An analysis of the institution of contractual penalties and the doctrine of force majeure

The impact of weather damage on the fulfillment of commercial contracts: Analysis of the Institute of Contractual Punishment and Doctrine In times of increasingly frequent weather damage and global changes, the Slovenian economy is faced with many legal challenges in practice, among which, after the last catastrophic floods in the summer of 2023, issues from the concluded of contractual relations in connection with traditional concepts of force majeure and contractual penalties.

Contract penalty and force majeure are two fundamental concepts of contract law, which are traditionally treated separately, but in certain circumstances directly interact. While the contractual penalty serves as a preventive tool and a mechanism to secure the fulfillment of the contractual obligations established between the parties, the doctrine of force majeure recognizes and takes into account external, unforeseeable and unchangeable circumstances that affect the party’s ability to fulfill these obligations.

During the period of weather damage in Slovenia in the summer of 2023, we witnessed rapid legislative changes, mainly with the help of intervention laws. Although these laws have provided some answers to urgent and immediate challenges, the private sector remains without a comprehensive regulatory framework.

The Act on Elimination of the Consequences of Natural Disasters (hereinafter: ZOPNN) stipulates that in contracts for the supply of goods or the provision of services or the execution of constructions, which private law entities concluded with state authorities or self-governing local communities, public agencies, public funds, public institutes and public economic institutes and other entities under public law that are indirect users of the budget of the Republic of Slovenia or the budget of the local community and do not relate to the supply of goods that represent the equipment necessary to eliminate the consequences of floods in August 2023, in the period until 31 December 2023, the provisions on contractual penalties due to delay, they do not apply, and the contractually agreed deadlines are extended for the duration of the elimination of the consequences of large-scale natural disasters.

Therefore, the intervention legislation adopted in response to weather disasters did not explicitly address the specifics of contractual relationships within the private sector. Therefore, due to the absence of specific regulation, the application of the provisions of the Code of Obligations (hereinafter: OZ) also remains relevant regarding contractual penalties and force majeure in the private sector.

FORCE MAJEURE in Slovenian judicial practice represents a legal concept that refers to unpredictable, extraordinary and unavoidable events that are beyond the control of the parties and that prevent the fulfillment of contractual obligations. These are events that could not have been anticipated or prevented despite all reasonable efforts by the customer. The concept of force majeure is used as a legal doctrine that allows parties to relieve themselves of responsibility for failure to fulfill their obligations in the event of such extraordinary events.

Force majeure is considered as an excuse for non-performance when the impact of the event is extraordinary and unforeseeable and would prevent the performance of the obligation despite the diligence and efforts of the customer. This may include natural disasters, wars, political changes, epidemics and similar unexpected events.

When asserting the concept of force majeure, it is important that the event was actually unforeseeable, unavoidable and that it seriously affected the fulfillment of obligations.

The position of Slovenian jurisprudence regarding force majeure in connection with weather damage was already taken by the High Court in Ljubljana in the judgment with reference no. no. I Cp 3818/2008 dated 08.04.2009, namely:

“According to the claims of the defendant, there was so much rainfall at that time that the water poured from all sides and flowed with great force outside the arranged channels, washed away the roads and caused a lot of property damage in the area of the market municipality. She therefore asserted force majeure, which is defined in law as an external event that is extraordinary, unpredictable and cannot be overcome (prevented, rejected, deflected). The court of first instance did not follow the plaintiff, who tried to prove that what happened on July 16, 2002 was not extraordinary. It found that as much as 118.7 mm of rain fell on the night of July 16, 2002. The fact of a severe storm is also confirmed by the newspaper articles submitted by the defendant, as well as the statements of witnesses.”

The Slovenian court therefore defined heavy rains and floods as force majeure. In the world of commercial law, the concept of force majeure is crucial in understanding the responsibilities of parties in contractual relationships. Contractual sanctions, particularly penalties, are established in advance as a means of ensuring compliance with contractual obligations. They are intended to protect one party against potential loss or damage caused by the other party’s default or delay. These sanctions are set out in the contracts as part of the contractual autonomy of the parties. The finding that force majeure directly affected the non-fulfillment of contractual obligations excludes the liability of the debtor in the legal sense, which consequently means the exculpation of the debtor regarding the obligation to pay a contractual penalty due to possible delay or non-fulfilment.

The legislation even provides for the termination of the obligations of one contracting party due to force majeure, if its fulfillment has become impossible due to force majeure. However, if, due to force majeure, such changed circumstances arise that the contract clearly no longer meets the expectations of the contracting parties and, according to the general opinion, it would be unjustified to keep it in force as it is, the party whose fulfillment of obligations is difficult or the party who, due to the changed the purpose of the contract cannot be fulfilled due to the circumstances, it requests the termination of the contract.

In cases where commercial companies are unable to fulfill their contractual obligations due to the consequences of an unexpected and large-scale flood, or, on the other hand, expect the fulfillment of their obligations by the counterparty, in our opinion, the involvement of legal experts is necessary to determine the correctness of the implementation of the contractual relationships. As soon as the situation allows it, it is necessary to carry out a detailed analysis of the concrete contractual relationship in relation to the actual situation and determine:

  • the meaning of contractual clauses, including force majeure clauses,
  • assessment of the applicability of the doctrine of force majeure,
  • possible need to modify already existing contractual provisions,

that the existing contractual relationship continues or that the business interests of both contractual parties are met.