There is no doubt that the coronavirus pandemic was a fundamental shock to the Hungarian economy. Many business operators have tried to reduce their losses by terminating contracts, referring to the coronavirus as force majeure cause and there have now been more court decisions in such cases. A recent one deals with the question whether a long-term framework contract may be terminated because of the impossibility of the performance, invoking the coronavirus as a force majeure.
Facts
In February 2020, the claimant, a workforce supplier entered into a framework contract with the defendant who operates baths and spas in Hungary, based on which the claimant provided temporary work agency services. The defendant undertook to use 280 000 man-hours of labor during the 24-month term of the contract and he had the option to extend the period of the contract for a further 24 months.
The parties excluded the possibility of the ordinary termination of the contract; however, the defendant could terminate the contract based on special reasons provided by the public procurement act. The defendant undertook to pay penalty for non-performance.
In February 2020, the COVID pandemic began to spread widely in Europe. In March 2020 the defendant closed its baths and spas. In May 2020 the defendant terminated the framework contract claiming that because of the COVID pandemic, it currently has no income from ordinary business activities and does not need temporary work agency services. Soon after the termination of the contract, the defendant reopened several of its baths.
First and second instance judgement
The claimant sued the defendant for penalty for non-performance (alternatively for damages) given that in its view, the termination of the contract by the defendant was unlawful.
The first instance court upheld the claimant’s action for penalty. In the court’s view at the time of the termination, the evolution of the COVID infection rate was not predictable and the defendant could not have foreseen the time, duration of the restrictions on the opening of bathing areas. The defendant had at least 21 months and possibly 24 more to use the claimant’s services, thus it terminated the contract prematurely, without waiting to see how the pandemic would affect its activities and the performance of the contract during its term.
Surprisingly, the second instance court completely dismissed the claimant’s action. According to the court, the targeted legal effect of the parties’ contract was relevant which was to satisfy the defendant’s demand for seasonal extra labor over and above the existing workforce. Given that the COVID as force majeure and its consequences such as the closing of bathing areas made it impossible for the parties to achieve their contractual objective and to perform the contract, it was terminated. Since the performance become impossible because of force majeure occurred after the conclusion of the contract, the defendant is not liable for the failure of the performance and cannot be obligated to pay the penalty.
The decision of the Supreme Court
Based on the claimant’s request for judicial review, the Supreme Court repealed the final judgement and ordered the second instance court for retrial.
In the Supreme Court’s view, the second instance court erred in finding that it was impossible for the defendant to perform the contract for the whole of the remaining 280 000 man-hours of work. First, the framework nature of the contract, the flexibility and the fact that the defendant could use the workforce during the whole 24 months of the contract term is relevant. Second, it cannot be deduced from the content of the contract that the defendant intended to cover its seasonal (extra) labour needs, and this contradicts to the earlier contractual practice referred to by the claimant, based on which the defendant used the claimant’s services not only in the high season but during the whole year.
According to the Supreme Court, the impossibility of performance implies the definitive non-performance of the contractual service and in addition to the finality, the complete impossibility of performance of the contractual services is also relevant. It is undisputable that the COVID pandemic and the related government measures influenced the defendant’s operation and workforce needs but the temporary closures of the bathing areas could not have caused the impossibility of the performance of the entire contract, taking into account the framework nature of the contract and the defendant’s loose drawdown obligation which could be activated at any time and to any extend during the contractual term.
Based on the above the second instance court shall examine whether the failure to draw down the remaining man-hours by the defendant may be excused and whether the mitigation of the penalty may arise.
Comment
The above decision of the Supreme Court shows that the COVID pandemic and the related government measures may be considered as force majeure cause. However, they cannot cause the automatic termination of a flexible long-term framework contract as the Supreme Court maintained its previous practice based on which the impossibility of performance implies the definitive and total non-performance of the contractual service.
By Anita Vereb, Attorney-at-law, SmartLegal Schmidt & Partners
