Pandemic and the rise of contractual defaults

Will the subsequent period of the publish-pandemic period be made the decision in court docket? Legal professionals elevate the probability of climbing contract defaults 

For virtually three a long time, Macau has been mostly slash off from the rest of the world owing to the COVID-19 pandemic.

This resulted in an helpful regulate of the virus in borders, but this condition has led to a substantial pressure on residents and enterprises.

So much, a blend of informal adjustments and governmental incentives has prevented an inflow of contractual default cases to the courts,” write Célia F. Matias (assistant professor with the Department of International Lawful Studies of the Faculty of Legislation, University of Macau) and Monica Chan (a PhD college student at the very same Faculty). in a new contribution to an edited guide on Asian deal regulation.*

Nonetheless, before the change in neighborhood anti-epidemic steps final month,
the authors predicted that “as restrictive actions continue to be in put, far more
citizens and businesses are very likely to experience complications.”

In a bubble by the sea COVID-19, time and agreement regulation
in the Macau S.A.R is a reflection about “striking the appropriate harmony
concerning the basic principle of pacta sunt servanda [a Latin expression which
means ‘Agreements must be kept’] and contractual justice is of paramount
significance, specially in long-time period contractual relationships, this kind of as rentals,
which are additional vulnerable to variations of conditions over time.”

The two authors place a specific concentration on “the system of termination or
modification primarily based on adjust of circumstances and its applicability to very long
time period contractual interactions in the context of the COVID-19 pandemic,”
concluding that “good faith and, arguably, the principle of contractual balance
(or justice) give legal avenues for reduction in case of irregular adjustments of
conditions that affect the parties’ capability to carry out.”

Nonetheless, considering the fact that there are nonetheless no recognised circumstances taken to neighborhood courts, “doubts
continue to be about the interpretation of these mechanisms in the context of a pandemic
that has been mainly controlled within the borders of Macau S.A.R.”

The fact that no acknowledged pandemic-relevant court docket scenarios have so far surfaced
“may be because of, in component, to its strict needs, but also to casual
contractual adjustments prompted by governmental intervention, in the variety of
subsidies and incentives. For now, it could be that these measures, as well as an
exertion to sustain ‘harmony’, is retaining these scenarios out of the courts” [Note:
although published in late December, the survey was completed in May, 2022].

Rentals, drive majeure
and change of situations

“Macau regulation admits force majeure mechanisms of the two statutory and
contractual resource,” the authors highlighted. “With regard to the former,
whilst there is no normal force majeure clause applicable to all
contracts, the principle appears in some scattered provisions, these types of as write-up
117 of the Commercial Code, according to which a business tenant is under the
obligation not to interrupt or stop the working of an business except a circumstance
of power majeure emerges.”

An additional vital region of statutory software of force majeure is
general public functions contracts, but Matias and Chan reveal that they only concentrate on
“the additional amorphous fact of personal contracts.”

That’s why they think about a hypothetical scenario review based mostly on the Macau
rental market, to explore “the continuing outcomes of this ‘bubble’ on lengthy-time period
contractual relationships – this kind of as housing and professional rentals – that appears to be
much more problematic, specified the certain properties of the Macau house
market.”

In this scenario, Matias and Chan foresee, “difficulties in complying with contractual terms see very likely.”

A different perspective is defended in a take note published on the net by the regulation
company Manuela António, pertaining to the similar issue.

“An epidemic would seem to healthy
perfectly with the basic academic speculation of pressure majeure or
switching of the conditions on which contracts had been launched,” they
said.

“In simple fact, it looks apparent
that the physical appearance of an epidemic will not be predicted in the danger sphere of
most contracts, so it is tough to argue that the contract, whatsoever its
nature, are not able to be revised in the light of the ongoing excellent
situations,” Manuela António lawyers wrote (“The COVID-19 outbreak
and its impact in contracts”).

They close with this powerful
belief: “it is expected that numerous contractual conditions need to be reviewed
on a case-by-scenario basis, in get to mitigate the destructive outcomes that this
epidemic may perhaps have on the economic system and on the security of the legal trade.”

(The short article we are quoting was
released on the internet on the website of Manuela António’s business at the starting of
the consequences of the pandemic, but the lawyer has now explained to Macau Organization that the
textual content is up-to-day and can be quoted without the need of restrictions).

Macau courts and ‘abnormal alter in circumstances’

Another local law firm that has
presently commented on this matter is Lektou, by way of an posting by lawyer
Cynthia Kou Ka, revealed in the bilingual Portuguese-Chinese weekly newspaper
Plataforma about a yr ago.

The lawyer starts by stating
that “the COVID-19 pandemic has substantially transformed the business
environment in Macau, with professional, small business, and particular person routines, in
the several sectors of activity, which depend predominantly on the tourist market,
currently being influenced by preventive steps in opposition to the pandemic taken by the
Govt.”

Cynthia Kou Ka goes even additional, stating that “legal proceedings in Macau resulting from contractual disputes have consequently been raising in modern several years, with the contractual functions afflicted, to a significant extent, resorting to the lawful norms referring to the ‘amendment of the circumstances’ as a basis for fixing issues similar to breach of agreement,” and that a lot more not long ago, “it has been claimed that the actions launched by the Macau authorities for the prevention and handle of the pandemic induced a major variation in between the present-day predicament in Macau and the problem existing at the time of summary of the deal.”

The attorney from Lektou workplace
factors out that there are many particularities to get into account.

One of them is if the hurt
bash is in arrears when the instances alter.

This would be the case for
“many commercial entrepreneurs who have out their exercise in a rented
position, in which the injured get together would have the proper to terminate or modify
the agreement, by judicial indicates, in accordance to equity judgments, basing the
delay in the payment of rents on the truth that the problems brought about by the
pandemic have damaged their income.”

However, if it is in arrears at
the time of the irregular transform in situations, the lessee “will not
delight in the right to terminate or modify the deal primarily based on that abnormal
improve in instances.”

Cynthia Kou Ka also recollects
that “according to prior choices of the courts of Macau, there were being
scenarios in which the motives invoked, which includes that of the world-wide financial
crisis that transpired previously, had been not acknowledged by the courts as getting
scenarios of ‘abnormal improve in circumstances’.”

As a result, if the contractual events intend to solve or modify the
contracts through the judicial system as a outcome of the present pandemic,
they have to assess no matter whether these and other legal demands have been met in
each individual certain case, according to Kou.

“On the other hand, the parties may perhaps also consider to enter into
mediation or negotiation, adapting or modifying the conditions of the primary
contract in response to the evolution of the pandemic, by entering into an
modification to the contract, in get to protect their rights and interests under
judgments of fairness, below the theory of contractual great religion and the
respective authorized provisions,” proceeds Cynthia Ka. “In this way, it will
be achievable to steer clear of, to a substantial extent, the have to have to vacation resort to the courts for
the resolution of conflicts resulting from the aforementioned contracts.”

“Only time will explain to when recovery comes, but in the meantime, it is up
to the legislation and its practitioners to strike a honest balance of rules inside
the bubble,” concluded Célia Matias and Monica Chan, prior to the new
radical alter pandemic regulate insurance policies adopted in December.

It will be interesting to see if the modern reversal of actions could
be a cause of shifting situations, supplied that, as is effectively identified, lots of
firms have had to close in recent months thanks to ill personnel.

* Normann Witzleb (ed.) Agreement Regulation in Transforming
Situations: Asian Views on Pacta Sunt Servanda (Routledge, 2022)