It is definitely no open secret that Malta, as much as the rest of the world, is presently undergoing an unprecedented crisis affecting individuals coming from every walk of life. The outbreak of the pandemic within our shores has triggered the shutdown of businesses and workplaces which are now being encouraged to mandate employees to work remotely when possible, in line with health department recommendations, with all the ramifications this brings with it. The current financial situation certainly does not allow the Government to maintain a laissez-faire attitude towards office and retail industries, resulting in emergency measures necessary to avert a calamity, which have an inevitable impact on contractual obligations, such as commercial leases. These contractual relationships are being, or are likely to be, severed not only as a consequence of the supervening global circumstances, but also because contractual force majeure clauses, which allow a contracting party to retract from or delay its obligations, either tend to be overlooked throughout the stage of contract drafting or simply put, fail to envisage specific contingencies such as the outbreak of a pandemic. In ascertaining whether one can invoke the ‘force-majeure’ event as a safeguard against the difficulties encountered by the contracting party in the adequate performance and fulfilment of its obligations in place, the following considerations have to be made:
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- Is the mere fact that a fortuitous unforeseen event arose sufficient?
- Must there be a causal link between the event & the non-performance of one’s obligation?
- Should the party claiming force majeure show that he tried to avoid / mitigate the effects of the event?
Statutory defences to frustration of contracts
The notion of ‘force majeure’ first originated in French civil law, with Malta having incorporated its teachings and standards into its own domestic system. The defence against liability hinges upon three pre-requisites: (i) contracting party must be totally extraneous to the unfolding of the event frustrating the contractual obligations (ii) the foreseeability of the event must presuppose preparedness by the party, failure of which occasions negligence (iii) the ramifications of the event must have been irresistible and unpreventable.
What does the Maltese governing law in the ambit of the Law of Obligations say?
Article 1134 of the Civil Code lays down that there is no liability for damages when non-performance was due to an ‘irresistible force’:
“The debtor shall not be liable for damages if he was prevented from giving or doing the thing he undertook to give or to do, or if he did the thing he was forbidden to do, in consequence of an irresistible force or a fortuitous event.”
Whilst ‘irresistible force or fortuitous events’ are not defined in our law, this phraseology is replicated in other articles of the Civil Code as a source of exoneration from civil liability. This can be appreciated through a cursory glance at some of the articles of the Code.
For instance, in a scenario of a contract for use (in the legal jargon, commodatum), a borrower is not liable for indemnity if the thing forming the subject of the contract perishes by a fortuitous event as per Article1828 of the Civil Code.
The loss of a thing due can also bring about the extinguishment of an obligation as laid down by Article 1207 of the Civil Code.
“Where a certain and determinate thing forming the subject-matter of an obligation perishes, or is placed extra commercium, or is lost so that it is absolutely not known whether it exists, the obligation is extinguished, provided the thing perishes or is placed extra commercium or is lost without the fault of the debtor, and before he is in default for delay.”
This does beg the question as to the whether it would tenable to argue that the unforeseen occurrence of the Covid-19 pandemic can in itself place the subject-matter of an obligation, say the provision of school services, ‘extra commercium’ given the uncertain climate which is one that “it is absolutely not known whether it exists”. Thus, on account of the said iter, the obligation emanating from the contract between the parties would be extinguished.
This is certainly subject to interpretation and to jurisprudential doctrine as moulded by significant pronouncements of the Civil Courts, which seem to have qualified the instances giving rise to a ‘force majeure’ event from time to time given that the law is silent as to the constitutive elements of an ‘irresistible force or a fortuitous event’.
‘Irresistible, unpredictable, external’: case-law
Our Courts have been consistently driven by the need to substantiate, to identify the core set of principles of the ‘force majeure’ defence against liability, as well as to define the notion of an ‘irresistible force or a fortuitous event’ and the circumstances giving rise thereto: elements which must be construed in strict and absolute terms if such a plea were to succeed.
The Civil Court, First Hall in George Farrugia et. vs. Pacifika Masini noe observed, on the basis of civil law theory and case-law that for the purposes of ‘force majeure’, the following elements must result ‘simultaneously’.
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- The event must be dictated by an irresistible force in that it subjects the debtor to the impossibility of fulfilling his obligations. If such event renders the obligation as more ‘onerous or cumbersome’, the obligation still needs to be observed however as per principles of European Contract Law ‘the parties are bound to enter into negotiations with a view to adapting the contract or ending it‘.
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- The event must be unpredictable.
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- The event must be external.
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- The party to a contract must have no responsibility in the unfolding of the event in that the event must be one which the party could not have avoided and which was beyond his control. As laid down in the case Robert Borg v. Peter Camilleri decided by the Commercial Court on the 30th of January 1941: “as established by doctrine and jurisprudence in order for the defence of a fortuitous cause to be availed it is not sufficient that an unusual occurrence be caused by the forces of nature independent of the concurrence of the matters of a person, but it is also necessary that this is inevitable, i.e. that which cannot be avoided by a person exercising the diligence of a bonus pater familias”.
Reiterating the ethos of Article 1029 of the Civil Code, the Civil Courts embraced the principle that violation of a contractual duty which is vitiated by imprudence and negligence is ultimately the shapeshifting mechanism which differentiates a fortuitous event from a negligent act:
“quando invece, vi ha la violazione di un dovere, ed una volontaria omissione di diligenza per cui non si prevedono la conseguenza della proprie azione ed omissione, e si viola il diritto altrui, senza volerlo ed anche senza avvedersene, allora si ha non il caso fortuito, ma la colpa ed il quasi delitto”
The Court of Appeal in the case Anthony Pirotta v. Direttur tal-Muzewijiet held:
“Skond il-gurisprudenza tal-Qrati taghna “‘il-forza magguri’ hija dik il-forza li ghaliha huwa impossibbli li wiehed jirrezisti, mentri ‘kaz fortuwitu’ huwa dak l-avveniment li ma setax ikun prevedut minn persuna ta’ ordinarja diligenza” (Delia v. Segretarju Permanent et, Appell (Inferjuri)19/05/2004 u Borg Falzon v. Darmanin, Appell Kumm. 7/06/1940), kif ukoll “il caso fortuito o la forza maggiore e’ l’evento non dipendente da azione o omissione volontaria o colposa, non prevedibile o almeno non evitabile” (Azzopardi v. Arcicovich et, Appell Civili, 14/11/1919, Vol. XXIV, PI, p.172). Biex ikun hemm il-kaz fortuwitu jrid ikun hemm event imprevedibbli u inevitabbli. It-test ghall-applikazzjoni tal-prevedibilita` o meno ta’ l-event huwa dak tad-diligenza tal-‘bonus pater familias’ fejn in-nuqqas taghha jirrizulta f’colpa (Kurunell Hugh v. Negte Busuttil, Appell Kummercjali, 16/11/1942). Jekk jirrizulta mill-fatti li kien hemm konkorrenza ta’ agir pozittiv jew negattiv tal-persuna allura l-event ma jibqax jinghad li kien kaz fortuwitu (App. Inf. Falzon vs Formosa 4/12/1991).”…
Of particular pertinence are the conclusions of the First Hall of the Civil Court in the case of “Middle Sea lnsurance Company Limited vs Sullivan Maritime Limited et”, in which it was declared the ‘force majeure’ can only justify the breach of contract when the impossibility of the performance or execution of the contract is objective and independent of the will of the contracting party.
In the context of commercial obligations, the Court of Appeal in the judgment Alfred Schembri vs. Dr. Louis Buhagiar made reference to legal author Giorgi who observed that when lack of certainty is not the result of the debtor’s fault but arises from the fault of the creditor or force majeure, the debtor cannot be said to be in default of payment, even after the judicial demand, since causally, and saving the instances where he was to be found at fault, there could be no link between the delay in payment and the debtor’s obligations.
In the case of TCG Company Limited v. John Ibbotson, the First Hall of the Civil Court opined that whilst the burden of proof of the existence of the ‘force majeure’ event is incumbent on the debtor who makes the allegation, in order for the defence of ‘force majeure’ to be satisfied the defendant had to prove the sudden change of his financial circumstances not only were beyond his control but that such change put him in such an impossible position to honour his contractual obligations and therefore to leave his home country. The defendant failed to prove this, and his allegation of the ‘force majeure’ event could not hold water in the eyes of the Court.
Thus, a ‘force majeure’ event must be inevitable within the limits of proper diligence, unforeseeable and free from the involvement of the party to a contract.
Fortuitous events and the Covid-19 pandemic
Article 992 of The Civil Code tells us that a contract legally entered into shall have the force of law which is binding on the contracting parties. The absence of a specific definition of ‘force majeure’ in statutory law, as well as the case-by-case assessment of the Courts with regards to the instances which legitimately warrant a ‘force majeure’ defence make it almost imperative for a contracting party to ensure the proper safeguards guaranteeing relief from liability are in place through ‘force majeure’ clauses. In the likelihood that an agreement stipulates that a contract is to be rescinded in case of a fortuitous event/force majeure thereby preventing the execution of the contract, then in such a case a party to the contract would not be bound to honour the terms and conditions of the agreement. This has been explored in case-law as well.
In the context of the Covid-19 pandemic, while it is not an easy enterprise to determine whether the outbreak in itself meets the criteria laid down by law and case-law alike, some contracts do include ‘force majeure’ clauses that contemplate scenarios in which the performance of the contract is somehow frustrated due to a supervening cause. This can give contracting parties a reassuring leeway by virtue of which they may decide, for practicality’s sake, to broaden ‘force majeure’ instances specifically to the pandemic event of Covid-19. Naturally, such inclusion can be conceived of as prior knowledge of the pandemic event and this can be problematic especially since unpredictability is one of the foundational elements of the fortuitous event.
Non-performance of contract due to force majeure – travel package contracts
Regulation 11 (1) of Subsidiary Legislation 409.19 of the Laws of Malta on Package Travel and Linked Travel Arrangements Regulations (which transpose the provisions of Directive 2015/2302 of the European Parliament and of the Council on package travel and linked travel arrangements) states that the traveller may terminate the package travel contract at any time before the start of the package.
Where the traveller terminates the package travel contract under this sub-regulation, the traveller may be required to pay an appropriate and justifiable termination fee to the organiser. The package travel contract may specify reasonable standardised termination fees based on the time of the termination of the contract before the start of the package, and the expected cost savings and income from alternative deployment of the travel services. In the absence of standardised termination fees, the amount of the termination fee shall correspond to the price of the package minus the cost savings and income from alternative deployment of the travel services. At the traveller’s request the organiser shall provide a justification for the amount of the termination fees.
However Regulation 11(2) states that notwithstanding the provisions of sub-regulation (1), the traveller shall have the right to terminate the package travel contract before the start of the package without paying any termination fee in the event of unavoidable and extraordinary circumstances occurring at the place of destination, or its immediate vicinity, and significantly affecting the performance of the package, or which significantly affect the carriage of passengers to the destination. In the event of termination of the package travel contract under this paragraph, the traveller shall be entitled to a full refund of any payments made for the package but shall not be entitled to additional compensation.
Regulation 11(3) further stipulates that the organiser may terminate the package travel contract and provide the traveller with a full refund of any payments made for the package, but shall not be liable for additional compensation, if the organiser is prevented from performing the contract because of unavoidable and extraordinary circumstances and notifies the traveller of the termination of the contract without undue delay before the start of the package.
On 5 March 2020, the European Commission published information on the Package Travel Directive in Connection with the COVID-19. The Commission stated that significant risks to human health, such as the outbreak of a serious disease like the COVID-19 at the travel destination or its immediate vicinity usually qualify as such unavoidable and extraordinary circumstances. An official travel warning of national authorities is an important indicator that the package travel contract can be cancelled due to such “unavoidable and extraordinary circumstances” impacting the performance of the trip.
The European Commission provides some examples:
“If you or an accompanying family member have a medical condition for which exposure to the COVID-19 is particularly dangerous, you should have the right to cancel your package travel contract if the risk of contamination with COVID-19 at the travel destination or its immediate vicinity is declared high by the competent authorities. Hence it would have to be assessed whether travellers can reasonably be expected to travel to the destination(s) in light of the risk to their health and life. A subjective feeling of fear would not be sufficient”.
In such cases, the traveller has the right to get a full refund of any payments made for the package within 14 days, and this in terms of the said Directive. This is effectively deals a further blow to badly hit industry operators such as hotels and English Language Schools, who not only have to cope with a sudden halt of operations and revenues, but are expected to dig into reserves to pay such refunds. The Government of Malta acknowledged this problem, and amongst the various Legal Notices issued to mitigate the consequences of the pandemic decided to extend this time limit in a bid to relieve some of the pressure on the industry. Legal Notice 80 of 2020 thus ordered:
“Provided that the 14-day limit set out in this sub-regulation shall not apply to any refund required as a result of termination of package travels under sub-regulations (2) and (3) when such termination occurred or occurs between the 1st of March 2020 and 31st May 2020 (both dates included), which refund shall be paid by the organiser by no later than 6 months after the package travel contract is terminated”.
Non-performance of contract due to force majeure – frustration of commercial leases
The closure of retail outlets amongst others as brought about by the recent Legal Notices is having a great impact on tenants and landlords leasing immovable property for commercial purposes. Many tenants are presently in a position whereby they have little bargaining power vis-à-vis landowners which could help them leverage their claim that the contract of lease is being frustrated ahead of the exceptional circumstances. This save in situations where rent abatements or suspensions can be availed of by the lessee since they are conditions specifically envisaged in the ‘force majeure’ clauses of the contract
Standard provisions of lease contracts, as well as of other kinds of contracts, will be certainly scrutinised following the outbreak of the pandemic, unexpected yet revelatory as it continues to unearth lacunae.
Maltese legislation still has to catch up with other jurisdictions in this respect whereby both owners and tenants are being encouraged to review their insurance policies as a means of identifying safeguards against business interruption or loss of rent attributable to the Covid-19 corona virus.
It is furthermore advisable that parties attempt to sit down at a negotiating table before resorting to the law which is in a constant state of evolution primarily due to the fact that most Maltese lease contracts do not contain force majeure clauses owners and furthermore tenants currently have to renegotiate payment terms and rent reductions to address the difficulties brought about by the Covid-19 outbreak.
The way forward
Taking into consideration all factors impinging on the severability of contracts, anyone affected by the status quo must strive to:
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- Include force majeure clauses in future contracts and attempt to negotiate their introduction where these are lacking;
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- Revisit ‘force majeure’ clauses of the particular contract, perhaps broadening such clauses to tangible situations, keeping time-limits into check;
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- Keep abreast with the latest legal developments, both at national and international level, and seek professional legal advice;
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- Compile any documentary proof which accounts for the undertaking of reasonable endeavours aimed at mitigating the force majeure
For further information on the matter visit our website or contact Dr. Andrea Zammit, Dr. Simon Galea Testaferrata or any member of Iuris Advocates.