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Contractual Obligations Amid a Pandemic – To What Extent Can a Default Be Excused?

The outbreak of the COVID-19 pandemic has by and large effected a wide spectrum of individuals and businesses who have been heavily impacted financially by an unprecedented and unexpected event to the extent that many are encountering difficulties in honouring obligations contracted in a pre-COVID19 world.

To make matters worse, following the Superintendent of Public Health’s declaration of a state of public health emergency with effect from the 7th of March 2020, authorities have imposed numerous restrictive measures including the stopping of flights and other travel restrictions, the closure of educational institutions, bars and restaurants and the prohibition of non-essential retail and services in an attempt to impose the social distancing advised by the health authorities.

This article intends to provide a brief overview of how our courts have historically dealt with when considering defences for the delay or non-performance of contractual obligations.

The Maltese courts, being a civil jurisdiction, have always been consistent in upholding the principle of ‘pacta sunt servanda’ to safeguard contractual certainty. However, there have been instances of exceptional nature where the Maltese courts have departed from such principle and adopted an approach normally associated with common law jurisdictions when contractual obligations would have become impossible or otherwise excessively onerous as a result of unpredictable and unavoidable events.

While our law is clear in crystallising the principle of ‘ad impossibilia nemo tenetur’ in Article 985 of the Civil Code (Chapter 16 of the Laws of Malta) – meaning that no one may be held responsible for obligations rendered impossible to carry out – the same civil code is silent when it comes to those obligations which have been rendered excessively onerous.

 Given that the current circumstances are unprecedented in the modern world, one may have to look back to decisions of our courts in war and post-war times to find out whether our civil jurisdiction roots have ever been put aside in favour of equitable decisions. Research shows that indeed our courts back then considered that when an obligation becomes excessively onerous to perform, thereby possibly resulting in financial ruin, the court must prioritise equity. Such was the case in the judgement of Kurunell Hugh Raymond vs Neg Manwel Busuttil pro et noe decided on the 16th of November 1942. In another case, Borg Falzon pro et noe et vs Charles Darmanin pro et noe, decided by the Court of Appeal on the 7th June 1940, the defendant had agreed to supply the claimant with printing paper. Due to the outbreak of war and the steep rise in the relative prices, the defendant failed to adhere to the aforementioned obligation. The defendant subsequently claimed that the non-fulfilment of the contractual obligation was due to the outbreak of war. By means of this judgement, the Court of Appeal considered that whilst a steep rise in prices does not render the obligation impossible to perform, the performance of such obligation could lead the defendant to financial ruin. To this end, the Court established that a significant change in circumstances which rendered an obligation excessively onerous and beyond any risk foreseeable at the time of contracting, constituted a ground for force majeure.

Whilst the principles of ‘eccesiva onerosita`’ and ‘rebus sic stantibus’ were discussed at length by the Maltese courts in the 1940s and 1950s as grounds of “force majeure”, this seemed to fall out of favour for a time and only recently revived to a certain extent when the Courts delivered judgements recognising this principle as part of our legal system, even though such defence has historically been very difficult to prevail.

In this regard, one may look at the judgements in the case of Direttur tal-Kuntratti vs Office Electronic Limits decided by the First Hall, Civil Court, on the 22nd of October 2004 and George Farrugia et vs Pacifika Masini et pro et noe decided by the First Hall, Civil Court on the 7th of January 2008. An interesting judgement of the Court of Appeal (Superior Jurisdiction) in Jean Borg vs. Nicole Borg of the 30th November 2012 considered that in grave circumstances which are completely inevitable and independent to the actions of the non-performing party, the obligation in question can be revised and default excused.

In the case of Mark Calleja Urry et vs Joseph Portelli et decided on the 25th of February 2011, the Court of Appeal (Superior Jurisdiction) agreed with the court of first instance, when with respect of penalties included in a contract, acknowledged that “when the non-performance has been caused by force majeure … the penalty cannot be claimed” .

If one had to rest on how our courts have acted historically when faced with circumstances such as those in which we are presently living, then it would be reasonable to expect that in pronouncing any decisions relating to contractual defaults as a result of COVID-19, the courts may be willing to give more weight to the principles of good faith and equity and be more lenient as to when to apply the principle of pacta sunt servanda. That said however, such matters would most definitely be quite subjective and dealt with on a case-by-case basis.

The above is not to be construed as, or substitute, legal advice and only sets our generic views. Get in touch with our team of lawyers at DF Advocates who may provide further advice and assistance.

 For information on this article or any related enquiries, please contact Dr Marlon Borg by email at marlon.borg@dfadvocates.com.

 

 

 

 

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