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May 27, 2021

Impact of the COVID-19 Pandemic on the Performance of Contractual Obligations, Particularly in Credit Agreements

Masa Miskovic, a 2020 Sylff fellow, reviews how the COVID-19 pandemic—as well as government measures to combat it—has impacted contractual relations worldwide. In the latter part of the article, she focuses on the support measures implemented in Serbia, which, as in many other countries, include a moratorium on payments of credit obligations.

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Impact of the COVID-19 Pandemic on Contractual Relations

The World Health Organization declared the COVID-19 outbreak a pandemic on March 11, 2020, in view of the rapid spread of the coronavirus outside the territory of China.[1] The appearance of the new COVID-19 virus has had and continues to have a devastating impact on all aspects of human life around the globe. The governments of many countries have been forced to take various extreme measures to slow down the spread of the virus, including lockdowns on cities and countries, closure of borders, traffic and travel restrictions, import and export bans, and various interventions in the legal and economic frameworks.

The COVID-19 pandemic has had a far-reaching impact on contractual relations worldwide. In the field of contract law, the pandemic and the measures taken by the governments of different countries to combat it have led to nonperformance or improper performance of contractual obligations in a large number of contracts.

The COVID-19 pandemic has had a far-reaching impact on contractual relations worldwide.
Source of image: https://www.gard.no/web/updates/content/29452615/covid-19-and-force-majeure-clauses-under-english-law, access date: 11.03.2021

The largest law firms around the world have already published client alerts anticipating a large number of court and arbitration proceedings in the future due to nonperformance or improper performance of contractual obligations during the COVID-19 pandemic. The main question is whether the obligor is entitled to invoke the institute of force majeure, impossibility to perform, or changed circumstances (hardship) if it did not perform its contractual obligations due to the COVID-19 pandemic.

When assessing the circumstances to refer to a particular legal institute, it should be taken into account whether the nonperformance or improper performance of contractual obligations is due to measures and restrictions imposed by governments, nonperformance of the supplier, illness of the obligor or its employees, or decision of the obligor to temporarily close its business and not perform its contractual obligations in order to protect itself and its employees and prevent the spread of the coronavirus (despite the absence of government orders to that effect), or because the obligor argues that it was unable to fulfill its contractual obligations due to the “chaos in the economy” arising from the COVID-19 pandemic.[2]

Many studies and expert predictions about the outbreak of a pandemic have been conducted, but based on them, it could not be said that the COVID-19 pandemic was foreseeable in terms of its consequences. For example, the German government-related Robert-Koch Institute conducted a comprehensive risk analysis study, published by the German Parliament in January 2013, in which the occurrence of a hypothetical pandemic such as COVID-19 was qualified as “conditionally probable” (bedingt wahrscheinlich). This means that statistically speaking, such an event occurs once in a period of 100 to 1,000 years.[3]  

The only open question is from what moment the pandemic should be considered an event whose impact could have been foreseen. One opinion is that for all agreements concluded after the World Health Organization declared the COVID-19 pandemic (March 11, 2020), the pandemic and the government measures that were introduced cannot represent a force majeure, because they became foreseeable.[4] The second opinion is that while a formal declaration of a pandemic only took place on March 11, 2020, the pandemic and government measures in Europe were unforeseeable only for contracts concluded before February 2020, and given the speed of virus transmission and its consequences, they became foreseeable for contracts concluded from February 2020 onward.[5]

When it comes to credit agreement, the obligation of the borrower is monetary. Fulfillment of a monetary obligation can always be demanded from the contracting party, and if the borrower does not fulfill its obligation, fulfillment can be demanded through enforcement procedure. It is highly unlikely that the borrower will be able to prove that fulfilling the monetary obligation was impossible due to the COVID-19 pandemic, given that payment of money can be performed by simply transferring money from one bank account to another, especially nowadays when the use of Internet (online) banking has become so widespread. Therefore, in order for the contracting party to invoke the institute of force majeure or impossibility to perform in a credit agreement, it must prove that there was no way to fulfill the contractual obligation. This is difficult to imagine in a credit agreement, given that these obligations are not “location dependent.”[6]

Increasing the costs of fulfillment of contractual obligations, even if it leads to insolvency, does not make fulfillment impossible; that is, it does not lead to impossibility to perform. The defense of temporary impossibility to perform (due to force majeure) could be invoked to postpone fulfillment of the contractual obligation. For example, if the number of employees and personnel access are limited but the physical access of employees is absolutely necessary to perform certain steps under a credit agreement, the defense of temporary impossibility may be used to suspend the contractual duty until the impossibility ceases and possibly for an additional reasonable time thereafter. This means that even in the event of a lockdown, the parties would not be able to invoke the defense of temporary impossibility to perform the contractual obligations if those obligations may continue to be performed when they are not location dependent. Therefore, in the case of a credit agreement, as a rule, a borrower cannot invoke force majeure as a reason for temporary or permanent impossibility to perform due to the COVID-19 pandemic, as the borrower has a monetary obligation that is not location dependent. Perhaps it would be possible to argue that there was difficulty in performing contractual obligations—in other words, to invoke the changed circumstances (hardship) defense.

When referring to certain legal institutes to be excused from nonperformance of contractual obligations due to the COVID-19 pandemic, practitioners emphasize the importance of assessing the circumstances of each case, that is, the importance of deciding on a case-by-case basis.  On the other hand, it must be noted that the case-by-case method is not appropriate in the current situation, which requires an approach that combines individual and collective remedies to prevent strong parties in a contractual relationship from abusing their power during individual negotiations, whether because of their contractual power, their ability to spread their risk among more contracts, or their better knowledge of the effects of certain measures taken by the authorities.[8]

The COVID-19 Pandemic and Credit Agreements

The consequences of the COVID-19 pandemic for borrowers are serious financial difficulties resulting in their inability to pay credit installments in accordance with the repayment plan. That is why some borrowers are forced enter into new credit agreements, often at higher interest rates, to overcome the poor financial situation. In other words, the outbreak of the COVID-19 pandemic and the response measures that have been adopted have significant economic consequences. Many businesses and private individuals may face difficulties in the timely payment of their financial and other obligations. This in turn has an impact on credit institutions.

Among the consequences of the COVID-19 pandemic are serious financial difficulties resulting in borrowers inability to repay credit installments.
Source of image: https://www.thedailystar.net/law-our-rights/law-vision/news/covid-19-and-default-commercial-loans-looking-ahead-1899451, access date: 11.03.2021

Many countries across the globe have implemented a broad range of support measures to minimize the medium- and long-term economic impacts of the COVID-19 pandemic and governmental actions taken in response to the COVID-19 pandemic. In many instances, these measures include some form of moratorium on payments of credit obligations, suspending or postponing borrowers’ credit payment obligations from three to six months (for example, such measures have been taken in Germany, Belgium, Switzerland, and Spain).[9] Although the moratorium took different forms in different countries, its aim and economic essence are the same: supporting the short-term operational and liquidity challenges faced by the borrowers.

Recognizing the situation in which many borrowers found themselves due to the COVID-19 pandemic, the National Bank of Serbia adopted certain decisions on temporary measures for banks with the purpose of mitigating the consequences of the pandemic to preserve financial system stability, providing citizens and corporations with a suspension in the payment of their liabilities to banks and financial lessors. The bank pointed out that for all companies and entrepreneurs, the moratorium is “an opportunity to feel more comfortable in the financial sense, because by postponing the payment of obligations, they would get additional liquidity for their business.” At the same time, the moratorium provides citizens with “the opportunity to at least mitigate the consequences of their reduced income or increased expenses by not paying their annuities in short-term credit obligations, but also by not having to engage in activities related to paying monthly installments in such a difficult situation.”[10]

Many countries across the globe have implemented some form of moratorium on payments of credit obligations, suspending or postponing borrowers’ credit payment obligations.
Source of image: https://www.mintos.com/blog/moratorium-for-borrowers-international-overview-by-mintos/, access date: 11.03.2021

The first three-month moratorium in Serbia was introduced in March 2020 by the Decision on Temporary Measures for Preserving Financial System Stability and the Decision on Temporary Measures for Financial Lessors Aimed at Preserving Financial System Stability.[11] An additional (second) two-month moratorium was introduced in July 2020 by the Decision on Temporary Measures for Banks to Mitigate the Consequences of the COVID-19 Pandemic with the Aim of Preserving Financial System Stability and the Decision on Temporary Measures for Financial Lessors to Mitigate the Consequences of the COVID-19 Pandemic with the Aim of Preserving Financial System Stability.[12]

One of the major issues regarding moratorium is whether interest continues to run during the moratorium period. Many moratoria permit interest to continue to run during the moratorium period, but there are also examples of legal solutions where demanding payment of any additional contractual costs in the form of fees or interest is not allowed (such as in Belgium).[13] As a basic model for payment of credit installments, the National Bank of Serbia recommended that banks add three monthly installments to the end of the repayment period by extending the credit contract duration by three months and allocating the regular interest to the remaining loan repayment period. The remaining loan repayment period has been increased by three months due to the moratorium. Therefore, monthly installments after the moratorium period increase due to the allocation of calculated interest from the moratorium period to the remaining increased repayment period. In other words, during the moratorium period, the banks in Serbia did not charge the regular interest, but they did calculate it. However, a moratorium by definition means a standstill in the repayment of obligations, that is, a “suspension, postponement, or reduction of a party’s obligations.” Therefore, not just charging but also calculating interest during the moratorium period is not justified, and such a practice should not be allowed.

Demanding payment of any additional contractual costs in the form of fees or interest should not be allowed during the moratorium period.
Source of image: https://www.stopwatchmarketing.com/interest-rate-what-it-is-and-what-are-the-types-of-interest-rates/, access date: 11.03.2021

 In addition to the abovementioned decisions of the National Bank of Serbia, which introduced two moratoriums for all borrowers in Serbia, the bank also adopted a decision on additional measures facilitating loan repayment by borrowers who are faced with difficulties in performance of their contractual obligations due to the COVID-19 pandemic. It adopted the Decision on Temporary Measures for Banks to Enable Adequate Credit Risk Management amid COVID-19 Pandemic and the Decision on Temporary Measures for Financial Lessors to Enable Adequate Credit Risk Management amid COVID-19 Pandemic.[14] In these decisions, the National Bank of Serbia prescribes the measures and activities to be applied by banks and lessors to ensure adequate credit risk management, which implies timely identification of debtors faced with potential difficulties and taking of appropriate steps. For this reason, it prescribes an obligation for banks and financial lessors to approve debt repayment facilities to debtors (natural persons, farmers, entrepreneurs, and companies) at their request, if they have or may have difficulties in the repayment of contractual obligations due to the conditions caused by the COVID-19 pandemic.

Financial stability is necessary in ordinary circumstances and even more so in extraordinary ones. As stated by the Governor’s Office, the National Bank of Serbia will keep a close eye on the impact of changed circumstances on all relevant market participants and will act responsibly, taking steps within its remit with a view to maintaining financial system stability, which is a precondition for preserving and boosting overall growth of the economy.

[1] See https://www.euro.who.int/en/health-topics/health-emergencies/coronavirus-covid-19/news/news/2020/3/who-announces-covid-19-outbreak-a-pandemic

[2] Franz Swarz, John A. Trenor, and Helmut Ortner, ed., introduction to Contractual Performance and COVID-19: An In-Depth Comparative Law Analysis (Alphen aan den Rijn, Netherlands: Kluwer Law International, 2020), http://www.kluwerlaw.com/covid-contracts/?doing_wp_cron=1588691772.5051820278167724609375#reports.

[3] German Bundestag, Bericht zur Risikoanalyse im Bevölkerungsschutz 2012 [Report on risk analysis in population protection 2012], January 3, 2013, annex 4: 55–56, https://dipbt.bundestag.de/doc/btd/17/120/1712051.pdf.

[4] Dominika Sulak Seyfried and Marta Bijak-Haiduk, “Poland: COVID-19 as Force Majeure,” Schoenherr (website), April 1, 2020, https://www.schoenherr.eu/content/poland-covid-19-as-force-majeure/.

[5] Klaus Peter Berger and Daniel Behn, “Force Majeure and Hardship in the Age of Corona: A Historical and Comparative Study,” McGill Journal of Dispute Resolution 6, no. 4 (2019/2020): 110, http://dx.doi.org/10.2139/ssrn.3575869; Christian Twigg-Flesner, “A Comparative Perspective on Commercial Contracts and the Impact of COVID-19: Change of Circumstances, Force Majeure, or What?” in Law in the Time of COVID-19, ed. Katharina Pistor (New York: Columbia Law School, 2020), 7, https://scholarship.law.columbia.edu/books/240.

[6] Robert Freedman, Alexandro M. Padrés, and Jesse Van Genugten, “The COVID-19 Crisis and Force Majeure in Credit Agreements,” Shearman & Sterling (website), March 24, 2020, https://www.shearman.com/perspectives/2020/03/the-covid-19-crisis-and-force-majeure-in-credit-agreements.

[7] Horst Ebhardt and Sarah Wared, “Does COVID-19 Constitute Force Majeure?” Wolf Theiss (website), March 2020: 1,  https://www.wolftheiss.com/fileadmin/content/6_news/clientAlerts/2020/Q1/20_03_23_CA_Does_COVID-19_constitute_Force_Majeure_Vienna.pdf; Anna Rizova, Oleg Temnikov, “Force Majeure and the Impact of COVID-19 Measures on Business in Bulgaria,” Wolf Theiss (website), March 2020: 2, https://www.wolftheiss.com/fileadmin/content/6_news/clientAlerts/2020/Q1/20_03_25_CA_Bulgaria_Force_Majeure_Sofia.pdf;Peter Ocko, “Coronavirus: Effects on Contractual Relations and Short-Term Need for Action,” Lexology (website), March 6, 2020, https://www.lexology.com/library/detail.aspx?g=e56ae158-ee75-4260-804b-0fc9a9fde8e7; Peter Gorše, “Slovenia: COVID-19 and Breach of Contract: Debtors Beware of Foreseeability Element,” April 21, 2020, https://www.schoenherr.eu/content/slovenia-covid-19-and-breach-of-contract-debtors-beware-of-foreseeability-element/; Ilya Bolotnov and Yuri Vorobyev, “Коронавирус vs договор” [Coronavirus vs contract], March 23, 2020, https://www.pgplaw.ru/analytics-and-brochures/alerts/coronavirus-vs-the-contract/.

[8] Richard Alderman et al. (COVID-19- Consumer Law Research Group), “Consumer Law and Policy Relating to Change of Circumstances Due to the COVID-19 Pandemic,” Journal of Consumer Policy 43, no. 3 (September 2020): 441, https://doi.org/10.1007/s10603-020-09463-z.

[9] Alderman et al., 441–42.

[10] National Bank of Serbia, “Moratorium on Payments of Credit Obligations” (in Serbian), 2020, 2, https://nbs.rs/export/sites/NBS_site/documents/mediji/vesti/Primeri-moratorijum-1.pdf.

[11] National Bank of Serbia, “Moratorium on Debt Payments,” March 18, 2020, https://www.nbs.rs/en/scripts/showcontent/index.html?id=15323&konverzija=no.

[12] National Bank of Serbia, “NBS Enables Additional Suspension in Repayment of Borrowers’ Liabilities—A New Moratorium,” July 28, 2020, https://www.nbs.rs/en/scripts/showcontent/index.html?id=15747&konverzija=no.

[13] Alderman et al., 442.

[14] National Bank of Serbia, “NBS Passes New Measures to Facilitate Repayment to Debtors Hit by the COVID-19 Pandemic,” December 15, 2020, https://www.nbs.rs/en/scripts/showcontent/index.html?id=16441.

Masa Miskovic

Masa Miskovic

University of Belgrade

Law

Received Sylff fellowship in 2020.
Academic supervisor: Prof. Nebojsa Jovanovic, PhD
Current affiliation: Teaching Assistant, University of Belgrade - Faculty of Law 

Academic achievements, social engagement initiatives:
Awards: 1. First place for the best Claimant Memorandum (Pieter Sanders Award) at the international competition in Vienna in international commercial and arbitration law (Willem C. Vis International Commercial and Arbitration Moot) - 2013, member of the University of Belgrade - Faculty of Law team (participation of 2000 students, 290 universities, from 66 countries)
2. Award “Best student of the generation”, Foundation "Professor Mirko Vasiljević", 2014
3. Award for the "Best graduating student of the generation 2009/2010", Faculty of Law, University of Belgrade, 2014
4. The winner of the “Youth Heroes” of Serbia award (second place in the field of education and science), at the competition organized by the EXIT foundation, in cooperation with the NIS Company and with the support of Radio-Television of Serbia and the Ringier Axel Springer Company 2019
5. The "International Digital Leader Award", awarded by the Government of India - the Ministry of Social Justice, the BRICS International Forum and the International Federation of Indo-Russian Youth Clubs, 2019.
6. The winner in the field of social sciences and humanities in the category of up to 27 years at the Erste Bank competition for young talents from Serbia, 2014
7. Award for the best paper of students of the University of Belgrade in the field of legal and economic sciences, Milivoje Jovanović and Luka Ćelović Foundation, 2015
8. "Harmonius" annual award for the best master thesis in the region of South East Europe for 2015 in the field of legal studies of private and business law
9. 2nd place in the field of Personal Improvements and Achievements at “Ten outstanding young persons” competition, organized by the "Junior Chamber International", 2015
10. Annual award "Plaque" of the Belgrade Chamber of Commerce, awarded to prominent individuals for professional achievements (as a member of the University of Belgrade - Faculty of Law team), 2013
11. The best student of her generation in the Russian high school and Gold Medal winner (18th Golden Medal out of 40 generations), 2009
12. Award of the best student of her generation at the High music school "Mokranjac", 2009
13. The "Dositeja" award for outstanding achievements at the republican piano competition, Young Talents Fund of the Ministry of Youth and Sports, 2009
14. The best pupil of her generation in elementary school "Borislav Pekić". Other academic achievements: • Member of the board of directors of the foundation “Professor Mirko Vasiljević”, which rewards the best students and socially disadvantaged students
• Member of the board of directors of the Business Lawyers Association of Serbia
• Member of the Teaching quality improvement Committee of the Faculty of Law University of Belgrade
• Editor of the web-site of Business Lawyers Association of Serbia.
• Managing editor of the scientific journal "Law and Economy"
• Member of the Advisory council of the journal "Student Economic Law Review"
• Secretary of the Civil Law Department at the Faculty of Law University of Belgrade.

Masa Miskovic was born on 22 September 1991 in Belgrade, where she completed elementary school, Russian High School and Music High School “Mokranjac”, as the best pupil of her generation in all schools with GPA 5 out of 5. She graduated from the University of Belgrade – Faculty of Law in 2013, as the best student of her generation with GPA 10 out of 10. She has finished her Master studies in 2014 at the same faculty with GPA 10 out of 10, where she defended her master thesis on the topic “Sales contract in common law legal system”. It has been published in the edition of the University of Belgrade - Faculty of Law. She is currently a PhD candidate at the same faculty, preparing for the defense of her doctoral dissertation on the topic "Legal nature of auction". In 2020 she completed the University of Belgrade’s master studies program “Social Sciences and Computing” with GPA 9,86 out of 10, defending her master thesis on the topic “Computational and Legal Aspects of the Data Processing”. In April 2021 she has completed Doctoral studies at the University of Belgrade - Faculty of Law, defending her doctoral dissertation "with distinction". The topic of her doctoral dissertation is "Legal Nature of Auction".
Since graduating from the University of Belgrade – Faculty of Law, she has worked for 2.5 years as Legal adviser and Head of legal and administrative department in an IT company ICL Services and Solutions ltd. in Belgrade. Since October 2017 she has been employed as a Teaching Assistant for Commercial Law at the University of Belgrade - Faculty of Law. She has published more than 20 scientific papers and participated in numerous international and domestic conferences. She is fluent in English (University of Cambridge Certificate of Proficiency in English) and Russian language and has intermediate knowledge of German language.
https://www.linkedin.com/in/masa-miskovic-51561988/

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