Koutalidis’ Gregory Logothetis discusses the impact of Covid-19 on Greek commercial obligations
The Covid-19 pandemic has inevitably monopolised legal discourse over the last year, as commercial arrangements and entire businesses have been stressed and often crushed under the burden of extended illiquidity. The pressure of meeting outstanding obligations as a going concern has been one of the catalysts in this direction.
Unsurprisingly, at least for civil law practitioners, numerous commercial contracts have been brought before the courts on the grounds of provisions drawing from the German doctrine of the frustration of the underlying basis of the contract (‘Störung der Geschäftsgrundlage’). In that context many, if not most, of the parties in commercial contracts governed by Greek law have either themselves triggered or been on the receiving end of litigation proceedings on the basis of a provision in the Greek Civil Code (the ‘GCC’) entitled ‘unforeseeable change in circumstances’.
In broad lines, the relevant GCC article (388) provides that if the circumstances on which the parties had based the conclusion of a reciprocal contract have subsequently changed on exceptional and unforeseeable grounds in a way that has rendered the debtor’s performance excessively onerous, the debtor may request the court to readjust or dissolve the contract.
It is common ground in both theory and case law that the dissolution of the contract is considered as the last resort and is not to be ordered by the court unless there is effectively no way to opt for readjustment.
It should be noted from the outset that the field of application of the above provision has considerably been refined by case law, albeit in a way heavily criticised by scholars. Still, there are no bright lines, especially in view of the fact that the above article 388 is, more often than not, applied in conjunction with other GCC provisions – typically the ones reflecting the principle of good faith performance (article 288 of the GCC) and restricting the abusive exercise of rights (article 281 of the GCC).
The provision of article 388, seemingly completely at odds with the common law axiom that courts do not make contracts for the parties, has been extensively used over the last year. Quite often, the unwelcome prospect of a judicial readjustment has been used as leverage in bringing parties to the negotiating table.
It might be worth mentioning that the outbreak of Covid-19 has not been the only occasion leading to an overabundance of claims on the basis of the above-mentioned set of provisions. Not long before that, the global financial crisis of 2008, which sternly affected the Greek economy, triggered a plethora of similar claims.
In such a state of affairs, which is not dissimilar to the factual circumstances of frustration, the adversely affected party has a right to ask the court for the dissolution of the contract, but – more importantly – for its readjustment in a manner reflecting the balance of rights and obligations originally sought by the parties. In fact, it is common ground in both theory and case law that the dissolution of the contract is considered as the last resort and is not to be ordered by the court unless there is effectively no way to opt for readjustment.
Naturally, article 388 of the GCC is not a carte blanche and can’t make up for reckless bargaining. A perusal thereof indicates that the conditions for its application are quite strict and that a court decision is indispensable for any adjustment/dissolution to take place. However, depending on the factual circumstances, there might be other legal bases which can achieve similar effects without the need to bring the claim before a court or meet the strict conditions of article 388 of the GCC. This overlap has been criticised as jeopardising the policy considerations behind the scrupulous drafting of article 388 GCC.
A rather distinctive feature of the present crisis in our jurisdiction has been the extensive interference of the legislator with the performance of ongoing contractual affairs.
However, these legal bases – and in particular art 288 of the GCC, which is the provision anchoring the good faith principle in Greek civil code – may be used, even when the lack of foreseeability element is not present, for the adjustment of obligations that were agreed following the outbreak of the pandemic and became due within its next waves at times when its repercussions could be regarded as foreseeable.
A related matter, lying on the other side of the spectrum, concerns the effect of clauses excluding the applicability of the GCC provisions on unforeseeable change in circumstances and/or good faith performance.
The relevant clauses’ objective is the ex ante exclusion of claims for readjustment – ie, the construction of an absolute obligation, unsusceptible to unilateral or external modification. Such clauses are usually drafted in the form of a waiver stating that ‘the parties expressly waive any rights stemming from articles 288 and/or 388 of the GCC’.
Such clauses, although quite common in commercial contracts, are of a narrow effect, if not entirely void. The relevant GCC provisions embody fundamental principles of Greek law which cannot be set aside by contract. As a rule of thumb, such clauses shall be invalid, although (depending on their drafting and the particular circumstances of the agreement) they may have some limited bearing (eg, providing indicia as to the balance of rights/obligations originally sought by the parties and/or the risks allocated between them). Noteworthily, the ineffectiveness of such clauses shall not, in principle, jeopardise the force of the contract as a whole, which will most likely remain effective, save for the void clause(s).
Finally, a rather distinctive feature of the present crisis in our jurisdiction has been the extensive interference of the legislator with the performance of ongoing contractual affairs.
Although direct state intervention has been limited to particular types of contracts (mostly leases, employment contracts, seasonal services contracts), its indirect effect has been much broader, virtually global. After all, most of the parties who have been suddenly found entangled in non-profitable agreements had themselves outstanding obligations to perform.
As a result, while the legislative intervention has halted a storm of claims in the aforementioned types of contracts, at the same time these legislative measures have been used as guidelines for the assessment by way of analogy of the impact of the pandemic on contracts with similar characteristics.
Since the emergence of the new variants of the virus are indicating that the recovery may be even more arduous than originally expected, it is important for firms operating outside their jurisdiction to be aware of their exposure to potential claims and make the best use of the rights awarded to them. An uninformed handling may have a doubly prejudicial effect, involving both the emergence of unexpected costs and the loss of unknown benefits.
Gregory Logothetis, partner, Koutalidis Law Firm