COVID 19 Resource Center, News

COVID 19: Guide to Force Majeure and Hardship

Since the COVID-19 outbreak was reported, countries around the world have imposed travel bans, quarantine citizens and isolate the infected in an attempt to stop the spread of the new virus.

The full impact of the outbreak globaly and the resulting emergency measures on Romanian and international trade remains to be seen. Many of our clients in Romania have reported severe business and operational disruptions, including termination of contracts, cancelling of events, closures of workplaces, disruptions to supply and distribution channels, shortage of labor and weakened regional demand.

Given the unexpected nature of the outbreak, at Gherghina Law we never give up on our clients…especially on hard times like this.

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In order to support our clients efforts to mitigate the damages of this unfortunate global situation, we immediately put in place a special COVID 19 Legal Task Force. Our lawyers and consultants attention has focused, among other tasks, on the prospect that parties to affected commercial contracts may invoke force majeure provisions in those contracts in order to excuse delay or non-performance.

Affected contracts with China

Numerous force majeure claims involving Chinese buyers or suppliers have already been reported in the world media and it seems likely that claims with a wider ambit will follow as the ripple effects of the outbreak spread globally.

Any contract with a specific force majeure clause may be the subject of a claim. Contracts governed by a civil law framework, like the Romanian law, which grants force majeure remedies, whether or not they are written into the contract, may also be the subject of the claim. This includes also the Chinese Law .

Force majeure claims are particularly relevant for contracts with a long-term or ongoing supply mostly and in the following markets:

  • Commodity contracts
  • Supply contracts for textiles, foodstuffs and mechanical equipment;
  • Contracts for electrical equipment and electronic components;
  • Medical equipment manufacturing contracts.

The Chinese government has acted on force majeure specifically, with the quasi-governmental China Council for the Promotion of International Trade (CCPIT) announcing on 30 January that it would offer “force majeure certificates” to help companies deal with disputes with foreign trading partners arising from government control measures. To date, it has been reported that thousands of certificates have been issued purporting to shield Chinese companies against liabilities for non-performance.

WHAT IS FORCE MAJEURE?

Force majeure and “hardship” are exceptions to the basic rule pacta sunt servanda. However, a clear distinction of the meaning of both terms in commercial practice is not always easy. There are indeed borderline cases, which cannot be labelled as falling in one or the other basket exclusively. Practitioners of international arbitration will also agree that there is a great confusion as to the use of these two terms. Even in important international contracts, they are often inserted as synonyms.

Force majeure

As regards force majeure, it is often believed that this term is solely of a contractual nature, so that parties to a contract are free to stipulate that a certain event shall be regarded as force majeure, irrespective of the conditions which have to be met under the applicable law.

This view is for instance reflected in contract stipulations, which can often be found, that a determined event will be recognized as force majeure when a Chamber of Commerce or a similar organization issues a “Force Majeure Certificate “.

In the interpretation of the parties, the presentation of such a certificate will release them from their contractual obligations. They are often subsequently surprised and disappointed to learn, through a decision of an arbitration court, that a Chamber of Commerce or other body can only certify that a specific event has taken place but that the arbitrators are bound to the qualifications of the applicable law.

One of the reasons for this confusion may be that Standard contracts, which are largely based on common law conceptions, are used by parties coming from different legal systems. Such is the case, for instance, of the Conditions of Contract (International) for Works of Civil Engineering Construction of FIDIC which introduce expressions like “excepted risks’; “special risks’; “frustration” which have not always a strict equivalent in continental legal terminology.

The legal elements for the qualification of an event as force majeure (vis maior, act of God, etc.) are essentially the same in most legislations, and court decisions show a universal trend to a comparable restrictive interpretation. These elements are

(i) that the event is of an external nature,

(ii) that it could not be foreseen or prevented and

(iii) that it renders performance of a contractual obligation impossible at all or for a certain time.

Hardship

This cannot be said for the term “hardship” in the meaning of an event that changes the contractual equilibrium between the rights and obligations of the parties in such a dramatic way that performance can become ruinous for one of them or cannot reasonably be expected. Although most legislations have rules to cope with such situations (which roughly fall under the so-called clausula rebus sic stantibus), accepted solutions by national laws as well as court decisions and legal doctrine show a remarkable degree of variation.

Civil and contractual force majeure regimes often differ in practise. Contractual can be, in scope and remedies, either wider or narrower than the more inflexible civil law schemes, depending on the bargaining power of the parties at the time the contract was entered into and how that translated into the drafting of the particular contract.

For example, many contractual Force Majeure provisions will include a list of examples of this kind of events. Generally it will be easier to bring a force majeure claim if the event is listed, although typically the other requirements of the objective test must still be met.

Epidemics are uncommon in modern times, but, recent memory includes SARS, Ebola and various severe flu outbreaks. Epidemics arise frequently enough though that the parties may have specifically included “epidemic” or “pandemic” as listed force majeure events or they may be subsumed within more general terms such as “disease” or “illness”. Similarly, emergency measures to address or contain an outbreak may be listed or covered under general terms such as “government action,” “government order,” “national or regional emergency” or “quarantine.”

Chinese law perspective

FM exists as a doctrine under Article 180 of the General Rules on the Civil Law and Articles 117 and 118 of the PRC Contract Law. The regime applies automatically to commercial contracts governed by Chinese law where the contract contains no force majeure provisions.

Test/Causation

There must be a causal link between the force majeure event and the affected party’s failure to perform (i.e., the affected party must establish that the force majeure event must have caused the non-performance.)

Requirements for claim

The affected party must notify the counterparty of the force majeure event promptly or in a timely manner stating their claim for an exemption of liability and providing proof of the existence of the Force Majeure event and the impact of the event on the affected party’s non-performance.

Where such prompt or timely notice is not given the affected party may become liable for losses suffered by the counterparty which could have been avoided had such notice been given.

For example, until fairly recently, English courts applied a test of unforeseeability to force majeure events and while there is authority that this is no longer the case, other common law courts may still impose such a requirement. Hong Kong and Singapore courts have tended to follow the English courts’ approach. Conversely, English courts have found that the affected party must also generally have been “ready, willing and able” to perform the contract but for the Force Majeure event. English courts have also tended to take a dim view of claims that a change in economic or market circumstances affecting the profitability of a contract may be a Force Majeure event.

Certain New York courts have tended to interpret Force Majeure provisions narrowly, reflecting the terms of the agreement and the intent of the parties, though there is also authority that “known practices within the industry” is important, particularly in specialist industries.

On the other hand, long-term supply contracts may provide for more complex scenarios, with some contracts requiring supplies to be made at a later date to maintain total quantities while others effectively cancel the affected supply (leaving the supplier with the headache of a quantity it may be unable to sell in circumstances where prices have fallen).

OUR ADVICE TO CLIENTS

If, whether as buyer or supplier, you have entered into commercial contracts that have or may be affected by the COVID 19 outbreak, we recommend the following actions:

  • We advise our clients to contact their designated lawyer at Gherghina Law and to review each contract carefully, with particular regard to the governing law and Force Majeure provisions, including any time bars or other procedural requirements.
  • We advise our clients to contact our office for a preliminary legal view on whether any Force Majeure provision is “open” or exhaustive in relation to the list of Force Majeure events and whether the COVID 19 outbreak and/or resulting government crisis measures are covered/excluded.
  • We advise our clients to discuss with their dedicated Gherghina Law lawyer if they need to invoke a claim, consider an obligation to mitigate the effect on non-performance and what steps they can take. Starting a mindful dialogue with the counterparty may be an important part of the process and our lawyers are always ready to support you in the negotiation process
  • Consider any potential flow on effects from the invoking of a claim such as termination of the contract.

Aside from your legal position, there are generally going to be several other important matters of concern:

  • For a counterparty who receives a Force Majeure claim they do not think is valid, there is the issue of enforcement of the contract,
  • There are the reputational risks and potential damage to long-term supply relationships with foreign buyers and suppliers. Even where there is no legal basis for Force Majeure relief, parties who receive Force Majeure claims may wish to be flexible about amending or restructuring (e.g. by postponing deliveries) the contract to accommodate the affected party.
  • Declaring Force Majeure or receiving a Force Majeure claim may impact on insurance arrangements.
  • Buyers who are part of a chain of supply contracts may themselves need to declare Force Majuere in response to a supplier’s declaration in order to avoid being in breach. Each contract in the chain may of course be on different terms or subject to entirely different governing laws and this can create substantial challenges for the buyer, especially where their downstream contract has less favourable (or no) Force Mîjeure provisions.

Clearly if you are entering into new contracts during this period you should consider the Force Majeure provisions with particular care.

Conclusion

With the full impact of the coronavirus likely to play out for some months yet and the potential for the outbreak to spread evan more in Romania, this is an issue seemingly becoming more important by the week.

If you would like to discuss any of the issues raised in this alert please contact us at office@firmadeavocatura.ro

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