Has your contract been cancelled due to the COVID-19 outbreak? What to do now

As this is a fast moving topic, please note that this article is current as at 27/04/20. For further information, please contact Luis Paulino or Iain Corbett

At a time when we work and live from home and everything may only roam free on the internet, many contracts were and will continue to be cancelled due to the pandemic outbreak the world is dealing with right now. Portugal is no exception and following the Italian and Spanish examples, was one of the European countries to quickly resort to quarantine and emergency state measures.

The real estate and construction business is no exception and while it may be too soon to detect any fundamental changes in the market dynamics, many companies are sustaining losses due to preventive measures such as safety distances, travel limitations and quarantined workers. However, in a more immediate scenario and up to mid-March this year more than 564 outdoor events and expositions had been cancelled, 254 of which were to take place in Europe. Even though not all of them were construction themed, construction companies that specialise in building structures to accommodate these events were certainly hit hard by such a wave of cancellations.

An “abnormal change to circumstances” or force majeure?

Portuguese law determines that whenever there is (1) an abnormal change to the circumstances that motivated the intention to enter the contract, and (2) demand for the injured party to fulfil its obligation that would severely affect general good faith principles, the injured party may cancel or adjust the terms of the contract (properly refunding any amounts which may have received).

In this case, the notion of “abnormal change” is similar to the concept of force majeure. However, although it has been understood that force majeure is an unforeseeable and inevitable event that deems the obligation impossible to fulfil, in the case of an abnormal change, the position would be economically disastrous.

For example, it is an abnormal change if a contractor is hired to perform building works and is paid €50,000 to obtain the building materials himself, but due to the European viral containment measures, the price of these materials rise to over 80%. In these circumstances, the contractor would be able to adjust the terms of the contract or cancel it. Nevertheless, the other party may intend to fulfil the contract and supply the materials himself, in order to reinstate the economic balance between the parties. However, there is no abnormal change if the hypothetical rise is only 5% or 10% because such increase in price is acceptable (though, not usual) in normal market conditions.

Another practical example is where someone hires a restaurant to cater for his wedding day and, due to the emergency state restrictions, the restaurant was closed and forced to shut down its business. In this scenario, the restaurant would be able to cancel the contract due to force majeure as it would be impossible to fulfil.

Conversely, if a lawyer was hired to present a petition in court, when ordered to work from home, it would still be possible to present the petition by email or online application from home. Therefore, force majeure would not be applicable here as it does not involve an absolute impossibility.

Comment

Legal counsel is essential to determine if your company is experiencing a contract cancelling situation in any of these situations and/or whether you may need to commence settlement negotiations with the other party or its insurance company where the other party can cancel a contract validly. In a number of cases, insurance policies have force majeure or a viral outbreak exclusion clause. Alternatively, contracts may have a general clause to include similar situations to the one the world is currently experiencing. In this scenario, only a case by case (or contract by contract) basis would be possible to determine your rights when facing a contract cancellation. Accordingly, it is vital to have a proper understanding of these clauses to prevent further losses.

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