Legislative changes pose a serious risk for businesses, especially when they come into force unexpectedly and adversely. In order to deal with such situations, a properly drafted force majeure clause is a safeguard to ensure that a business is not put in an unjustifiably breach of contract situation. It is worth ensuring at the time of contracting that the inability to perform due to changes in the law is addressed and does not entail liability for either party.
In Hungary, changes in legislation are not uncommon and often have a significant impact on business operations. These changes are not only unexpected, but often adversely affect market participants, especially those who have to comply with strict requirements in a particular area. One notable example is the amendment to the regulation concerning qualified temporary work agencies, which, as of 1 July 2024 imposes new and significantly stricter requirements on industry operators. The significant increase in the number of staff required to qualify for qualified status has led to many temporary work agencies losing this status and no longer being able to employ third-country nationals on temporary agency work under the new conditions.
Legislative changes such as these can significantly affect not only on the day-to-day running of businesses, but also on the fulfilment of their existing contractual obligations. A company could easily find itself in a breach of contract situation if it is unable to meet previously agreed obligations due to the new legislation. It is therefore of the utmost importance to think about these risks at the contracting stage and to put in place adequate protection in the form of force majeure clauses.
What is a force majeure clause and why is it essential?
A force majeure clause is a fundamental element of contracts which allows the contracting parties to be relieved of their obligations in the event of certain unforeseeable events beyond their control. These can be natural disasters, acts of war or – particularly relevant to the subject of this post – changes in legislation.
A properly drafted force majeure clause will help to avoid disputes and confusion over liability. Changes in the law are often circumstances beyond the control of the business which make it impossible to fulfil the terms of the contract. If there is no force majeure or other clause in the contract which precludes a business from being in breach of contract because of a legal impediment to performance, the business may be in breach of contract.
The treatment of legislative change in contracts
Legislative change can be a particular problem in sectors where operating conditions are subject to strict legal requirements. The effect of a tightening of legislation may be that a company is unable to fulfil its previous contractual obligations, for example, in the case of a restriction on the employment of a third-country worker. It is therefore important to specifically address changes in legislation in contracts and to consider these events as unforeseeable and unavoidable situations beyond the control of the parties.
Drafting the force majeure clause in this way may allow the inability to perform due to changes in the law not to be considered a breach of contract. It should be stipulated in the contract that the obstacle caused by a change in the law cannot be considered as an event in the interest of the contracting party and does not entail the consequences of a breach of contract, but results in the impossibility of performance of the contract for which neither party is liable. This is particularly important in the case of long-term contracts where circumstances may change significantly during the duration of the contract.
How to draft the force majeure clause?
When drafting a force majeure clause, it is important to include the following elements:
- A list of force majeure events: do not limit the clause to natural disasters and wars, but also cover changes in legislation. It is important to include significant changes in the legislative environment as force majeure events.
- Exclusion of liability: It should be made clear that force majeure events are not the responsibility of the contracting parties and do not constitute a breach of contract.
- Impossibility of performance of contractual obligations: If the force majeure event affects the performance of the contractual obligations to such an extent that it becomes impossible, impossibility of performance of the contract should be established. In such cases, neither party is liable for the termination of the contract.
- Obligation to notify: It is important that the contracting parties undertake to notify each other immediately of the occurrence of the force majeure event and its expected impacts.