A Coronavirus Diary – Preparing for Court Proceedings

When life returns to normal, the courts will be required to rule on hundreds of cases claiming that the pandemic thwarted the possibility of implementing contracts – It is important to record events and their implications in real time, in order to prove, ex factum, what could and could not be implemented

15.04.20 | Eleanor Stark

The intensity of the crisis we are currently experiencing, as well as its scope and essence are unprecedented both in terms of the Government’s intervention in the economy and the intensity of the damage to businesses and private individuals.  Storeowners have notified their landlords that they cannot meet their rental fees, suppliers have warned that they will not succeed in supplying merchandise that was ordered from them, and many other examples.  These are normative businesses that in a normal situation would have honored their commitments, however, reality has struck them in the face.

These extreme circumstances require enlisting legal tools that will enable the parties to the contract who have encountered hardships to be released from their contractual commitments, or to execute a new allocation of dangers and risks in the contract.  A government team was established to discuss all the influences of the crisis on existing contracts, and its conclusions are not yet known.  It is still unclear whether legislative amendments will be made to settle this situation and what they will include.

In the existing law, there is a force majeure clause that protects someone who breaches a contract as a result of a surprising and unexpected change of circumstance, beyond his control.  As a rule, if a force majeure clause is accepted, the individual who breaches the agreement is exempt from paying compensation for the breach or from implementing the agreement.  The assessment of the best jurists is that when the crisis comes to an end, the courts will be flooded with claims of breach of contract and this claim will be take center stage.  For example, the Israel Bar Association published an opinion paper regarding rents, whereby a force majeure claim applies to rental contracts for businesses for which the emergency legislation instructed their closure, such that these businesses are exempt from paying rent until withdrawal of the restriction (see link).

A ruling recently issued by the Tel Aviv District Court (No. 13003-06-19) illustrates the power of a force majeure claim and its boundaries.  In this case, a claim by a car rental company against a person who rented a car was discussed.  The renter did not return the car at the agreed upon date, due to a serious incident.  He had parked the car near a restaurant where he was eating; and at that time, a fight broke out during which a person was stabbed to death.  The Police closed the crime scene and confiscated the rental car for investigative purposes, suspecting that the renter was involved in the incident.  The renter was arrested and released a few days later.  After the renter’s release, the car remained in the custody of the Police and was returned to the rental company 42 days later, following inquiries and clarifications it had conducted.  The Court ruled that the confiscation of the car by the Police as part of a murder investigation was indeed a force majeure circumstance that prevented the renter from returning the car on the agreed upon date.  Consequently, a ruling was issued that with reference to the period until his release from custody, the renter would not be charged compensation by the rental company.  With regard to the period following his release from custody until the return of the car (those additional 42 days), the force majeure claim did not apply.  Judge Sarah Dotan said that during this period the renter should have taken active measures to return the car, which he did not do.  Therefore, the renter was charged compensation for that period.  The Court recognized that this was a force majeure incident; however, review of the course of events in their entirety led to the conclusion that starting from a particular date, the person in breach of contract could and should have taken measures to remedy the breach.

If we return to our matter at hand, it is important to understand that even if the courts recognize the present crisis as a force majeure, this is insufficient.  Each case is judged on its own merits, and even if there is a force majeure circumstance, this does not necessarily grant a complete exemption to the person in breach of contract.  Consequently, from a practical standpoint, it is recommended to currently open a ‘Coronavirus diary’ and document how the situation has impacted the business, while identifying and defining the connection between the crisis and the inability to meet the contractual commitments.

Since the crisis is likely to be prolonged, it is important to conduct many situation analyses, and to periodically review the measures required to reduce damages and cope with the changing circumstances.  As long as the principles of mutual guarantee do not lead the parties to an agreement, these steps will help those in breach of contract in a legal proceeding that will ensue.