COMMENT BY PARTNER DR. LAURYNAS DIDŽIULIS ON THE PANDEMIC, LEASES, AND FAIRNESS

The challenges brought about by the coronavirus hit us swiftly and unexpectedly – impacting the population, the health system, businesses, government institutions, and legal professionals advising individuals and entities. At the onset of the spring quarantine, with court hearings being systematically postponed and lawyers finding extra time, social networks and legal information pages became ablaze with various comments on the coronavirus’s impact on contract execution. It’s worth noting that classical institutes of civil law in Lithuania haven’t garnered such attention since the initial years of the Civil Code of the Republic of Lithuania – a period that could be considered the golden age of Lithuanian civil law doctrine.Without delving into specific examples, during the spring, most public comments on coronavirus-related legal affairs were provided by respected legal colleagues in practice. Typically, these analyses concluded with skeptical remarks stating that, while a specific assessment of the situation is necessary, the coronavirus hardly justifies the non-fulfillment of contracts. It’s usually emphasized that force majeure circumstances may affect only obligations in kind, not monetary obligations, such as paying rent. After this brief surge of activity within the legal community, the force majeure topic gradually lost popularity and did not return to the headlines of legal journalism during the second wave of the pandemic. Even in the program of the Spring of Legal Science, an annual event at Vilnius University dedicated this year to the legal challenges of the COVID-19 pandemic, no reports on the topic of force majeure were presented (which, by the way, is a category not only in private law but also in public law).However, my esteemed colleague from Alma Mater and representative of contract law doctrine, Dr. Stasys Drazdauskas, shared an insightful perspective on a social network, succinctly stating: “The Supreme Court has said that it is necessary to find very specific reasons that prevent the fulfillment of a very specific obligation, so that we can rely on irresistible force.” However, tenants still don’t want to pay for what they don’t get, and landlords want to get what they can’t give. I believe that the last sentence is particularly impactful and conveys more than a series of review comments. In this brief article, I will attempt to explain why I think so, but first, it is necessary to clarify the concepts of pandemic phenomena.The phenomena of the COVID-19 pandemicIn public discourse regarding the impact of the COVID-19 pandemic on contractual relations, there is often confusion between the concepts of coronavirus, COVID-19, and quarantine (referred to as the phenomena of the COVID-19 pandemic below). For instance, the title “The Draft Law of the Republic of Lithuania on the Effects of the New Coronavirus (COVID-19) on the Execution of Lease Agreements” equates coronavirus with COVID-19. While this might be acceptable in general media, it is crucial for legal applications to understand that these are distinct concepts, influencing contractual relationships differently.The coronavirus currently prevalent worldwide was identified in China in 2019 and officially named SARS-CoV-2 in December. This virus leads to the severe upper respiratory disease known as COVID-19. To prevent the spread of this disease, many countries have implemented quarantine measures—a special mode for the prevention and control of infectious diseases. Therefore, COVID-19 is not a virus but a disease that prompted the imposition of quarantine. Referring to COVID-19 as a virus is as accurate as referring to the virus that causes AIDS. Similarly, it is inappropriate to conflate the terms coronavirus and COVID-19 with quarantine, as quarantine represents a legal regime while coronavirus and COVID-19 are biological phenomena.Force majeureIn Lithuania, as in many countries, the concept of force majeure encompasses both natural phenomena (commonly referred to as “act of God”) and state actions (commonly referred to as “act of State”). In the context of the biological phenomena of the COVID-19 pandemic—the coronavirus and COVID-19—can be considered natural phenomena, while the quarantine represents the actions of the state. However, it is essential to assess whether the specific pandemic phenomena in a given case equate to force majeure and warrant the non-fulfillment of the contract according to the criteria defining force majeure.According to Article 6.212, paragraph 1 of the Civil Code, a party is released from responsibility for non-performance of the contract if it proves that the contract was not performed due to circumstances it could not control and reasonably foresee at the time of concluding the contract, and that it could not have prevented the occurrence of these circumstances or their consequences. Court practice has clarified that to recognize the existence of force majeure circumstances according to Article 6.212 of the Civil Code, all the following conditions (cumulative conditions) are necessary: 1) the circumstances did not exist when the contract was concluded, and their occurrence could not be reasonably foreseen; 2) due to the circumstances, the contract cannot objectively be fulfilled; 3) the party that failed to fulfill the contract could not control those circumstances or could not prevent them; 4) the party did not assume the risk of the occurrence of those circumstances or their consequences. In the absence of all these conditions, the factual circumstances cannot be recognized as force majeure (see the ruling of the Supreme Court of Lithuania of October 8, 2003, in civil case No. 3K-3-931/2003; ruling of October 4, 2010, in civil case No. 3K-3-370/2010; etc.). As seen, Lithuanian law embraces the classical concept of force majeure known to the tradition of civil law, characterized by three elements—unpredictability (French imprévisibilité), externality (French extériorite), and invincibility (French irréstibilité)—as well as their influence on the failure to fulfill the obligation.When analyzing the events of the COVID-19 pandemic for the purpose of applying force majeure, it’s essential to note that if these events are classified as force majeure due to the COVID-19 pandemic, their impact on contractual relations needs to be determined. It’s evident that coronavirus, COVID-19, and quarantine are distinct factors that may be related to contractual relations in various causal relationships. For instance, the deadly threat of the coronavirus can hinder the ability to use rented premises, even when the tenant’s activities are not subject to quarantine. Employers must create safe working conditions (Part 3 of Article 90 of the Labor Code), and, except in cases of objective necessity, cannot send employees to work premises where they might be exposed to the coronavirus in common areas. In this case, the influencing factor in contractual relations is not the COVID-19 disease or quarantine, but the virus itself.COVID-19 can impact the performance of contracts when the debtor must fulfill a purely personal obligation (intituu personae), such as painting a picture or treating a patient, and is unable to do so because of illness. Here, the direct cause of interference is not the virus or quarantine but the disease. Additionally, quarantine can affect the performance of contracts by simply prohibiting certain economic activities, such as providing sports club services. This hindrance is legal and remains relevant regardless of whether the contractor is sick or at risk of contracting the disease due to the virus.When assessing the impact of the phenomena of the COVID-19 pandemic on contractual relations, the moment of time is also important. The developing practice of the Lithuanian courts in COVID-19 cases shows that the courts often refuse to justify the non-performance of the contract simply because the debtor violated the obligations even before the declaration of the quarantine or after it ended, which means that the real reason for the non-performance of the obligations is not the quarantine, but already formed before then insolvency or just an attempt to cheat.Can monetary obligations be affected by force majeure?As mentioned earlier, opinions in the spring of 2020 about the application of force majeure in the context of the COVID-19 pandemic usually emphasized that force majeure circumstances can only affect in-kind obligations, but not monetary obligations such as paying rent.When evaluating this position, the second sentence of Article 6.212, paragraph 1 of the Civil Code is relevant, indicating that the lack of goods on the market necessary to fulfill the obligation, the contracting party not having the necessary financial resources, or the debtor’s counterparties violating their obligations is not considered force majeure. Prof. V. Mikelėnos’ commentary on this provision interprets it as established because the specified circumstances do not correspond to the signs of force majeure. While generally agreeing with the reasoning in this comment, it should be emphasized that this provision should not be interpreted broadly, ostensibly meaning that monetary obligations cannot be affected by force majeure simply because money is a replaceable asset (genera non pereunt).Firstly, paragraph 1 of Article 6.212 of the Civil Code does not refer to all cases of fulfilling monetary obligations but to the lack of monetary resources. For example, a person may have monetary resources but may not be able to fulfill the payment obligation if the interbank payment system does not work. Secondly, the mere fact that a party to the contract does not have the necessary financial resources is not and cannot be force majeure, as it does not satisfy the signs of externality and foreseeability. However, it does not mean that the lack of financial resources caused by force majeure circumstances cannot be justified. In other words, the lack of monetary resources in itself is not and cannot be justified, but if a person cannot fulfill a monetary obligation due to a force majeure circumstance that caused their lack of monetary resources, the non-fulfillment of the obligation can be justified. For example, when an indigent person is temporarily unable to pay for services rendered because the state has mistakenly seized all of their property and they cannot even get a loan during the period of seizure, their ability to fulfill the monetary obligation is affected by nothing but the form of force majeure state actions. Thirdly, examples from the practice of Lithuanian and foreign courts in cases of COVID-19 show that courts analyze the presence of force majeure in cases of non-fulfillment of monetary obligations. Therefore, it can be stated that, in practice, the supposed ban on applying force majeure to justify non-fulfillment of monetary obligations is far from being observed in all cases.Altogether, there is no absolute interpretation limiting the application of the force majeure clause to in-kind (non-monetary) obligations in the Civil Code (CC). Circumstances of force majeure can qualify even in relation to monetary obligations, provided they meet all the necessary conditions.Can the tenant rely on force majeure circumstances?One of the most pertinent legal issues in business, not only in Lithuania but worldwide during the COVID-19 pandemic, revolves around the payment of rental fees. Specifically, it questions whether a tenant, unable to use premises for business due to restrictions, can invoke force majeure and refuse rent payment. In addressing this, I will discuss relevant Lithuanian legal norms, recent foreign court cases, and provide a brief doctrinal assessment.The lease agreement is bilateral (synallagmous). The lessor agrees to temporarily grant the lessee management and use of the property for a fee, and the lessee agrees to pay rent (Article 6.477, paragraph 1 of the Civil Code).The lessor’s primary responsibility is to deliver the property in a condition meeting the contract terms and purpose (Article 6.483, paragraph 1 of the Civil Code). This includes ensuring the property is fit for use throughout the rental period, covering both physical and legal aspects.The tenant’s main duty is to pay rent on time (Article 6.487, paragraph 1 of the Civil Code). If not stipulated otherwise by laws or the contract, the tenant can demand a rent reduction when conditions of use substantially deteriorate due to circumstances beyond their control. Additionally, the lessee has a secondary obligation to use the rented item according to the contract and its intended purpose (Article 6.489, paragraph 1 of the Civil Code).In the context of rental relations, the COVID-19 pandemic introduced two significant and debatable phenomena – the coronavirus and the quarantine. The coronavirus is relevant in tenancy relationships as it causes the life-threatening disease COVID-19 and can be transmitted in premises where people gather or work. Thus, even if a specific business is not subject to quarantine restrictions, managers were compelled to consider government recommendations, as ignoring them could risk civil liability.While the government’s recommendations were not legally binding, they carried weight due to the general civil duty of care outlined in the Civil Code (Article 1.5, Article 6.248, Part 3, Article 6.256, and the first parts of Article 6.263). This duty, driven by both private and public interests, obligated private companies to implement remote work if feasible, irrespective of direct quarantine requirements. Failure to do so could expose a company to civil liability for potential harm caused by negligence.In essence, the duty of care could restrict a lessee’s use of the leased object, even if their activities were not subject to quarantine under public law. The government’s recommendations served not only as advice but also as criteria for assessing individual behavior in civil legal relations, guiding individuals on how to act prudently and legally to protect both themselves and society from the virus’s spread.The direct application of quarantine, guided by public law norms, constitutes a specific and immediate restriction on property use, mandated by relevant legal acts unless exceptions are explicitly stated. According to Part 11 of Article 21 of the Law on the Prevention and Control of Human Infectious Diseases in Lithuania, during quarantine, a person’s freedom of movement may be temporarily restricted, and economic activity limitations may be imposed. The Government, through Resolution no. 1226 on November 4, 2020, re-declared quarantine nationwide, still in effect. Notably, from December 9, 2020, private sector entities were mandated to implement remote work, except where on-site functions necessitate it. This includes ensuring necessary health and safety measures, compliance with social distancing, and provision of required personal protective equipment. This obligation extended beyond specific activities, such as wellness service centers, encompassing the entire private sector and prohibiting collective work involving more than two people on premises, except when objectively necessary. What are the implications for leases?Quarantine, being a public law restriction on object use, is obligatory for all individuals and entities tasked with implementing measures for infectious disease prevention and control (Article 37, Part 2, Point 1 of the Law on the Prevention and Control of Human Infectious Diseases in Lithuania). This mandatory restriction, arising from circumstances beyond the lessor’s control, hinders the lessor from fulfilling the obligation stated in Article 6.483, Paragraph 1 of the Civil Code – ensuring the object’s suitability for its intended purpose throughout the lease term.The inability to use the object raises a crucial question: what about the tenant’s obligation to pay rent when the leased item cannot be utilized as intended? Part 1 of Article 6.62 of the Civil Code addresses this, stating that if a party cannot fulfill an obligation due to circumstances beyond both parties’ control, and the law or contract does not specify otherwise, neither party can demand performance from the other. In such cases, both parties have the right to demand the return of everything exchanged without corresponding counter-performance.At the heart of the issue raised by a colleague, where ‘tenants still don’t want to pay for what they don’t get, and landlords want to get what they can’t give,’ lies the application of Article 6.62, paragraph 1 of the Civil Code. In cases where the lessee is entirely unable to use the premises, such as a gym or office, due to a genuine threat of infection or applicable restrictions, the lessor, although not at fault, is unable to fulfill the obligation to guarantee the physical (due to the virus spread) or legal (due to quarantine) quality of the item. Using rented premises in such situations is either unsafe (strongly discouraged by the state) or entirely prohibited. Contract law, based on the quid pro quo principle, deems it unfair to demand rent when the tenant cannot use the premises at all, irrespective of their financial situation.If the lessee still has the legal and safe opportunity to use the object, for instance, if they have immunity or an objective necessity, the force majeure clause doesn’t apply. In such cases, other legal instruments, like a fundamental change of circumstances under Article 6.204 or a rent reduction under Article 6.487, paragraph 1, can be considered. The application of these norms depends on the lessee’s ability to use the object according to its intended purpose, not just the abstract access to the premises. If legal possibilities are absent, even temporarily leaving belongings in the rental object or picking up items doesn’t alter the force majeure status. In these instances, the economic relationship effectively shifts from rent to storage services, justifying charges based on prevailing rates in the storage market.Several examples of the practice of courts of foreign countries:If you find the above interpretation too theoretical or bold for a free market, consider recent examples from foreign court practice. Last year, the United States Federal Seventh Circuit Court’s decision in the Hitz Restaurant Group case gained attention in the legal world. The court reduced rent during the quarantine based on a force majeure clause that released both parties from obligations disrupted by authorities’ actions or inactions, with a note that ‘Lack of money is not considered Force Majeure.’In this case, the court, acknowledging that the governor’s executive order only restricted certain activities (serving visitors in the restaurant premises), not the overall operation (food production for take-out or delivery), concluded that force majeure didn’t affect the entire lease agreement. Recognizing the reduced income opportunities, the court reduced the rent by 75%. While this decision might seem akin to a fundamental change of circumstances, it aligns with Lithuanian law logic.Notably, by limiting restaurant visits and allowing only food production for take-out or delivery, the restaurant hall couldn’t be used for its intended purpose (seating visitors), only auxiliary premises were utilized. This doesn’t signify a reduced intensity of use of the entire item (as per Article 6.204 of the Civil Code) but the impossibility of using a specific part of the thing (as per Article 6.127, paragraph 1). The obligation was deemed divisible, given that the tenant could still use a part of the premises affected by force majeure.If you remain skeptical about the applicability of force majeure in jurisdictions with continental law traditions, consider a case from Quebec, a Canadian province rooted in civil law. In the 2020 Hengyun International Investment Commerce Inc. v. 9368-7614 Québec Inc. case, the Quebec Superior Court ruled that the lessor is not entitled to rent payments as long as the lessee, a sports club, cannot operate due to a ministerial order.Applying Article 1470 of the Civil Code of Quebec, the court justified force majeure by highlighting that, due to quarantine, it was not the tenant but the landlord who couldn’t fulfill the obligation to ensure uninterrupted use of the property. As sports services were restricted, the lessor couldn’t guarantee unimpeded use. The court emphasized that this obligation cannot be waived by contract but can only be limited. Simply having access to the premises for storing equipment wasn’t enough, as the purpose of the premises was for the sports club’s activities. Consequently, the court ruled that as long as force majeure circumstances persisted, the lessee was not obliged to pay rent if the benefit of fulfillment was not received.In conclusionIn summary, contract law fundamentally rests on the principle of fairness, serving as both its moral foundation and a measure of its quality. The concept of fairness should be applied universally in contractual relations, irrespective of their complexity. Demanding a benefit when one party doesn’t receive the agreed-upon advantage is inherently unjust. A legal system that fails to address such situations is deemed ineffective and reveals serious value flaws, necessitating improvement. It is reassuring that Lithuanian statutory contract law outlines possibilities for practical solutions, preventing the exploitation of one party’s interests at the expense of the other. The direction Lithuanian courts take in implementing these principles will be closely observed.