Corona Virus Pandemic as Force Majeure in International Contracts
Introduction
The recent outbreak of COVID-19 and the precautions to prevent the disease from further spreading to populations have had important implications for international contracts. In particular, the disruptions faced by a large number of manufacturers/contractors in fulfilling their contractual commitments caused by the outbreak have once again brought the “force majeure” issue to the forefront of the legal agenda all over the world. In this information note, implications of the COVID-19 outbreak from the perspective of force majeure are presented along with recommendations to businesses, whose performance of their contractual obligations are impeded by the outbreak.
“Force Majeure” Clauses
First of all, it would be beneficial for the purposes of this note to define the concept of “force majeure”. Force majeure clauses are provisions in contracts that give a party a valid excuse for non-performance of its contractual obligations due to an extraordinary event or effect that the parties could not have anticipated or controlled.
Force majeure clauses are usually treated as boilerplate provisions and not given much thought at the time of drafting. Notwithstanding this, the term “force majeure” is not used uniformly in all commercial contracts and may cover different circumstances as agreed between the parties. Therefore, it is possible that while some of the force majeure clauses set out by parties include “pandemics”, some others do not.
In addition, some force majeure clauses exhaustively list the events that constitute a force majeure, while in others, parties content themselves with only giving examples of such events (which is often called as an “open force majeure clause”). Whatever the scope of these clauses, when the events envisaged therein realizes, their effect is release of the parties from their contractual obligations and termination of the contract, or a suspension of such obligations for the duration of the force majeure event.
As a result, when assessing a contractual party’s position in the face of a force majeure event, the “wording” of the force majeure clause plays a very significant role.
As a similar concept, some contracts also include provisions known as “hardship clauses”. Hardship clauses are intended to cover circumstances in which the equilibrium of a contract breaks down due to unforeseen events that create an excessive burden for one of the parties involved. Therefore, these clauses usually oblige parties to adjust the contractual terms to be able to cope with the unforeseen circumstances.
Different Implications in Different Jurisdictions
After presenting a brief outline of the concept, it should be noted that the legal implications of “force majeure” are not the same in different jurisdictions. Therefore, apart from the wording of the force majeure clause, the governing law of the contract is also of utmost importance for determining the consequences of “force majeure”.
Below is an overview of how civil and common law systems treat the matter of force majeure, as well as the position in cases where the UN Convention on the International Sale of Goods (CISG) applies to the contractual relationship between the parties.
Civil Law Systems
In most civil law jurisdictions, force majeure is implicit. It is, therefore, possible to invoke “force majeure” even in the absence of a force majeure clause or in the event that the relevant clause does not include pandemics. In other words, originating from Roman law and having been codified in Code Napoleon, in most civil law systems, there are remedies stemming from the law itself regarding the force majeure situation.
Turkey, following the civil law tradition, recognizes the doctrine of force majeure under the principles of objective impossibility under Article 136 of the Turkish Code of Obligations. According to this article, a debtor shall be released from its obligation if the fulfilment of that obligation becomes impossible due to a reason that is not attributable to the debtor and which occurs after the conclusion of the contract.
In light of this provision and similar provisions in other civil law jurisdictions, even if the pandemic is not covered by the relevant force majeure clause, it can be accepted as constituting a force majeure event provided that it has not been possible to prevent the pandemic from occurring. There was no way of foreseeing this event beforehand and there is a causal link between the pandemic and the impossibility of performance.
Common Law Systems
If in contrast, the governing law is that of a common law jurisdiction, there is no “force majeure law” so to speak. Therefore, the black letter of the Contract becomes even more important as “the law between the parties”. In these jurisdictions, courts give effect to the definition made by the parties in their agreements and do not rule based on an implied term of force majeure. In other words, unless pandemic diseases or specifically COVID-19 is inserted in the force majeure clause, the party affected by the outbreak might not be able to invoke this event to be relieved from its contractual obligations.
In a nutshell, the scope of the concept of force majeure is determined primarily through the agreement between the parties. If the “force majeure clause” lists the related situations exhaustively and does not include the pandemic or a comparable event as a state of force majeure, it might be difficult to invoke this clause, especially in common law jurisdictions. If, however, the force majeure clause is an “open” one, then, following an assessment of the facts surrounding the case, the party may be able to successfully invoke the pandemic as a force majeure event.
CISG
Given that many international contracts concern the international sale of goods, in many cases where the parties are from different contracting states, the UN Convention on Contracts for the International Sale of Goods (“CISG”) will become relevant.
Article 79 of the CISG provides that a party is exempted from paying damages if the breach of a contractual obligation is due to an impediment beyond its control, and it could not have been reasonably foreseen at the time of concluding the contract or the party could not reasonably avoid or overcome the impediment or its consequences. Accordingly, in a contract to which CISG applies, parties, whose operations were forced to halt due to the pandemic and the relevant governmental measures may assert the outbreak of COVID-19 as an unforeseeable event beyond their control.
What to do if the corona pandemic impacted your contractual obligations?
Check your contract: To determine whether the pandemic and the relevant governmental measures all over the world constitute a valid ground for asserting force majeure, parties must first check whether their contract covers events similar to the COVID-19 outbreak, such as epidemics.
If an epidemic, outbreak, pandemic, etc. is expressly mentioned in the list of events that qualify as force majeure, then, depending on the terms of the contract, the party invoking force majeure can be excused or suspended from performing its obligations under the contract.
If an epidemic or outbreak etc. is not expressly included in the force majeure clause, it is still useful to bear in mind that sometimes such clauses provide a general definition and include force majeure events as examples. If that is the case, depending on the scope of the clause, parties may still be able to invoke the pandemic as a force majeure event. In addition, it can also be argued that governmental measures against the pandemic may be considered as “emergency measures”, usually listed in force majeure clauses.
If the underlying contract has no force majeure clause or the case of a pandemic/epidemic is not covered under the clause, then the law governing the contract becomes decisive in how the force majeure event will be treated.
Notify the counterparty: After making sure the force majeure clause covers the concrete situation, the very first thing to do is to notify the counterparty regarding the force majeure event in a timely manner.
In this notification, it is essential to submit the details of the event and the causal link to the impediment to the performance of the contractual obligations. In other words, the implications of the pandemic on the business which makes it “impossible” to carry out the obligations must be clearly set out.
Get ready for mitigation: In most cases, force majeure clauses and related legislation impose a duty to mitigate the effects of non-performance by the party invoking the force majeure event. In this context, it would be beneficial to discuss the issue with the counterparty and determine the precautions to be taken regarding the post-force majeure period and the respective responsibilities of the parties in the process.
Conclusion
The force majeure clauses in international contracts are definitely worth a closer look, as it can already be observed that many companies across all industries on an international basis are asserting both the pandemic itself and the measures taken by governments to combat it as force majeure to be excused from performing their obligations.
The situation stays fluid with China recovering, and Europe nowadays being hit hard. It is, however, also certain that continuing travel restrictions, shortages in the workforce, enforced quarantines, break-down of supply-chains, and event cancellations will further give rise to many cases where force majeure will be asserted to avoid contractual obligations.
While there is no doubt that the coronavirus pandemic and its consequences are serious impediments beyond the parties’ control, answering the question as to whether they can be treated in a contractual relationship as force majeure still requires a careful assessment of the specific facts and circumstances relating to that relationship, as well an analysis of the scope and extent of the force majeure clause in the contract. Where there is no applicable clause agreed between the parties, an assessment of the situation under the law governing the contract is needed.
In any case, in order to avoid disputes concerning the specific rights and obligations of a party exposed to an unforeseeable and uncontrollable event, it is always advisable to spell out clearly what constitutes force majeure, the procedures for invoking force majeure and the results of doing so when drafting international contracts.