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COVID-19 in Latvia: General issues

2020-03-20

Emergency situation  

Impact on Latvian law governed contracts without a Force Majeure clause 

The parties to a Latvian law governed contract retain some discretion to invoke force majeure provisions even if the contract itself does not contain a specific force majeure clause. Even though there is no statutory definition of force majeure, the Civil Law relieves the party from its obligation to reimburse accidental loss in case the loss has occurred in result of force majeure circumstances.   

United Nations Convention on Contracts for the International Sale of Goods (CISG) may be applicable to purchase agreements, which defines the justifications for the default more broadly. According to CISG a party is not liable for the failure to perform its obligations if the failure was due to an impediment beyond its control, which and tha the party could not have reasonably expected this impediment at the time of entering into the contract and or could not have avoided the impediment within the performance of the contract to have avoided or overcome it, or its consequences (Art.79).  

Agreements that contain a Force Majeure clause

Commercial contracts typically include force majeure clauses that provide a course of action in the event of force majeure. Usually contracts also contain a list of examples, such as strikes, fire, flood, earthquake, that are recognised as force majeure events. When reading the force majeure clause, three issues must be considered. Firstly, whether the definition of force majeure is exhaustive or open–ended? If it is closed and does not mention an epidemic or state–imposed prohibitions, enforcement will not be possible. Secondly, how does force majeure manifest itself? A “state–imposed prohibition" is not the same as an “epidemic" or “pandemic". It is important to remember that the state of the emergency declared by the Cabinet of Ministers is not a case of force majeure; it is just a legal concept that denotes the right of the Cabinet of Ministers to introduce various restrictions. Thirdly, is there a causal link between the circumstances of force majeure and the impossibility of fulfilling the obligation? For example, the ban on passenger transport has no effect on the contract for the supply of food. If the contractual provisions allow the parties to refer to COVID-19 situation,  it must be evaluated whether and to what extent the virus and its effects impact the fulfilment of contractual obligations and what remedies can be reasonably applied to avoid the non-fulfilment of the contract.

It must also be noted that generally Latvian law does not release the party from the fulfilment of its obligations simply because providing services or delivering goods becomes difficult or expensive. In order to invoke force majeure, the respective party must demonstrate that the provision of services or delivery of goods is reasonably impossible.  

Supreme court on Force Majeure  

The Supreme Court of Latvia has previously ruled on the notion of force majeure. The court explained that it is necessary to distinguish force majeure events from events that materially change the balance of contractual obligations, but do not render the fulfilment of contract impossible. 

 Namely, under current case-law, financial inability to perform – or, put more bluntly, lack of money – has not been considered as force majeure. This is understandable as the ability to pay depends not only on cash flow but also on savings and other assets.

Consequences of the occurrence of force majeure 

The party referring to force majeure events, is under an obligation to inform the other party thereof immediately. Such obligation derives not only from international contract law, but also from the general principle of good faith. In the event of failure to notify, the party which has failed to fulfil its obligations due to force majeure events may be liable for the loss resulting from the failure to inform the other party.

For further information please contact COBALT Latvia Managing Partner Lauris Liepa, Partner Gatis Flinters and Specialist Counsel Andrejs Lielkalns.