV-2;
[2] Law no 287/2009 regarding the Civil Code;
[3] https://www.juridice.ro/677722/forta-majora-banii-si-rinocerul-alb-sau-despre-cum-si-de-ce-forta-majora-apara-de-raspundere-si-in-materia-neexecutarii-obligatiilor-de-plata-a-unor-sume-de-bani.html
[4] https://www.crowell.com/NewsEvents/AlertsNewsletters/all/Court-Concludes-Force-Majeure-Clause-in-Lease-Excused-75-of-Tenants-Rent-Obligation-Based-on-Tenants-Permitted-Reduced-Use-During-COVID-19-Shutdown
[5] https://iclg.com/briefing/11618-is-it-possible-to-invoke-the-covid-19-pandemic-as-a-force-majeure-event-with-regard-to-a-commercial-contract


Casiana Dusa, Senior Associate CRISTOFOR VLADU & ASOCIAȚII SCA
Sebastian Ilie, Junior associate CRISTOFOR VLADU & ASOCIAȚII SCA

Related posts