The World Health Organisation (WHO) declared the novel coronavirus disease (COVID-19) a public health emergency of international concern on 30 January 2020. In addition to the very real and tragic human impact, the consequences of the outbreak of the coronavirus disease are being felt by companies across many industries and in territories across the world.
In the light of this, businesses are increasingly looking to understand their options in the face of delays and/or contractual non-performance. With the prevalence of force majeure clauses in commercial agreements in particular, a key question for many businesses is whether the global outbreak would constitute a force majeure event entitling a party to invoke the rights - or avail itself of the remedies - afforded to it under a force majeure clause.
In a global commercial environment, businesses need to take a holistic approach to their commercial contracts. This tool offers a multi-jurisdictional overview of the circumstances in which a party may be able to rely on a force majeure clause, as well as some of the other remedies – contractual or otherwise – on which a party may seek to rely if exposed to delays and/or non-performance as a result of the outbreak of the coronavirus disease.
In Australia, relief against force majeure events are not implied into contracts, but rather must be expressly incorporated into the relevant agreement between the parties. In other words, the relief will only operate if, and to the extent that, the contract specifically provides for it. As such, parties will first need to review their particular agreement and identify that a force majeure clause indeed exists.
If the contract contains force majeure provisions, then there are a number of considerations: There are a number of considerations a party seeking to rely on a force majeure provision should consider:
Contractual
Aside from the force majeure provisions, the contract may also include other clauses which parties may be able to rely on in relation to delays and non-performance, for example:
Non-contractual
Unlike force majeure clauses which will only apply if the contract provides for it, the doctrine of frustration is readily implied into every agreement. In short, a contract may be frustrated by an event which, without the fault of either party, causes performance of the contract to be impossible or makes performance radically different to what was contemplated at the beginning of the contract.
In practice, the question is whether the COVID-19 pandemic makes performance of the contract impossible (not merely more difficult).
For instance, if the COVID-19 pandemic merely makes performance of contractual obligations more costly or causes significant delays, then it is unlikely to be sufficient to frustrate the contract.
On the other hand, if government bans or restrictions certain activities make it impossible for parties in contracts connected to those activities to honour their obligations, then it is more likely those contracts are frustrated. For instance, a government ban on all shopping centres would likely mean it is impossible for landlords of shopping centres to perform their obligation to remain open to the public potentially frustrating the retail agreements with their tenants.
One of the fundamental principles governing the Czech civil law is the freedom of contract. Hence, as a first step you should always check your contract for a force majeure clause. The below statutory remedies will only apply to the extent not covered by your contract.
Contractual
A typical force majeure clause will define what events trigger the clause and what remedies the clause offers. The clause often sets out additional conditions to be observed by the invoking party.
- Events triggering the clause are often defined as extraordinary, unpredictable or insurmountable circumstances outside of the contractual party's control preventing that party from performing under the contract. Some force majeure clauses would also enlist typical events triggering the clause such as natural disasters, war or rebellions often followed by a general catch-all provision (such as "… or similar events"). When checking your force majeure clause, keep in mind that not only the COVID-19 outbreak itself but also the related government measures can constitute a force majeure event.
- Remedies offered are again defined by the parties in the contract itself. Some of the most common remedies include a release of the parties from the contract, a suspension of performance during the force majeure event or exemptions from liability.
- Additional conditions may include a requirement to notify the other party or to make reasonable efforts to mitigate the damages.
Statutory
In the absence of a force majeure clause the parties to a contract can rely on the statutory regime. Under the statutory regime, a party may be liberated from the obligation to pay damages caused by their failure to perform the contract if they failed to perform due to an extraordinary, unpredictable or insurmountable circumstance outside of their control. We believe that the COVID-19 outbreak and the related government measures would most likely generally fall within the definition in contracts concluded prior to the outbreak.
One word to note in the statutory definition of force majeure, however, is "unpredictable". It means that the invoking party couldn't have reasonably expected the force majeure event at the time they concluded the contract. If for example a party entered into the contract after the health emergency was declared by WHO, they could hardly argue that the outbreak was unpredictable to them. The statutory force majeure provision also cannot be relied upon by parties who were already in default when the COVID-19 outbreak prevented them from performing.
The statutory force majeure provision only liberates the party from the duty to pay damages. It does not prevent the party from being in default with all its implications. For example if a contractual penalty or a right to terminate the contract in case of default has been agreed on, those rights could still be enforceable in a force majeure situation.
Contractual
For a party considering its options in relation to delays and/or non-performance, the contract itself is a good place to start. Aside from the force majeure clause, there might be other clauses that a party could seek to rely on, for example:
- Termination/suspension/step-in rights: a party may be entitled to terminate the contract for convenience on the giving of notice to the other party, to suspend the contract or to appoint an alternative supplier to temporarily step-in and perform services in order to mitigate its losses.
- Break clauses: some contracts contain provisions which entitle either or both parties to terminate the contract early, either on the occurrence of specific milestones or at set intervals.
- Non-exclusive arrangements: the customer or service recipient may have the right to source alternative suppliers more generally or on the occurrence of specific events, such as failure to meet predetermined delivery targets.
- Compliance with law: many contracts contain provisions which oblige the parties to comply with certain laws. It may be that supply chain disturbances would cause a party to be in breach of a provision of this type - for example due to a failure to comply with health and safety laws - such that the other party is entitled to terminate the contract.
Statutory
Czech law offers two other remedies that might be relevant in the COVID-19 situation.
Firstly, the outbreak or the related government measures could constitute a substantial change in circumstances under which the parties concluded the contract. This is applicable if those substantial changes lead to a disproportionate hardship on one party's side, consisting either in a disproportionate increase of the cost of performance, or a disproportionate decrease in the value of the consideration. The substantial change in circumstances can only be invoked by a party which could not have reasonably expected and influence the change at the time the parties concluded the contract.
In case of substantial change in circumstances the invoking party is entitled to re-open negotiations of the contract. The right to re-open negotiations must be notified to the other party within a reasonable timeframe (usually 2 months under a statutory presumption). Until a new agreement is reached, the original one is still in place. That means that during the negotiations both parties are still obliged to perform under the original contract. If the parties are unable to reach a new agreement within a reasonable time either party is entitled to request a court to change the original contract or to cancel it.
In line with the freedom of contract, some contracting parties choose to "assume the risk of change in circumstances". That means that the change in circumstances provision does not apply and the party is not entitled to re-open negotiations even if the circumstances change dramatically.
Secondly, the Czech Civil Code recognizes a concept called subsequently impossible performance. Compared to the change in circumstances, this is rather an extraordinary measure applicable in specific cases only. It provides that if an obligation becomes impossible to perform the obligation ceases to exist. It is important to distinguish situation where the performance is truly impossible from those where the performance is still possible only with higher costs, more effort, assistance of a third party or a delay. While the former truly impossible performance would result in cancelation of the obligation, the latter hardship could perhaps amount to a change in circumstances as described above. Typically, the impossible performance is applicable in cases of fixed obligations. Fixed obligations are obligations to be performed on a specific date where it is evident from the nature of the obligation that the other party would not be willing to accept late performance. A good example of a fixed obligation is a hire of a venue for an event.
In case of impossible performance the obligation ceases to exist. That means that any payments or other performance already made under the contract must be returned. Neither party is entitled to claim damages caused by the cancellation against the other party. However, if the party fails to notify the other party about the performance impossibility without undue delay, it could be liable for damages arising as a result of the other party not having been made aware of the performance impossibility in due course.
UPDATE (23 April 2020): As part of the attempt to mitigate the negative consequences of the pandemic a number of laws is currently being passed in the Czech Parliament, commonly called "lex covid". One of the acts that have already been passed, called "lex covid justice", limits contractual penalties imposed for late payment. If the payer can prove they were unable to pay or it was substantially harder for them to pay due to the current extraordinary measures the payee is only entitled to a penalty up to the statutory late payment interest rate, i.e. 10 % p.a. Any contractual penalties exceeding 10 % p.a. will be temporarily disregarded. The limitation applies to defaults commencing after 12 March 2020 and it is effective until 30 June 2020. The limitation also does not apply to new contracts concluded after the effective date of the lex covid justice.
Practical advice
Whether or not a contractual or statutory remedy is available to you, keep in mind that most businesses are in some way affected by the COVID-19 outbreak. Everyone is therefore aware of the current crisis and everyone is striving to find solutions to keep their businesses running as smoothly as possible. We encourage you to reach out to your partners to tailor a one-off solution that fits both your and your business partner's needs best.
General notions
Unlike some jurisdictions (such as the UK), Finnish law does, per se, recognize the concept of force majeure as a general principle of contract law even if not explicitly agreed on. However, Finnish law also is grounded on the wide ranging principle of freedom of contract, particularly as regards contracts between two (or m0re) businesses (B2B). Hence, specific contractual provisions on matters such as force majeure are generally upheld and supersede the respective underlying general legal principles.
The foremost aspect in assessing the question of force majeure is that it must be assessed against the specific contractual obligations of each party, instead of just on a general level. Insofar as the contract does not provide otherwise, to be considered a force majeure, an event must be unrelated to, external to, unforeseen by, and exceptional to the parties, and it must (actually) hinder the performance of the contract such that its effects are beyond the normal control of the party invoking force majeure.
The fact that a party does not have financial means to pay due to effect of Covid-19 on its business, or that the contract has become patently unfeasible to perform from a financial standpoint, does not constitute force majeure. Were the banking system down, for instance, that might constitute a force majeure from the point of view of the customer, but only for the duration of the distress.
That said, in Finnish B2B it is very common to include a specific force majeure clause, and the situation must then be assessed first and foremost against such clause (obviously having first made sure that Finnish law is agreed as the applicable law).
Effects of force majeure
Under Finnish law, a party successfully invoking force majeure would be released from its performance of the affected contractual obligation(s) subject to and for the duration of force majeure, and would not be liable for damages resulting from such delay or non-performance. However, a force majeure does not give the invoking party the right to declare its contractual obligation void altogether. Rather, once the force majeure event ceases to exist, the performance of the contractual obligations must continue immediately thereafter. Moreover, a force majeure clause normally includes the right for the opposing party to terminate the contract should the force majeure event exist for a pre-defined period of time. This is particularly important to keep in mind when considering whether to invoke force majeure.
Non-contractual
In addition to force majeure, e.g. the following non-contractual remedies might be of relevance on a case-by-case basis for purposes of a party evaluating its options with respect to a delay or non-performance due to Covid-19. However, as regards all of these, it must be strongly emphasized that as of current, there is no relevant legal praxis to be able to determine with any certainty whether and to which extent these might ultimately prove viable.
Section 36 of the Finnish Contracts Act (228/1929): According to this general provision, if a contract term is unfair or its application would lead to an unfair result, the term may be adjusted or set aside by a court of law. In determining what is unfair, regard shall be given to the entire contents of the contract, the positions of the parties, the circumstances prevailing at and after the conclusion of the contract, and to other factors. Whilst thus far seldom successfully applied in legal praxis in b2b contracts, we foresee that there may be an influx of cases following the Covid-19 pandemic seeking to invoke adjustment on the basis of the resultant radical change in market conditions.
Financial hardship: Besides force majeure, another general ground (i.e. not spelled out in law, but accepted in legal literature) on which it is theoretically possible to be released from a performance obligation is so called financial hardship (in Finnish: taloudellinen liikavaikeus). Financial hardship is usually assessed through the principle of proportionality, i.e. it is assessed, whether the performance in natura requires a disproportionate sacrifice from a party in relation to the benefit which the other party gains from the performance. If the answer is positive, there are grounds to interpret that the obligation may lapse. In practical terms however, claims based on financial hardship often would be evaluated under the broader scope of Section 36 of the Contracts Act discussed above.
Contractual
In addition to a specific force majeure clause, e.g. the following contractual clauses (insofar as included in the respective contract) might be of relevance on a case-by-case basis for purposes of a party evaluating its options with respect to a delay or non-performance due to Covid-19:
Summary
The coronavirus outbreak as such should not and cannot be automatically considered as a force majeure event. Rather, the force majeure related analysis should always begin by reviewing and analyzing the applicable agreement and its specific provision(s) on force majeure from the point of view of the concrete obligations at issue (e.g. performance of work or making available a space for rent versus payment of money), and then focus on evaluating whether the coronavirus outbreak actually hinders or prevents the respective party's capability to perform its contractual obligation(s) which are directly affected.
Ultimately, it may oftentimes be far more beneficial for two parties to a contract to seek for an amicable resolution, including without limitation a delay or non-performance due to force Covid-19, as compared to pursuing enforcement of one's rights, and obligations of others', to the maximum extent. This may be so especially with a view on the continuity of mutually beneficial commercial relationships in the long-term, which many a company will probably come to appreciate once the outbreak passes and commercial activity returns to its pre-coronavirus state.
Authors: Sakari Halonen, Juuso Pyy, Pekka Takki
French law defines force majeure in contractual matters as “an event beyond the control of the debtor, which could not have been reasonably foreseen when the contract was conclude and which effects cannot be avoided by appropriate measures, (and which) prevents the performance of its obligation by the debtor” (article 1218 of the French Civil Code - CC).
Parties to a contract are free to adjust the definition of force majeure, specifying what would expressly be considered or not as a case of force majeure. Where no force majeure clause in inserted in the contract, the legal definition of the French Civil Code will apply.
In the past, French courts have ruled out the qualification of force majeure in situations of epidemic: where no causal link was characterised between the Ebola virus and the company’s fail to meet with its payment obligations (Paris Court of Appeal, March, 17th 2016, n°15/04263), where the Ebola virus did not make the performance of the contract impossible (Paris Court of Appeal, March, 29th 2016), where the H1N1 virus had been widely announced and planned (Besancon Court of Appeal, January, 8th 2014), for travelling, when SARS did not present a major health risk in the destination country (Paris civil lower court, May 4th 2004, n°11-03-000869), where the Chikungunya symptoms were not of a serious nature (which is not the case of COVID-19) (Basse-Terre civil lower court, December 17th n°17/00739).
Therefore, the mere existence of an epidemic is not sufficient to constitute force majeure. The contractor must prove (1) the causal link between the Covid-19 and the impossibility to perform its obligation, (2) the impossibility to implement appropriate measures and (3) that the following conditions of the force majeure are met :
Concerning Covid-19, it will be necessary to question when the epidemic could have been anticipated (from the moment when the epidemic began in China? when it arrived in Europe? in France? when the WHO declared it to be a pandemic?). An objective reference date would be the 30th of January 2020, when the WHO declared the coronavirus outbreak to be a public health emergency of international concern. It will certainly be difficult to invoke force majeure for contracts signed after the 30th of January as it will be hard to characterise the unpredictability of the event. However, it cannot be automatically and definitively ruled out due to the evolving nature of the epidemic. Caution must be taken for recent and future contracts.
It can be assumed that, as soon as the debtor is personally affected, force majeure will be applicable since the latter is no longer in a position to meet his contractual obligations. However, this cannot be invoked as a mere excuse to release oneself from the obligations provided for.
There are exceptions to the application of force majeure: for example, payment obligations cannot be exempted by force majeure.
Also, only the contractual obligations which performance is affected by force majeure will be exempted. In response to the force majeure event, the contract can be either suspended (temporary impossibility) or terminated (permanent impossibility).
On February 29th 2020, French Minister of Economy has announced that the notion of force majeure could be raised by suppliers in the context of public procurement contracts. This provides an indication as to how the epidemic may be assessed from a legal standpoint by administrative Courts. However, the Minister has no authority to assert rulings or give instructions to Courts on this topic.
As a conclusion, while the very existence of Covid-19 may not automatically qualify as an event of force majeure, governmental measures and orders aiming at addressing the health crisis (mandatory administrative decision to restrict gatherings, to suspend transport activities, to order the shut down of restaurants and shops, etc) may qualify as such. A detailed analysis of the contractual relationship and of the specific decision impairing or preventing the performance of the applicable obligations will be necessary to assess whether force majeure can be upheld.
Indeed, State law prevails over party law so that contractual stipulations may only be valid if they comply with law. Containment measures prevent de facto some activities from being carried out. Therefore, qualification as force majeure will depend on line of business concerned and, more precisely, on whether or not the operators are allowed to continue their business in the light of the measures taken by the State. Similarly, even though a line of business may not be impacted by these restrictions (e.g. factory...), they could nevertheless be subject to requisition for the production of sanitary equipment, so that they will be unable to carry out the performance of their contracts.Parties can renegotiate the contract under the theory of unpredictable circumstances stated by article 1195 of the Civil Code, which sets out that: “if a change in circumstances unpredictable at the time of the conclusion of the contract makes performance excessively onerous for a party who had not agreed to assume the risk, that party may request the other party to renegotiate the contract. It shall continue to perform its obligations during the renegotiation.”
This article further provides that in the event of refusal or failure to renegotiate, (1) the parties can agree to terminate the contract, (2) request by mutual agreement a court to adapt it or, (3) if no agreement is reached, either party can file a request for a Court to revise or order the termination of the contract on the date and on the conditions that it determines.
Please note that such statutory mechanism is not deemed to be a public policy rule and can therefore be ruled out or altered by contract. As an exception, the theory of unpredictable circumstances is always valid and cannot be set aside under public procurement contracts (Canal de Craponne, Conseil d’Etat, 1876).
The German civil code (“Bürgerliches Gesetzbuch” or “BGB”) does not entail express statutory provisions on force majeure (except for a provision for tourist travel contracts, § 651h BGB).
Therefore, the concept of force majeure usually occurs in the context of contractual provisions. However, even if the parties should not have agreed on a force majeure provision, the parties may be safeguarded by various provisions of the German Civil Code (“BGB” – for more details, see the following section on other remedies).
Following is an example wording that forms part of the T&Cs of a major German car manufacturer:
“Force majeure, labour disputes, civil disturbances, action by official bodies and other unforeseeable, unavoidable and serious occurrences shall release the contracting parties for the duration of the disruption and, to the extent affected by such occurrences, from their duties to perform. The contracting parties shall, wherever reasonably possible, be required to immediately provide the required information and adjust their obligations to suit the changed conditions in good faith.”
Bespoke contracts often contain much more detailed provisions on force majeure. This can include an extensive catalogue of examples of when a force majeure event occurs. In addition, notification obligations including deadlines are often regulated.
It is also important to assess the contractual provisions on damages. If the relevant provisions are part of general sales / purchase terms and conditions or if contractual provisions are qualified as standard terms and conditions (the German law on standard terms and conditions also applies to B2B contracts!), (liquidated) damage as well as penalty clauses with no-fault liability are, in case of doubt, ineffective (§ 307 BGB). This ineffectiveness derives from the general principle of German civil law that damage claims depend on the debtor's fault (§ 280 para. 1 sentence 2 BGB). The same applies to penalties (§§ 339, 286 para. 4 BGB). Contractual provisions according to which the debtor is liable regardless of default contradict this general principle.
Similarly, the provisions on (liquidated) damages and/or penalties in combination with force majeure provisions should be assessed if they entail a higher liability risk compared to the statutory provisions of the German civil code (“BGB”). In particular, clauses in sales/purchase conditions or general terms and conditions may be ineffective (§ 307 BGB), which reduce the statutory provisions on the impossibility of performance and on responsibility (“Vertretenmüssen” - §§ 275, 276, 280 para. 1 sentence 2 BGB) to the stricter elements of force majeure to the detriment of the other contracting party.
The current COVID-19 situation is now generally known. However, it cannot be ruled out that - even if the current wave of infection flattens out - further waves of infection may occur in the future. It will then be much more difficult - if not impossible - to justify the fact that delivery delays and failures in performance were unforeseeable or unavoidable in the future. There is thus a high liability risk in the event of future delays and failures in performance. Contractual precautions should definitely be taken here.
Contractual
In addition to the force majeure clause, the parties may also have agreed on clauses such as
Non-contractual
In case there is no contractual provision that expressly covers epidemics such as COVID-19 or that may be of help, the parties should investigate their rights and obligations according to the statutory provisions of the German civil code (“BGB”). These statutory provisions may also apply in part in addition to a force majeure or change in law clause.
In particular, the following rights may be conceivable:
In detail:
In case the effects of COVID-19 interfere with the economic basis of the contract/transaction, the affected party may be entitled to adapt the contract, if such party cannot reasonably be expected to uphold the contract without alteration, taking account of all the circumstances of the specific case, in particular the contractual or statutory distribution of risk.
In principle, COVID-19 can lead to the fact that you or your contractual partner are not responsible for the delay (should you or your contractual partner not already be entitled to adapt the contract, to refuse performance or to be exempted from the obligations, see the doctrine of frustration above).
In particular, you or your contractual partner are not responsible for the delay if it was unforeseeable and unavoidable. In individual cases, however, the delay may be avoidable if the execution of matching cover transactions, relocation of production or alternative means of transport are possible and reasonable.
If you or your contractual partner are not responsible for the delay, there is also no obligation to pay (liquidated) damages or penalties. Something different may apply if a no-fault obligation to pay (liquidated) damages or penalties has been agreed upon in a permissible manner (i.e. usually outside of the terms of sale/purchase or general terms and conditions).
Stricter liability would also apply if a procurement risk were assumed or a procurement guarantee were provided.
However, the hurdle of achieving an exemption from the obligation to perform or from the consideration obligation is high. In principle, each party bears the risk of the usability of the work/service. In this case as well, the actual content of the contractual provisions is crucial.
Similar to English law, force majeure in Hong Kong is a contractual mechanism that needs to be expressly incorporated into the contract and will not be readily implied. The content of a typical force majeure clause is similar to the ones that can be found in other common law jurisdictions, including:
1. A statement of the triggering events: Often this will be in the form of a list of specific examples, followed by a catch-all provision for the force majeure mechanism to kick in. In some contracts, parties may also set out the events which are excluded.
a. The exact events that are included or excluded from the application of a force majeure clause vary from contract to contract. Examples of force majeure events commonly found in commercial contracts include Acts of God, war, terrorist attack, and natural disasters.
b. The catch-all provision will generally require that the force majeure must not be foreseeable, avoidable, or within the control of the party wishing to invoke the clause; also, the force majeure must be of such magnitude that would impede or prevent the performance of the contract.
2. Obligations of the party wishing to invoke the force majeure clause: Almost certainly a force majeure clause will provide for the time frame within which and the method by which a party must notify its intention to invoke the force majeure clause. Such party is also usually under a contractual obligation to take reasonable steps to mitigate the impacts of the force majeure.
3. What happens to the parties' contractual obligations: Parties enjoy a degree of flexibility in tailoring the remedies available when a force majeure event happens. Parties may either be released from the contract, or be entitled to suspend the performance of their obligations.
The uncertainties surrounding a force majeure clause are illustrated by the challenges faced by the retail industry. The Hong Kong Government's requirement that civil servants work from home does not have mandatory force on the private sector. However, many employers have followed suit with a view to discharge their duties to ensure workplace health and safety. Consequently, small and medium enterprises (SMEs) are facing difficulties as the virus outbreak has discouraged private consumption. Naturally, with business premises being shutdown, they would want to know if they can be either permanently or temporarily relieved from obligations such as supplying or taking delivery of goods.
Whether the outbreak of COVID-19 falls within the ambit of the force majeure clause is a matter of construction of contract. A party facing difficulties under the outbreak would need to review their contracts to see if the clause covers the spread of epidemics. Companies should also assess the width and gravity of the impact of the outbreak. A force majeure clause is generally narrowly construed and therefore mere commercial hardship may not qualify to release a party from their obligations.
Contractual
Where the contract does not contain a force majeure clause, parties may wish to explore other remedies provided in other provisions to make the maximum use of the contract (see examples of these remedies in the discussion for the United Kingdom above).
Non-contractual
Alternatively, a party may also wish to invoke the doctrine of frustration. As in other common law jurisdictions, frustration is a narrowly applied doctrine in Hong Kong. A contract is frustrated only where its performance is rendered impossible, illegal, or radically different from what was envisaged in the contract by a supervening event. The supervening event must not be foreseen, foreseeable, or within the control of either of the parties. A contract is also not frustrated where it has merely become a bad bargain.
In Hong Kong, the combined impact of the US-China trade war, political unrest, and the virus outbreak, has added uncertainties to the already volatile property market. However, at least some guidance can be taken from the outbreak of Severe Acute Respiratory Syndrome (SARS).
In Li Ching Wing v Xuan Yi Xiong [2004] 1 HKLRD 754, a tenant of domestic premises for a two-year tenancy sought to terminate the tenancy agreement on the ground that the tenancy agreement was frustrated by the outbreak of SARS. In particular, the tenant relied on the facts that many residents in the tenant's block of flats had contracted the disease and that the Department of Health later issued a ten-day isolation order for the residents living in the block of flats.
Despite finding the outbreak of SARS an unforeseeable event, the court rejected the tenant's argument because "the supervening event did not … significantly change the nature of the outstanding contractual rights or obligations from what the parties could reasonably have contemplated …" (at [11]).
The above case illustrates the Hong Kong court's cautious approach to the doctrine of frustration. Currently, the Hong Kong Government has imposed a 14-day compulsory quarantine on visitors from certain countries. Although the mandatory quarantine may affect the operation of commercial contracts, whether it amounts to a frustrating event would hinge on the exact nature of the parties' obligations.
Practical advice
Termination of contracts on the grounds of force majeure or frustration are often more fraught and uncertain than it seems. When considering terminating the contract, parties are also advised to explore the possibility of working out a solution in a more collaborative fashion, such as by conducting "without prejudice" negotiations to adapt to the change of circumstances.
Italy does not have any general statutory provisions relating to force majeure which would allow parties to a commercial contract to avoid the performance of their contractual obligations in case of a supervening event, even if force majeure is a legal concept well known inside the Italian law framework. Consequently, it is necessary to understand on a case-by-case basis whether a contract can be terminated, or its performance can be lawfully suspended due to the current coronavirus emergency situation prevents a contractual party (or both) to perform some or all of their obligations under an agreement. Obviously, each agreement has its own content and legal design; however we can underline the following:
Finally, in the face of the COVID-19 emergency, the hypothesis of exemption from liability on force majeure is potentially conceivable, but the resolution of any conflicts remains largely left to the content and tenor of the individual agreements and their interpretation.
The Italian Government is constantly monitoring the situation and issuing new legislation to try to protect citizens, companies and institutions as much as possible, introducing new exemptions or legal solutions to limit the damages deriving from the current pandemic crisis (you can see a first example in the right column with the recent Law Decree No. 9/2020). It is possible therefore that new legislation will come into effect in the near future that might change this opinion.
The fundamental rule of Italian contract law is article 1218 of the Italian Civil Code which provides that the debtor who does not exactly fulfil his obligation must compensate the other party for the damage, unless he is able to prove that the failure or delay in performance is not attributable to the debtor himself.
Also, Article 1256 and Article 1463 of the Italian Civil Code have to be taking in consideration, concerning the (definite or temporary) supervening impossibility to perform a contract.
Indeed, according to Article 1256, the obligation of a party ceases if its performance becomes definitively impossible for a reason not attributable to the debtor. If the impossibility is temporary, the obligor is not liable under the contract for the time and for the whole duration of the impossibility, but the obligation ceases when - according to the nature of the contract - the impossibility persists, so that the obligor is no longer bound to perform its obligation, or the other party has lost its interest in such performance. In bilateral contracts, the party who has been released from his obligations because of the impossibility has not the right to demand performance of the counter obligation and must return any performance already received (Art. 1463).
In this context it is useful to remember also art. 1467 of the Italian Civil Code. (excessive onerousness arising) according to which, in continuation contracts, the party whose obligation has become excessively onerous due to an extraordinary and unforeseeable event (for example, a situation similar to that of COVID-19) has the right to request termination of the contract.
In addition, specific cases have been already taken into account by the new legislative provisions and in particular the recent Law Decree No. 9/2020 has introduced, among others, the following provisions:
In the Netherlands, force majeure is both a contractual and statutory remedy.
Contractual
In the Netherlands, freedom of contract is an important principle, especially in business-to-business relations. Parties are free to draft almost any variety on a force majeure clause. Whether force majeure can be contractually invoked will depend on the terms of the force majeure provision in question. A party seeking to rely on a force majeure provision should consider:
Parties should keep in mind, however, that invocation of a force majeure clause is always subject to a reasonableness and fairness test in the Netherlands. However, in business-to-business relations, judges will usually not interfere with such invocation.
Statutory
If nothing is contractually agreed, the statutory regime applies. In such cases, a party which can invoke force majeure will not be liable. However, what constitutes force majeure is not defined in the law and is therefore dependent on judicial interpretation. There is currently no case law on whether force majeure can be invoked in relation to COVID-19.
In general, however, the following, rather strict, criteria apply:
In light of these criteria, invocation of statutory force majeure is likely to only be successful if performance is forbidden by measures imposed by the government in the fight against COVID-19.
Contractual
In the Netherlands, freedom of contract is an important principle, especially in business-to-business relations. Parties are free to draft almost any arrangement regarding delays and/or non-performance. Examples of such clauses:
Parties should keep in mind, however, that invocation of any such clause is always subject to a reasonableness and fairness test in the Netherlands. However, in business-to-business relations, courts will usually not be inclined to interfere with such invocation.
Non-contractual
In the Netherlands, parties may rely on the statutory doctrine of unforeseen circumstances.
If a party wishes to rely on this doctrine, that party would have to request a court to modify/terminate the applicable agreement. The legislative history of the Dutch Civil Code instructs judges to practice reluctance in applying this doctrine. Judges should only modify/terminate an agreement based unforeseen circumstances if the counterparty may not reasonably expect unchanged continuance of the agreement in light of the principles of reasonableness and fairness. Most unfavourable unforeseen circumstances are often viewed as falling within the margins of normal entrepreneurial risk. For example, a changing state of the economy or a party’s financial situation will generally not meet the threshold. Generally speaking, courts will only grant a request to modify/terminate an agreement on the basis of unforeseen circumstances if:
There is currently no case law on whether a crisis such as the COVID-19 crisis falls within one of these categories. Depending on the circumstances, this could be the case. For example, the legislative history states that natural disasters could be cause of successful invocation of unforeseen circumstances and the current crisis (in particular circumstances) be viewed as similar by courts.
In the Netherlands, legal relations between parties are always subject to the principles of reasonableness and fairness. In light of this, some commentators have argued that in case of invocation of unforeseen circumstances in light of COVID-19, judges should divide the risk equally between the parties, meaning that any loss should be divided 50/50, unless an applicable contract provides for a different distribution of risk.
In Singapore, whether the coronavirus outbreak and/or the resulting government restrictions are covered by a force majeure clause will depend on the wording and scope of the clause, the steps taken by the party seeking to invoke the clause, and whether the outbreak constitutes a foreseeable contingency. The courts are typically guided by the contracting parties' intentions as embodied in the contract. (RDC Concrete Pte Ltd v Sato Kogyo (S) Pte Ltd; Holcim (Singapore) Pte Ltd v Precise Development Pte Ltd) A party seeking to rely on a force majeure provision should consider:
Contractual
For a party considering its options in relation to delays and/or non-performance, the contract itself is a good place to start. Aside from the force majeure clause, there might be other clauses that a party could seek to rely on, for example:
Non-contractual: Doctrine of Frustration
Even if the terms of the agreement do not specify the outbreak as a triggering event allowing parties to terminate the contract, parties may still discharge themselves from contractual obligations if the contract has been "frustrated". A contract is frustrated when something renders it physically or commercially impossible to be fulfilled or transforms the obligation to perform into a radically different obligation. (Adani Wilmar v Rabobank Nederland; Alliance Concrete Singapore Pte Ltd v Sato Kogyo (S) Pte Ltd) The result of proving that an agreement is frustrated is the discharge of the contract in its entirety.
There is legislation setting out the extent to which advance payments made before the frustrating event intervened may be refunded and work done in preparation of the performance of the contract may be reimbursed. (s 2(2) and s 2(4) of the Frustrated Contracts Act (Cap 115, 1985 Rev Ed))
Practically speaking, the legal threshold to invoke the doctrine of frustration is generally higher than that for force majeure. The Singapore Courts have been careful to apply the doctrine strictly and not to allow a party to invoke the doctrine of frustration merely to escape a bad bargain. (Holcim (Singapore) Pte Ltd v Precise Development Pte Ltd)
IIn Slovakia, whether or not the coronavirus disease will amount to a force majeure event (resulting in exemption from liability) will depend on the terms of the force majeure provisions in a commercial contract. If the contractual parties did not specify the terms of the force majeure in the commercial contract, then provisions of the Slovak Commercial Code on force majeure shall apply.
Pursuant to the Slovak Commercial Code, any party is liable for damage caused as a result of breaching his/her duties arising out of the commercial contract, except the damage was caused as a result of force majeure. Force majeure in general shall be considered as an event that arose independently of the will of the contractual party and prevents the contractual party from fulfilling his/her duties arising out of the commercial contract, if it was not possible to divert the event and it was not reasonably foreseeable at the time when the commercial contract was concluded. Further, the event did not come into existence when the contractual party was already in default and the event did not arise as a result of economic conditions of the contractual party.
Thus, following the definition of force majeure in the Slovak Commercial Code we are of the view that outbreak of coronavirus may amount as a force majeure. Under the condition that parties did not agree otherwise and the contractual party was not already in default when the coronavirus started spreading.
Notification: Parties seeking relief based on force majeure should notify the other party in the event of force majeure without undue delay after the contractual party found out or should have reasonably found out on force majeure.
In general, force majeure provision does not automatically give rise to terminate the contract. It may provide the party in delay an excuse for non-performance preventing that party from being in breach of the contract.
Remedies differ based on the wording of the contractual terms of the commercial contract, i.e. whether or not the force majeure amounts to a default of the party.
In case the parties agreed explicitly that force majeure does not give rise to default of the party (and Covid-19 falls within the defined scope of force majeure in the contract), then the affected party is not in breach of the contract.
In case the contractual terms of the commercial contract do not contain the clause that force majeure does not give rise to default, then the affected party is in default. As stated above, the party in default is not liable for damages to the other party, however, defaulting party is still in breach of the contract and the other party may terminate the contract immediately in case the breach due to default is considered as substantial. Substantial breach is defined as a breach when the breaching party knew or should have known at conclusion of the contract that the other party would not be interested in receiving the fulfilment after such a breach. As to the duty to pay the potential contractual penalty, if agreed between the parties, this may not be materially enforceable since in general the performance of rights and duties contradictory to honest business trading is not protected by law. Thus, applying this rule the court may declare that paying the contractual penalty is contradictory to honest business trading in case of breach of duty as a result of Covid-19.
Further, in case of contracts where fulfilment was agreed for some limited time period, the party is entitled to terminate the contract if the purpose of the contract (the purpose explicitly stated therein) is destroyed due to substantial change of circumstances under which the contract was concluded.
In Spain, the coronavirus pandemic and the declaration of the State of Alarm through Royal Decree 463/2020 may make it impossible to fulfil certain obligations. This said, a party seeking to rely on a force majeure provision should consider:
a) Lack of culpability of the debtor.
b) Impossibility of fulfilment.
c) Unpredictability/ inevitability.
d) Causal relationship: The fortuitous or unavoidable event must be cause and have as consequence the breach of the obligation.
a) Total and definitive, giving rise to a right to terminate the contract. This consequence will not be applicable when the obligation consists of a monetary debt (Supreme Court Rule of May 19, 2015 and July 13, 2017) or when the obligation is generic and not specific.
b) Partial. A party is released only in the part that is impossible to fulfil, but still bound by the part that can be carried out.
c) Temporary. The force majeure event delays a party from performance for a material period of time.
Contractual
For a party considering its options in relation to delays and/or non-performance, the contract itself is a good place to start. Aside from the force majeure clause, there might be other clauses that a party could seek to rely on, for example:
Non-contractual
Swedish contract law is founded on the principle of freedom of contract. Contracts are thus enforced in accordance with their terms and they may only be modified or invalidated by a court in exceptional situations (in practice it is very uncommon in B2B contracts). Swedish contract law is often consequently a good and predictable alternative.
Hence, whether the outbreak of the coronavirus (and the effects thereof) will qualify as a force majeure event or not will depend on the interpretation of the contract of which the wording of contract (including the force majeure clause in question) is one very important part.
A force majeure clause under Swedish law normally begins with an (non-exhaustive) list of different force majeure events. Often force majeure clauses in contracts under Swedish substantive law do not usually explicitly mention pandemics or government imposed measures as a force majeure event, but refers instead to an event beyond the reasonable control of a party and that is not attributable to such party’s fault or negligence. Often there is a provision that regulates how a party must inform the other party if a force majeure event has occurred. Both parties also have a respective obligation to mitigate the consequences of the force majeure event. Finally, there is normally a provision on the effects of the force majeure event, for example discharge from the fulfillment of a certain provision of the agreement.
Considering the current situation, our view is that the outbreak of the coronavirus most likely will be considered to be outside the reasonable control of a party and could therefore constitute a force majeure event. However, force majeure only relieves a party from performance of its obligations under the contract and of liability for breach of contract to the extent that the force majeure event actually prevents said party from fulfilling a specific contractual obligation. The fact that it becomes more difficult or more expensive to fulfil the contractual obligations does not always entail a right to invoke force majeure itself.
Since force majeure is contractually regulated, it is difficult to provide general advice on what the affected party should do when it finds itself in a force majeure situation. However, the affected party is usually deemed to (i) promptly inform the other party of the force majeure event and, within a certain timeframe, (ii) provide evidence of the force majeure event, and (iii) both parties shall seek to find an equitable solution and use all reasonable efforts to minimize the consequences of the force majeure event.
However, caveat must be taken before invoking a force majeure provision. One reason for that is that the party invoking the force majeure clause must bear in mind that a long lasting force majeure event may entail a termination right for the other party. Another reason is that if a party does not fulfil its obligations under the contract does not follow the stipulated scheme of the force majeure clause, or if the event does not constitute a force majeure event at all, the party is in a breach of contract. That could mean that the other party may demand the correct performance of the contract, terminate the contract and/or claim damages.Non-contractual
There are no general statutory provisions relating to force majeure. In cases when there is no force majeure clause in the contract it can be argued that a party does not have to fulfil its obligations with reference to the provisions in the Swedish Sales of Goods Act or the Swedish Contracts Act.
Another non-contractual remedy that a party may rely upon is the principle that a party may be excused for its non-performance under the contract if unforeseeable events outside the party’s control are at hand and that the knowledge of such conditions/events had changed how the party had acted when entering into the contract. Whether this principle should be regarded as generally applicable is however yet to be determined, and depends on the circumstances in each case.
Contractual
Where the contract does not contain a force majeure clause, a party may wish to explore other remedies provided in other provisions to make the maximum use of the contract (see examples of these remedies in the discussion for the United Kingdom above).
A practical solution
Even if the outbreak of the coronavirus amount to force majeure event, there is another contractual or non-contractual ground for delay/non-performance or not, an affected party may always seek a "goodwill oriented solution". Basically everyone is aware of the crisis that coronavirus has caused and, under the prevailing situation, it is often possible to find a one-off solution that will ensure that suppliers, customers and partners mutually have as good conditions as possible to get through the crisis and continue to do business after the corona-crisis settles.
In the UK, force majeure is a contractual remedy so whether or not the coronavirus disease will amount to a force majeure event will depend on the terms of the force majeure provision in question. A party seeking to rely on a force majeure provision should consider:
Contractual
For a party considering its options in relation to delays and/or non-performance, the contract itself is a good place to start. Aside from the force majeure clause, there might be other clauses that a party could seek to rely on, for example:
Non-contractual
The common law doctrine of frustration may aid a party which finds itself affected as a result of the coronavirus disease outbreak. It applies after the formation of a contract, where an event which is unexpected and beyond the control of either party occurs. Such an event would need to transform the contractual obligation to perform into something radically different from what it was when the contract was entered into, or render the contract physically or commercially impossible to fulfil.
In practice, this doctrine has been very narrowly applied by the courts. Further, there is case law to suggest that, if a party is seeking to rely on the doctrine of frustration and could have relied on a force majeure clause but failed to invoke the contractual remedy correctly, its right to rely on the doctrine of frustration would be lost.
