The Effects of COVID-19 on International Contracts

How to handle the case in which a supplier or customer within an international supply chain defaults on a contract? When can Force Majeure be invoked? What are the consequences on contracts? How to minimize risks to the company’s business?

To answer these questions, it is necessary to analyze the content of the contracts and understand what the law applicable to the individual agreements provides for.

Our experts explain how to manage the effects of the Covid-19 pandemic on industrial and commercial activities and share operational advice for managing international contracts during the emergency.

Check out the FAQ of the country of your interest below and get in touch with our Coronavirus Helpdesk and to set up a free call if you need assistance.

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Argentine

How is Force Majeure regulated under Argentinean law?

The Argentinean Civil and Commercial Code establishes in its article 1730 that Force Majeure takes place when there is an event which could not been foreseen or that, having been foreseen, it has been impossible to prevent. Force Majeure exempts from liability, except as otherwise provided.

The expression Force Majeure in the Argentinean Civil and Commercial Code is treated in the same way as Act of God or fortuitous cases.

In summary, under Argentinean Law, Force Majeure can be defined as the incident related to external circumstances, impending the fulfillment of obligations.

Unless an agreement establishes that the parties are going to be liable in case of Force Majeure, the parties will not be liable for damages for non-fulfillment of their obligations.

Can the Coronavirus outbreak be considered as Force Majeure in Argentina?

Yes, taking into account the legal definition, it is possible to consider Coronavirus as Force Majeure given that it’s a pandemic situation which couldn´t been avoided whether or not it could have been foreseen and affects the possibility of complying legal obligations.

Remember that is important that the parties had not established in the agreement that Force Majeure will not apply.

Moreover, in order to be exempt of complying, the agreement had to be executed before the Force Majeure event occurs. If you sign an agreement after the pandemic situation of Coronavirus, Force Majeure will not apply.

It is important always to notice the other party that you cannot comply given the Force Majeure event as soon as you know the impossibility to fulfill your obligation.

On the other hand, in order to be able to have the “benefits” of an event of Force Majeure, the party does not have to be in default before the event happens.

How to prove the event of Force Majeure under Argentinean Law?

According to Argentinean Law, the burden of proof falls on whoever is alleging Force Majeure and claiming the respective rights.

In the case of Coronavirus, the party does not have to prove the event given that its of public knowledge. However, the party will have to prove that Coronavirus directly affected its ability to fulfill its obligations in the specific case.

What to do in case of a notice of Force Majeure due to Coronavirus?

Before issuing a notice to the other party claiming Force Majeure due to Coronavirus, the affected party should analyze the contractual terms in order to be sure that it does not establishe the waiver of Force Majeure and collect all the evidence needed to prove the causal link between Coronavirus and the impossibility to fulfill its obligations. Moreover, it is important to check if there is an insurance coverage applicable to the case.

In any case it is important to check if there are alternatives to minimize problems and losses. Sometimes the parties can renegotiate the agreements terms and conditions in order to continue business and benefit both.

On the other hand, if a party receives a notice of Force Majeure, I would recommend to open an avenue for amicable settlement with the other party in order to check all the circumstances, implications and possibilities of amending the actual terms and conditions.

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Australia

Covid-19 and contractual relationships in Australia

The disruption to a party’s ability to perform its contractual obligations as a result of Covid-19 is generally being dealt with in Australia through consideration of the doctrine of Frustration, Force Majeure clauses within contracts themselves, and temporary measures being introduced by the Australian Government (a recent example of this is the Commercial Leasing Code of Conduct).

Reliance on the doctrine of Frustration, a Force Majeure clause, or temporary government measures may provide an immediate fix, but parties should consider the long-term commercial fallout from relying on legal protections in the first instance. Without waiving their legal rights, parties should consider whether temporary amendments to contracts will achieve the same outcome as relying on their legal rights, but better preserve the commercial relationship between the parties.

Can the doctrine of Frustration apply to Covid-19?

The doctrine of Frustration looks at whether an event has arisen since the formation of the contract without fault of either party that makes a contractual obligation incapable of being performed because the circumstances in which performance is called for would render it a thing radically different from that which was undertaken by the contract. If the doctrine is satisfied, then the contract will be deemed to have been terminated, and the parties will be released from obligations due to be performed after the event that causes the contract to be frustrated.

The test for frustration can be difficult to satisfy. The mere fact that an event has occurred that makes certain obligations more onerous or expensive to perform will itself not be enough. Whether the doctrine of frustration will apply as a result of Covid-19 will require an analysis of the contractual obligations of a specific contract and the circumstances that surround the relevant parties.

For example, XYZ Pty Ltd is a food service business that provides food and beverage solutions to functions and events. Oz Events Pty Ltd organises and manages an annual fun festival that attracts over 50,000 people. XYZ Pty Ltd has entered into a contract with Oz Events Pty Ltd to provide food and beverage services at the festival. The Australian Government has introduced a number of measures to flatten the Covid-19 curve in Australia, including the banning of all outdoor festivals. In this circumstance the contract between XYZ Pty Ltd and Oz Events Pty Ltd would be frustrated as a result of the Government’s actions because the festival cannot now legally take place. However, the contract may not be frustrated if instead of banning all outdoor festivals the Australian Government only introduced new regulations requiring XYZ Pty Ltd to implement more hygiene and safety measures at XYZ Pty Ltd’s cost.

Reliance on the doctrine of frustration is not without risk. If the requirements for frustration are not met, then the party seeking to rely on it for not performing their contractual obligation may be deemed to have repudiated the contract, and enable the other party to terminate the contract and seek damages. Further, it may be difficult to assert the contract has been frustrated if the contract has a Force Majeure clause that applies in the case of Covid-19, as it would demonstrate that the parties had considered the situation and have included a mechanism to enable the contract to continue.

Will a Force Majeure clause apply to Covid-19?

It is common for many contracts (but not all) to include a Force Majeure clause that deals with circumstances or events beyond the control of the parties that may impact or prevent the performance of certain obligations under the contract.

Not all Force Majeure clauses are created equal, and whether a Force Majeure clause will apply in relation to Covid-19 will depend on the drafting of the clause within a contract. When looking at a contract you should consider:

  • the definition of a Force Majeure event;
  • if the Force Majeure event impacts the performance of contractual obligations, and threshold for such impacts in the contract;
  • the consequences of a Force Majeure event arising; and
  • the process for giving notice in relation to a Force Majeure event.

A Force Majeure clause will list the events the parties agree are beyond their control and may impact the performance of obligations under the contract. For Covid-19 to be directly covered by a Force Majeure clause, then a reference to infectious disease, virus, pandemic, or something similar should be included in the definition of Force Majeure event. However, a Force Majeure clause may still apply if the definition of a Force Majeure event in the contract doesn’t specifically include reference to infectious disease, but includes a reference to change in law or government direction.

If a Force Majeure event has occurred, consideration should be given to the language of the contract and what is required before a party can give notice that they seek to rely on the Force Majeure clause. The mere occurrence of a Force Majeure event does not necessarily mean that a party is prevented from performing their contractual obligations. Consideration should be given to a party’s specific contractual obligations and how they are impacted by the Force Majeure event.

If a Force Majeure event has occurred that impacts or prevents the performance of certain obligations under the contract, the Force Majeure clause will generally allow contractual obligations to be suspended but not permit a party to immediately terminate the contract. For example, a Force Majeure clause may require an event to prevent the performance of contractual obligation for more than 30 or 60 days before the contract can be terminated, but even then the right to terminate will not generally be for the benefit of the party that is unable to perform.

If a Force Majeure clause is not applied correctly by the party seeking to rely on it, then the other party may assert that they have breached the contract, and seek damages or other legal remedies.

What is the best course of action recommended in case either party issues a notice of Force Majeure?

All parties should ensure that they follow the procedure outlined in the contract for dealing with a Force Majeure event, with specific attention given to the notice requirements.

The party seeking to rely on a Force Majeure clause should document the basis for relying on the clause. If the giving of the notice is likely to be contentious, then the party should seek advice about protecting certain documents and opinions under legal professional privilege.

The recipient of a Force Majeure notice should consider:

  • if they are willing to accept the notice;
  • any additional information they may require for their consideration of the notice;
  • interim measures they can implement to manage the impact of the Force Majeure event, and alternative long term arrangements if the Force Majeure event continues and they wish to terminate the contract (subject to the requirements of the contract); and
  • how they will test whether the Force Majeure event continues to prevent the other party from performing their contractual obligations.
Australian Government Response to Covid-19

The Australian Government has implemented a number of measures to support Australian businesses during the health crisis. Such measures include but are not limited to wage subsidies to keep people employed, extension of tax incentives to encourage capital expenditure, and other temporary measures to ‘hibernate’ businesses impacted by Covid-19 and limit the number of businesses that are wound up due to restrictions put in place by the Government to protect the health and wellbeing of Australians. Foreign companies with operations in Australia may be able to benefit from some of these measures.

The Australian Government has also put in place temporary measures to protect Australian companies from foreign takeovers. Temporary amendments have been made to Australia’s foreign investment rules. The amendments do not prohibit foreign companies from acquiring Australian assets, they simply reduce the threshold of the value of acquisitions (i.e. threshold is now $0) that require an application to and approval by the Foreign Investment Review Board. The Foreign Investment Review Board may take several months to consider an application, so any application should be made sooner rather than later.

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Belgium

How are Force Majeure and Hardship defined in the Belgian Civil Code (BCC)?

 “Force Majeure” is defined as an exceptional and unforeseeable event independent of the will of the party who invokes it, which makes it completely and definitely impossible to perform an obligation or a duty.

In practice, contractual clauses often stipulate which circumstances are considered to be Force Majeure events and they can do so in a limited or unlimited way. By doing this, the parties can limit or extend the legal effects of events which the parties did not foresee when concluding the agreement, but nevertheless want to prepare themselves for. Paradoxically, these clauses tend to foresee the unforeseeable.

“Hardship” (or “imprevisie”, “imprévision” in Dutch and French) is a term which is widely recognized in international commerce, and generally defined as unforeseen circumstances which make the performance of a contractual obligation considerably more onerous or more difficult to the extent that a party may be liberated from performance. Hardship  is not recognized in the Belgian Civil Code as a statutory remedy to liberate a party from performing its obligation or to amend a contractual provision. Nevertheless, hardship can be part of Belgian law in the following two situations:

  • When a Hardship clause is contained in a contract, which is subject to Belgian law, it shall however be accepted as an expression of the parties’ freedom to contract.
  • Belgium is a contracting state to the Vienna Convention on Contracts for the International Sale of Goods (CISG) and the text of the treaty is entirely adopted into Belgian substantive law. This means that any sales contracts which falls within the scope of the treaty will automatically be covered by its provisions. Via this treaty the concept of “Hardship” will be applicable to international sales contracts.
What are the criteria to invoke circumstances related to Coronavirus as Force Majeure?

When a written contract is in place, the parties will first check the text of the contract, or the general conditions which the parties have agreed upon (the conditions of acceptance of general conditions is not further developed within this memo).  Not only Force Majeure clauses, but also clauses in relation to the suspension of performance, or provisions relating to circumstances allowing early termination shall be relevant for analysis. As mentioned, parties have the freedom to contractualise which circumstances they consider to be Force Majeure or not.  Force Majeure clauses often stipulate a specific obligation to inform the other within a certain period or in a specific way.

The enumeration of circumstances in a Force Majeure clause can be either to list what is Force Majeure or what is not considered Force Majeure.  One should take note of wording like: “including, but not limited to” or “such as”, indicating that also non-listed events could be considered Force Majeure.  “Disease” is often excluded, or not listed as Force Majeure, whereas an “epidemic” is sometimes included.  Very often “natural disaster” is mentioned, but it is not obvious that a pandemic like the coronavirus is to be considered as a natural disaster (whereas a pandemic is more likely considered to be caused by a natural disaster like an earthquake).

What if there is no written contract, or the contract in place does not mention anything about Force Majeure?

In that case, the statutory provisions will apply to the contract.  First of all, the contract must be characterised.  Is the contract the international sale of moveable assets or goods, then the provisions of the Convention on the International Sale of Goods will apply. Also goods which have been manufactured for an international client can fall under this treaty.

If Belgian law applies to the contract and the Vienna Sales Convention has not been excluded, then recourse may be had to what this Convention defines as: “An impediment beyond his control and that he could not reasonably be expected to have taken the impediment into account at the time of the conclusion of the contract or to have avoided or overcome it, or its consequences”.

If the contract is not an international sale of goods, but for instance a domestic sales contract or a service contract, then the Belgian Civil Code shall apply.  A contracting party is released from its obligation if the non-fulfilment of results from a foreign cause that cannot be attributed to this party or if the non-fulfilment of its obligation is due to Force Majeure.

Force Majeure can be validly invoked if the following two conditions are met:

  • performance of the contractual obligations must be impossible or insurmountable, and
  • failure to fulfil contractual obligations is not due to fault on the part of the debtor.

The impossibility to perform the contractual obligation traditionally had to be absolute, but Belgian courts now tend to weaken this principle to a relative impossibility. As a result, it is sufficient that performance of the obligation is humanely or practically impossible. With regard to the second condition, it is necessary that the Force Majeure was unforeseeable at the time of the conclusion of the contract and, in any case, unavoidable.

Even today, not every crisis situation is a matter of Force Majeure. When closures or cancellations take place as a result of a decision of the Belgian government as well as when there is a complete lockdown, in principle there shall be Force Majeure.

In any case, a company that wishes to invoke Force Majeure will have to inform this to its contracting party in good time and will have to prove its decision with sufficient evidence. The test shall be considered in concreto, taking all circumstances into account, if there is Force Majeure or not. Business is encouraged to remain in going concern whenever possible.  If services can still be provided remotely, for example by working from home, this will in principle not constitute Force Majeure.

When is a debtor not liable for a failure to perform?

First of all, the consequence of this absence of liability, is that the creditor of the obligation cannot invoke the remedies in case of default: he cannot claim late payment interest, penalty interest or contractual compensation for the delay in performance during the entire period of the impediment. Once the impediment is lifted, the contract should take its normal course.  If the impediment becomes final and irrevocable, the contract can be terminated but without the right to claim compensation from the non-performing party.

The following cases could illustrate what situation arises in relation to the Coronavirus outbreak:

  • The cause of the hindrance was foreseeable at the time the contract was entered into

If at the time the obligation was entered into, the impediment was such that a normal, prudent debtor with the same knowledge and experience as contracting party would have taken this into account, Force Majeure cannot be invoked.

  • Insolvency 

Insolvency does not in itself justify invoking Force Majeure, even if entirely beyond the control of the debtor, as this is an event which prudent risk management and contingency planning should take into account.  Only a very exceptional and unforeseeable event of insolvency or multiple insolvencies might qualify for Force Majeure.

  • Illness

Unless the debtor is the only one that is able to perform (e.g. in case of an intuitu personae contract), illness would not have to constitute Force Majeure as it only hinders one of the possible ways of performance.

This is different in the circumstances of the Coronavirus, where illness is becoming a systemic problem which over time reduces a workforce to a critical low. Especially where employees are obliged to remain absent and be confined to their homes in case of minor symptoms, entire industries may not be able to guarantee their normal activities when the presence of a critical number of employees cannot be guaranteed. These circumstances could justify Force Majeure.

  • Risk to life, health, freedom, etc.:

If a debtor by performing the obligation, would expose himself or his family to danger to life, health, freedom or subsistence, then the question arises if this would qualify as Force Majeure. While Force Majeure exonerates a party from its non-performance, so does a “foreign cause”, being an extraneous overriding reason justifying the non-performance.

  • The debtor’s inexperience

Inexperience, how understandable it may be in the face of these extreme circumstances, shall not be an excuse for non-performance of an obligation. We recall that the failure to fulfil a contractual obligation shall not be due to the fault on the part of the debtor. The liability test shall remain the normally careful and professional debtor placed in similar circumstances.

Can the Coronavirus constitute a situation of Hardship?

 Hardship is the situation where abnormal and unforeseeable circumstances make it more difficult or more onerous for the debtor who is not at fault to fulfil a contractual obligation, thereby upsetting the contractual balance. An example of this could be a sudden unavailability and price increase of necessary raw materials

The current Corona crisis could also constitute a situation of Hardship. The words “could constitute” indicate that Hardship has not yet been adopted in the Belgian Civil Code as such and is not widely accepted in case-law. Hardship will therefore only apply if the parties have included a hardship clause in their contract and/or general terms and conditions.  In principle, without such a clause, it cannot be invoked under Belgian law. The only exceptions so far have been international contracts for the sale of goods to which the Vienna Sales Convention has been declared applicable (see above).

Today, the question arises as to whether case-law will continue to adopt an equally rigorous stance in the light of the probably frequent discussions following the Corona crisis.

In B2B relationships, parties are free to include hardship clauses in their contracts. In that case, it is important to thoroughly assess the interpretation of these clauses, as well as the consequences, in the light of the current situation and circumstances. In addition, we also point out any (reporting) procedures and information duties to be followed that are included in the contract or the general terms and conditions. However, the parties to the contract are always free to deviate from this amicably.

When the contract contains no Hardship clause, can the debtor turn to the judge and obtain relief from its obligations? Belgian civil law does not give debtor much leeway to escape from the binding effect of its obligations, the pacta sunt servanda.

Only the general principle of law and the obligation of each party to execute the agreement in good faith, could provide an opening for the debtor to allege that the creditor, by insisting on performance of an obligation on behalf of the debtor in certain circumstances, could make an abusive of right. The burden of proof lies with the debtor.

A second relief from contractual obligations could be found in insolvency law and the possibilities to reorganize an undertaking, which could include a modification of contractual obligations in view of a debt reduction or the amendment of contracts to support the continuity of the undertaking.

How to prove that the Coronavirus outbreak can be deemed as an event of Force Majeure?

Subject to any contractual stipulation with regards to the matter of proof, the general rules of civil law would apply. The creditor who demands performance of an obligation does not have to prove anything.  The debtor who alleges to be released from his obligation, must prove the facts that allow him to invoke Force Majeure (art. 1315 Belgian Civil Code).

The debtor may use all possible means of evidence and may both positively prove the facts that are the cause of Force Majeure, or negatively, the reasons why he (or his agents) cannot be blamed for non-performance of the obligation. When the creditor raises as a defense, that that the alleged cause of Force Majeure is attributable to the debtor, it is the creditor who must prove so.

What is the best course of actions recommended in case of notice of Force Majeure?
  • Retrieve, keep and safeguard any elements of proof that may be needed later.
  • Inform as soon as reasonably possible and within the deadlines stipulated in the contract. If Force Majeure can be anticipated, inform in advance to allow the creditor to mitigate the damages. If Force Majeure is limited in time, keep the creditor informed in advance, when performance will possibly resume.
  • Are there any governmental remedies in place that can be relied upon? Invoke them in time and if there are formalities to be respected, observe them as closely as possible.
  • Consider any possible alternatives, including second best alternative and try to mitigate damages from occurring.
  • Approach the creditor in due time and discuss the possibilities to amend the contract amicably.
  • When entering into new agreements, verify the way Force Majeure and Hardship clauses are worded and verify if a future outbreak of Coronavirus would be covered.
  • Check the current insurance policies in place to see if damages would be covered. Conclude an insurance coverage which could cover part of the risks involved with epidemics and future outbreaks of Coronavirus.
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Brazil

How are Force Majeure and Hardship regulated under Brazilian law?

The Brazilian Civil Code (Law no. 10.406/2002) establishes in its article 393 that Force Majeure takes place when there is an unavoidable event which effects are unavoidable or impossible to prevent. In this case, the debtor is not liable for damages resulting from such event, unless debtor has expressly assumed liability.

It is important to note that we use the expression Force Majeure throughout this work as Brazilian legislation does not differentiate Force Majeure and Act of God, treating them as the same.

In summary, under the Brazilian legislation, Force Majeure can be classified as the incident related to external facts, with no influence of human will, impeding the fulfillment of obligations.

Unless a contract foresees that parties will be liable even in case of Force Majeure, the exclusion of liability for damages caused by the inability to fulfill obligations due to force majeure is recognized.

On the other hand, Hardship is understood as the excessive burden on one party, with extreme advantage for the other, arising from an extraordinary and unpredictable event, as determined by article 478 of the Brazilian Civil Code. Such extraordinary and unpredictable events may not be objectively related to the nature of the agreement. As an example, Brazilian courts considered that climate issues impeding the delivery of sugar cane under a supply agreement are not a Hardship event as the climate is a risk inherent to agricultural business.

In the event of Hardship the party suffering the excessive burden may request the termination of the agreement or the alteration of its conditions. The other party may avoid the termination offering to alter the contract to restore its balance, as per the sole paragraph of the above-mentioned article.

Moreover, Brazil is a signatory of the 1980 United Nations Convention on Contracts for the International Sale of Goods (CISG), and, therefore, its application on contracts for the sale of good entered by and between parties domiciled in Brazil and another country that is signatory of the CISG is automatic, unless the parties expressly derogate from specific articles or exclude its application.

However, as Brazil has been a signatory of CISG since 2014, its Courts have not formed solid jurisprudence on the matter so far. First caselaw is dated from 2017 and recognizes the application of CISG in a case of international sale of goods not supported by a written contract. There is no case law yet regarding Force Majeure and CISG.

Can the Coronavirus outbreak be considered as Force Majeure in Brazil?

Having in mind the legal definitions and concepts, it is possible to verify that Coronavirus can be classified as Force Majeure, considering that a pandemic situation cannot be avoided or predicted, reflecting directly in business relations.

First of all, the agreement should be analyzed to check if there is a Force Majeure clause and what are its terms and conditions. In some cases, the parties include their own definition of Force Majeure or foresee the actions that should be taken in case of a Force Majeure event. These particularities must be taken into consideration.

If epidemics are not mentioned in the definition of Force Majeure in the contract, then there is a risk Coronavirus would not be considered as Force Majeure for the purposes of non-fulfillment of such contract’s obligations. In this case, the party in breach should consider claiming a Hardship event, since the Coronavirus outbreak made it excessively burdensome for the contractual obligations to be fulfilled.

The provisions foreseen in the Force Majeure clause should also be respected before the agreement may be terminated. It is common for parties to include clauses stating that a notice should be sent in case of an event of Force Majeure and that the agreement should have its fulfillment suspended for a certain number of days before it may be terminated.

Another matter to be considered is the date of execution of the Agreement. If the agreement was executed when the Coronavirus outbreak was at its start, a claim that Coronavirus is a cause for hardship may be weakened, as parties could already foresee or predict it could present itself as a problem in the future.

However, if the agreement expressly provides for the liability of the party for damages even in case of Force Majeure, it is unlikely the party would obtain a legal protection by the Courts.

How to prove the event of Force Majeure under Brazilian law?

According to the Brazilian Civil Procedure Code, article 373, as a rule, with the exception of consumer cases, the burden of proof falls on whoever is alleging the facts and claiming the respective rights, meaning that the party shall provide evidence to support all allegations.

In this sense, the party that cannot comply with contractual obligations due to the Coronavirus outbreak must prove the causal link between the pandemic and the impossibility to fulfill its contractual obligations.

The other party only has to prove that there was a contract signed by the parties, that it was breached by the other party and that it has suffered damages (apart from claiming any contractually established penalties).

Force Majeure certificates issued by governments could be used as a part of the evidence necessary for proving the Force Majeure under a specific contract. Also, the announcement of “public health emergency of international concern” made by the World Health Organization in January 2020 could be useful. Anyway, the party would have to prove that the situation did directly affect its ability to fulfill its contractual obligations. 

What to do in case of a notice of Force Majeure due to Coronavirus – COVID19?

In case of an event of Force Majeure, before issuing a notice to the other party, the affected party should analyze the contractual terms to make sure it foresees the exclusion of the liability, collect all the evidence it will need to prove the causal link between the event and the impossibility to fulfill its contractual obligations, and check if there is insurance coverage.

It is also advisable to study if there would be alternatives that could be taken to minimize problems and losses. In some cases, it is more advantageous for parties to renegotiate the contractual terms and find a compromise that would benefit, or be less harmful to, both. If so, these intentions should be indicated in the notice to be sent and a mediation could be suggested to aid parties to reach a settlement.

Moreover, there are other issues to be taken care of when a notice of Force Majeure is issued. The party receiving the notice must also assess the impacts the notice will have on third parties and take immediate measures to inform them and mitigate the damages, applying all the above-mentioned steps.

Finally, we would recommend to the parties to make an effort and try to find a mutual acceptable alternative solution to avoid the termination and litigation, mitigating the damages.

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Canada

Update on April 18, 2020

On April 18, the Investment Review Division of Innovation, Science and Economic Development Canada announced that it is adjusting its regulatory policies in response to the COVID-19 pandemic.

Under the new policy, the Government of Canada (“Government”) will subject certain investments by non-Canadians in Canadian businesses and entities, and the establishment of new Canadian businesses and entities, to enhanced scrutiny under the Investment Canada Act. The policy applies to investments in Canadian businesses “related to public health or involved in the supply of critical goods and services to Canadians or to the Government”. However, it does not define or describe what businesses fall under the scope of “public health” or “critical goods and services”. In this respect, the policy applies broadly. The policy also sets out enhanced measures applicable to investments made by state-owned enterprises (“SOEs”) or investors working under the influence or direction of a foreign government.

The enhanced scrutiny that such investors may receive could include, for example, the Minister of Innovation, Science and Industry requesting additional information or extensions of timelines for review “in order to ensure that the Government can fully assess these investments”. It is to be seen whether the new policy also will result in the Minister requiring certain classes of undertakings that have not been requested in the past.

Finally, the policy does not have a set end date, other than applying “until the economy recovers from the effects of the COVID-19 pandemic”. It remains to be seen when and whether the Minister will formally repeal the enhanced measures or whether the policy portends a more restrictive environment for certain classes of investments by non-Canadians into Canadian businesses and entities in the future.

How is Force Majeure defined and regulated in Canada?

In common law jurisdictions like Canada (with the exception of the province of Quebec), a Force Majeure clause must be an express clause in a contract. Given the underlying principle of freedom of contract, parties are free not to include a Force Majeure clause in their agreements, or to structure any Force Majeure clause which they do include in the manner they see fit (subject to basic limitations on contractual freedom such as illegality, public policy, etc.).  As a result, the application of any particular Force Majeure clause will depend on both the wording of the clause itself, and the circumstances in which it is invoked.  Courts emphasize that “[w]hether a Force Majeure clause is triggered depends on a proper interpretation of the particular clause”.[1]

The Supreme Court of Canada described the general function of Force Majeure clauses as follows:

An act of God clause or Force Majeure clause generally operates to discharge a contracting party when a supervening, sometimes supernatural, event, beyond the control of either party, makes performance impossible. The common thread is that of the unexpected, something beyond reasonable human foresight and skill. … Was the change so radical as to strike at the root of the contract? …[2]

Such provisions share a common underlying structure and seek to address three principal issues:

  1. How broad should be the definition of triggering events?
  2. What impact must those events have on the party who invokes the clause?
  3. What effect should invocation have on the contractual obligation?[3]

Most Force Majeure clauses also require that the event be: (a) unforeseeable; and (b) outside the control of the parties. To the extent that the clause does not specifically provide for this, courts may still be willing to read in such a requirement.[4]

The notion of “unforeseeability” in this context can be the subject of contractual definition. Where the parties have not included such a definition, courts are inclined to use the notion of “something beyond reasonable human foresight and skill.”[5] Importantly, the foreseeability analysis is conducted at the time of contract formation. Therefore, COVID-19 may not constitute a Force Majeure event for contracts that were entered into after the pandemic began or became reasonably predictable.

With respect to “lack of control”, the courts view this as requiring both that the event originate outside the control of the impacted party, and that it not have been avoidable with the exercise of reasonable diligence.[6]  If the reason for the impacted party’s difficulties are due to a cause which the impacted party itself brought about (e.g., lack of an effective business plan), it may be denied the ability to rely on the Force Majeure clause.[7]  This may be important in the context of COVID-19, insofar as some firms may have already been experiencing underlying problems that the disruption associated with the virus simply brought into prominence.

In the province of Quebec, the Civil Code of Quebec (“CCQ”) defines the Force Majeure defence (referred to as “superior force”):

  1. A person may free himself from his liability for injury caused to another by proving that the injury results form superior force, unless he has undertaking to make reparation for it.

Superior force is an unforeseeable and irresistible event, including external causes with the same characteristics.

It applies in contractual and extra-contractual matters, and allows the debtor to be freed from an obligation of means and of result. Pursuant to the provision, the concept of Force Majeure designates an event that is unforeseeable at the time of the conclusion of the contract, that cannot be resisted, and that prevents the performance of obligations. This concept also includes fortuitous events.[8]

In brief, the primary characteristics of Force Majeure are unforeseeability, irresistibility, and externality. Furthermore, the event must result in the absolute impossibility of performing the obligation in question.[9] This impossibility cannot be simply personal to the debtor; the event must be generalized and must make the performance impossible for all.[10] Accordingly, the theory of hardship does not apply in Quebec.

[1] Domtar Inc. v. Univar Canada Ltd., 2011 BCSC 1776 at para. 78.

[2] Atlantic Paper Stock Ltd. v. St. Anne-Nackawic Pulp and Paper Company Limited, [1976] 1 SCR 580 at 583. [Atlantic Paper Stock]

[3] Atcor Ltd. v. Continental Energy Marketing Ltd., 1996 ABCA 40 at para. 12.

[4] Atlantic Paper Stock, supra note 2 at 583.  See also: West Fraser Mills Ltd. v. Crown Zellerbach Canada Ltd., 1983 CarswellBC 541 (S.C.) at para. 26, aff’d 1985 CarswellBC 2168 (C.A.) where even though the economic downturn was reasonably foreseeable, the Court still held that the Force Majeure clause applied on the ground that it was outside the impacted party’s control.

[5] Atlantic Paper Stock, supra note 2 at 583.

[6]    See e.g. Wal-Mart Canada Corp. v. Gerard Developments Ltd., 2010 ABCA 149, where the court held that the failure to obtain necessary permits by the date required was not a Force Majeure event because they could have been obtained with reasonable diligence.

[7]    Atlantic Paper Stock, supra note 2 at 587.

[8]    Vincent KARIM, Les obligations, vol. 1, 4e ed., Montreal, Wilson & Lafleur, 2015, n° 3223, 3225 and 3226.

[9]    Id., n° 3247.

[10]   Jean-Louis BAUDOIN and Yves RENAUD, Code civil du Québec annoté, 22e ed., Montreal, Wilson & Lafleur, 2019, art. 1470, n° 1470/2.

How to prove that the Coronavirus can be considered as an event of Force Majeure?

Under Canadian common law, the party invoking the Force Majeure clause bears the burden of proving its application. In considering whether a party has done so, some cases suggest that Force Majeure clauses are to be interpreted strictly. However, it is important not to push such categorical rules of construction too far given the modern, contextual approach to contractual interpretation. In order to prove that a Force Majeure clause applies:

The party seeking to invoke the clause must prove that a triggering event has occurred. In most cases, a Force Majeure clause will list a few examples of events that constitute Force Majeure and then end with a residual or “basket” clause that includes any other events which are unforeseeable and outside the control of the impacted party.  This structure makes these clauses amenable to interpretation ejusdem generis, so that the breadth of the basket clause may be restricted to situations similar to the enumerated examples. It is therefore important to consider the specific triggering events that are listed when assessing whether they may be engaged by developments relating to COVID-19.  For instance, there may be a greater ability to invoke a Force Majeure clause in response to the COVID-19 crisis if the provision includes a triggering event such as an “epidemic”, “quarantine”, “pandemic”, “disease” or “public health emergency”. However, even if the listed triggering events are more general (such as, e.g., an “act of God” or “plague”), it may still be arguable that they encompass certain aspects of the crisis.

In addition, as noted above, most Force Majeure clauses also require that the triggering event be: (a) unforeseeable; and (b) outside the control of the parties.

Absent contractual language to the contrary, the party seeking to invoke the clause must demonstrate that: (a) its ability to perform its contractual obligations has been impacted; and (b) the impact was caused by the triggering event, rather than some other cause.

As to the requirement of an impact, the degree of impact necessary to trigger the Force Majeure clause may be stipulated by the parties.  Some provisions may require that performance be rendered impossible by the Force Majeure event (e.g., by stipulating that a party must be “prevented” or made “unable” to perform), whereas others may require (typically as an addition, rather than alternative, to impossibility language) that performance simply become impracticable (e.g., by stipulating that a party’s performance  must be “hindered”). Still others may require, for example, that performance become illegal.

As to the requirement for causation, most Force Majeure clauses will require a direct causal connection between the Force Majeure event and the inability or difficulty of performance (e.g., “as a result of”, “occasioned by”, “in consequence of”, etc.). However, clauses with “weaker language such as ‘in case of an event of Force Majeure’ may be interpreted as not requiring a causal connection between the event of Force Majeure and non-performance.”

Under the Quebec civil law regime, the burden of proof also lies with the party raising the Force Majeure defence. The party seeking to invoke the clause must demonstrate:

  • The event met the criteria set out in section 1470 CCQ (i.e. an unforeseeable and irresistible event of an external cause);
  • The circumstances were exceptional and extraordinary; and
  • The event is the sole impediment to the performance of its obligations and the only cause of the damage.

Absent an explicit contractual clause in the parties’ agreement, the determination of Force Majeure is left to the discretion of the judge of the competent court. The trial judge has large discretion to appreciate the facts in order to assess the unforeseeable and irresistible nature of the event.[1]

[1]    V. KARIM, prec., note 8, n° 3260.

What is the best course of actions recommended in case either party issues a notice of Force Majeure?
  • Every Force Majeure clause should be considered and interpreted separately and in light of the contract as a whole.
  • Take reasonable steps to prevent the event from occurring in the first place and to mitigate its impact (e.g. quarantine protocols, increased sanitation, remote work capabilities, etc.). The requirement to avoid the Force Majeure event and mitigate its impact is consistent with jurisprudence concluding that the application of such clause is reserved for those events which are truly beyond the parties’ control. Note that reasonable steps may change with the circumstances, particularly in the context of a public health crisis evolving daily. Accordingly, both parties are well advised to keep up-to-date on local, national, and international evolutions in the response to COVID-19.
  • Force Majeure clauses may contain strict notice obligations. They typically require that notice that a Force Majeure event has occurred be given in writing within a specified number of days of the event. Particular attention must paid to these timelines as an individual’s ability to rely on the Force Majeure clause may be barred if they are missed.
  • Where a contract does not include a Force Majeure provision, parties may consider relying on the common law doctrine of frustration.
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China

How are Force Majeure and Hardship regulated in the laws of the People’s Republic of China?

Article 180 of the PRC General Rules of Civil Law provides that no Civil Liability is borne in case of failure to perform civil duties due to Force Majeure, unless otherwise provided by law.

Force majeure means the impossibility to perform the contractual obligation due to an event which unforeseeable, unavoidable and impossible to overcome with reasonable efforts.

Article 117 of the PRC Contract Law provides that if it is not possible to fulfil a contract due to Force Majeure, then, depending on the extent of the event, the performing party shall be partially or wholly excused from liability, except where laws provide otherwise. In case an event of Force Majeure occurs when a party is already defaulting its obligations (e.g. the deadline to deliver the products e has already passed), the said party will not be excused from liability.

PRC law does not have a very clear provision defining Hardship: where the event does not cause the impossibility to fulfil the contract, but has  a major impact  on the performance of the obligation of one party, then the principle of fairness and the rule of change of circumstances, may be applied.

According to the Minutes of the National Economic Trial Work Meeting in 1993, the Supreme People’s Court held that, if due to reasons not attributable to the parties, the basis of the contract has undergone fundamental changes that could not be foreseen by the parties, with the result that performance of contract would be unfair, the contract may be modified or terminated at the request of the parties in accordance with the rule of change of circumstances.

Article 26 of the Interpretation of the Supreme People’s Court on Several Issues Concerning Application of the Contract Law of the People’s Republic of China, which came into effect as of May 13, 2009, provides that “Where any significant change in the objective environment has taken place after the formation of a contract which could not have been foreseen by the relevant parties at the time of entering into the contract, and does not belong to any commercial risk occasioned by any force majeure cause, rendering the continual performance of the contract manifestly unfair to the relevant party or rendering it impossible to realize the goal of the contract, the People’s Court shall confirm whether the contract shall be modified or terminated in accordance with the principle of fairness taking into account the actual circumstance, where the concerning party applies to the People’s Court for modifying or terminating the contract.”

When it comes to international contracts, the People’s Republic of China is a member of the 1980 Vienna Convention on the International Sale of Goods (CISG): if CISG applies to contract then Force Majeure would be disciplined by its art. 79  titled “Impediment Excusing Party from Damages” which provides that, “A party is not liable for a failure to perform any of his obligations if he proves that the failure was due to an impediment beyond his control and that he could not reasonably be expected to have taken the impediment into account at the time of the conclusion of the contract or to have avoided or overcome it or its consequences.”

Can the Corona Virus emergency in China be considered an event of Force Majeure?

In the public Q&A session on the website of the Beijing People’s Court, the reply to the question concerning “whether the outbreak of COVID-19 constitutes a ‘Force-Majeure event’ was given as follows: both the General Rules of the Civil Law of the People’s Republic of China (“General Rules of the Civil Law”) and Contract Law of the People’s Republic of China (“Contract Law”) stipulate that a Force-Majeure event refers to a situation which, on an objective view, is unforeseeable, unavoidable and cannot be remedied. If the failure to perform civil obligations is caused by a Force-Majeure event, no civil liability shall be borne, unless otherwise provided in the law.

Since the occurrence of the outbreak of COVID-19, there has been no direct and effective treatment, nor direct and effective methods to completely prevent the spread of the epidemic, therefore, on an objective view, it is unforeseeable, unavoidable and is not able to be overcome, which meets the requirements of a force majeure event prescribed by law.

What to do in case of notice of Force Majeure in China?

In accordance with article 118 of the PRC Contract Law, where one of the parties is unable to perform the contract due to Force Majeure, the said party shall immediately notify the other party in order to reduce the potential losses suffered by the other party, and shall also provide evidence of the Force Majeure within a reasonable time.

When issuing the notice, a key point is to prove a causal connection between the Force Majeure event and the impossibility of performance of the contract. Therefore, when claiming exemption from liability for termination of a contract based on a Force Majeure event, the Party must prove: (1) whether there is a causal connection between this outbreak and the impossibility of performance of the contract, wholly or in part and  (2) whether the party affected by the outbreak has taken reasonable measures to mitigate or avoid the adverse effect of the event on the performance of the contract.

It is important to mention that the China Council for the Promotion of International TradeCCPIT  has indicated that in case a company is unable to perform an international trade contract due to the impact of Coronavirus, such company may apply to the CCPIT for issuance of a certificate of Force Majeure. However, in practice, unless it is explicitly agreed in the contract that the Force Majeure Certificate issued by the relevant organization is sufficient to prove the causal relationship, such certificate alone should not be sufficient to prove the causal relationship between the event and the impossibility of performance of the contract, nor that reasonable efforts to overcome the effects of the event have been taken by the party which is unable to perform its obligations.

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Cyprus

How are Force Majeure and Hardship defined in Cyprus laws?

The concept of Force Majeure has no definite meaning or context in Cyprus law (a common law jurisdiction). Rather the term is descriptive of contractual clauses which excuse performance of contractual obligations where the events giving rise to the failure to perform are outside the control of the party wishing to rely on them. Much depends on the precise language adopted in the clause at hand. Such clauses may define what the parties agree to accept as events constituting Force Majeure and their consequences e.g. automatic termination, excuse from performance, adjustment of the commercial terms etc. The concept of Hardship is also not adopted by Cyprus law. The statute, Contract Law Cap. 149, provides for the doctrine of frustration (essentially used as a plea): a contract to do an act, which after the contract is made, becomes impossible, or by reason of some event which the promisor could not prevent, unlawful becomes void when the act becomes impossible or unlawful. The courts would not apply the doctrine of frustration where the parties made provision for the event e.g. an epidemic in the contract.

Is the Coronavirus an event of Force Majeure in Cyprus?

Where Coronavirus would be evaluated in the context of a Force Majeure clause, much would depend on the precise language of the clause at hand e.g. whether it expressly covers epidemics. On the other hand if Coronavirus would be evaluated in the context of the doctrine of frustration, the test would be: if the literal words of the contract were to be enforced in the changed circumstances, would this involve a significant or radical change from the obligation originally undertaken. Establishing the plea of frustration before courts is a difficult task; the courts rarely rule that a contract is void on this basis. It is important to understand that a Force Majeure clause addressing epidemics or provisions fully and completely providing for the effects of such event included in the contract deprives the parties from the plea of frustration. In that case the parties cannot claim that the contract is void but can only rely on the contractual terms expressly agreed between them as to the consequences of the Coronavirus outbreak.

What to do in case of notice of Coronavirus Force Majeure in Cyprus?

Generally the burden of proof would lie with the party claiming the application of a Force Majeure clause or alternatively frustration. Judicial notice would possibly be applied as to the occurrence of this event i.e. the Coronavirus epidemic in light of special measures adopted by the government but submission of evidence (preferably by experts) would be recommended. However, in the case of the plea of frustration that would not be enough as further elements would need to be established: (a) obligation has become incapable of being performed, (b) the new circumstances in which performance is called for, (c) significant or radical change from the obligation originally undertaken.

What is the best course of actions recommended in case either party issues a notice of Force Majeure?

Supply side: The actual wording of the term needs to be taken into consideration. Compliance with the arrangements contemplated in the contract as regards Force Majeure is recommended for the application of a Force Majeure clause. Effort to execute the contract despite the changed circumstances and collection evidence of such effort. Mitigation of damage including alternative solutions to perform the obligations. Collection of evidence proving: Force Majeure event/changed circumstances, impossibility of performance of obligation, significant or radical change from the obligation originally undertaken. Check whether covered by insurance policies.

Buy side: The actual wording of the term needs to be taken into consideration. Compliance with the arrangements contemplated in the contract as regards Force Majeure is recommended for the application of a Force Majeure clause. Effort to execute the contract despite the changed circumstances and collection evidence of such effort. Mitigation of damage including alternative solutions to perform obligations under contracts in downstream supply chain. Insist on the performance of obligations of supplier in writing. Collection of evidence proving non-performance of obligation by supplier and damages. Collection of evidence, to be used if contracts in downstream supply chain will be affected, proving: Force Majeure event/changed circumstances, impossibility of performance of obligation, significant or radical change from the obligation originally undertaken. Check whether covered by insurance policies.

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Croatia

How is Force Majeure defined under Croatian law?

Under the Croatian Civil Obligations Act Force Majeure relates to unforeseeable and extraordinary external events that are unavoidable. Acts of God such as earthquakes or floods, wars and riots or certain political and social events are typical examples of force majeure. In case an agreement contains a Force Majeure clause, contracting parties will often include examples of Force Majeure events in their agreements.

Can the Coronavirus be considered as Force Majeure?

Whether or not a Force Majeure can be invoked primarily depends on the wording of the Force Majeure clause or, in the absence thereof, on the Croatian Civil Obligations Act and respectively its interpretation by the Croatian courts.

In principle, contracting parties may freely decide what kind of events shall qualify as Force Majeure. As mentioned above, earthquakes, floods, wars and riots are typical examples of Force Majeure events that are often explicitly listed in Force Majeure clauses.

Unless there are indications in a Force Majeure clause that a list of specific Force Majeure events shall be considered as exhaustive, it seems fair to assume that lists of Force Majeure events shall not be exhaustive, meaning that events not explicitly mentioned in the clause may qualify as Force Majeure as well. This holds true, e.g., for epidemics such as the one caused by the COVID-19. It seems rather unlikely that the parties to an agreement intend to exclude global epidemics from the scope of application of Force Majeure clauses.

In the absence of a Force Majeure clause, it seems quite likely that the circumstances caused by the coronavirus qualify as Force Majeure events for the purpose of the Civil Obligations Act.

Consequences in case Coronavirus is Force Majeure

If performance of an obligation becomes permanently impossible due to a Force Majeure event, the obligation is deemed extinguished and the debtor is exonerated. The debtor must return any consideration already received from the creditor on the basis of the statutory provisions on unjust enrichment and loses its counterclaim against the creditor to the extent it has not yet been satisfied (Article 373, paragraph 1 Civil Obligations Act).

Note that a temporary inability to fulfil an obligation does not, as a rule, abrogate the obligation to fulfil, but it may lead to an expiration of that obligation depending on its duration and the interest and expectations of the contractual parties.

The debtor will be relieved of liability for damage if he proves that he was unable to fulfil his obligation or that he was late in fulfilling his obligation due to such circumstances (Article 343 Civil Obligations Act).

Besides that, debtor should notify the other party timely on the inability to fulfil its obligation, otherwise it could be liable for damages occurred due to missed or late notification (Article 348 Civil Obligations Act).

On the other hand, if the circumstances did not disable fulfilment but made fulfilment of the obligation significantly more difficult or would cause loss to one contracting party, that contracting party may require modification of the contract or even termination (Article 369 Civil Obligations Act).

Having said that, it is important to clarify that the COVID-19 itself does necessarily qualify as a Force Majeure. In the context of trade agreements, rather the circumstances caused by the COVID-19 may qualify as Force Majeure. By way of example, such circumstances may be:

  1. an involuntary temporary closure of manufacturing facilities;
  2. temporary export restrictions; or
  3. transport interruptions
How to Prove an event of Force Majeure

In the absence of Force Majeure clause, it is necessary to show that:

  1. the event is of extraordinary character, and not something that could be expected as a regular occurrence of an event;
  2. outside circumstances are at hand, that is, circumstances beyond the control of the contracting parties (ie caused by third parties or without human influence);
  3. The event occurred after the conclusion of the contract and before the due date of the obligation you are considering;
  4. the event is unpredictable, and objectively unpredictable in the context of the business relationship you are in, or one that could not even have been foreseen by a conscientious contractual party – special emphasis is placed here on the fact that the event that occurred was unpredictable at the time of the conclusion of the contract; and
  5. failure could not be prevented, avoided or remedied by other measures, available means and methods.

Hence, it is not sufficient to establish that the debtor was not able to fulfil the obligation due to the current situation with the COVID-19, but also to establish when our obligation occurred (that is, whether we should already have been aware of the situation at that moment) and whether we could have prevented the failure to fulfil.

What is the respective burden of proof on the parties to prove the coronavirus outbreak can be/cannot be deemed as an event of Force Majeure?

In the absence of a Force Majeure clause that allocates the burden of proof to one of the parties, the burden of proof lies with the party who wishes to exonerate itself, i.e., which is affected by Force Majeure.

What is recommended in case of notice of Force Majeure in Croatia?

Companies should screen their agreements and assess whether they are able to perform in accordance with the agreement despite of the COVID-19.

If it is foreseeable (or at least likely) that a company will be prevented from fully performing its obligations in a timely manner due to the coronavirus epidemic, the company should do whatever is feasible to mitigate the consequences of the epidemic on the performance of its own obligations.

Such efforts should be documented in an appropriate manner, since such documentation might be necessary as evidence if disputes should arise later on.

In addition, the company should notify affected counterparties as soon as possible in writing about the circumstances which prevent the company from fully performing in accordance with the contract, including a description of measures taken to mitigate the effects of the epidemic and, if possible, a forecast regarding the length of the delay caused by the epidemic. Further notification requirements might be stipulated in agreements, general terms and conditions etc.; if such requirements exist, they should be fully complied with.

Notifications to counterparties should be updated whenever circumstances change, e.g., as soon as it is foreseeable that information in earlier notifications might be outdated.

If a company receives a notification of Force Majeure from the other party, but does not agree with the qualification as Force Majeure, such company should inform the counterparty without delay in writing that reliance on Force Majeure is unjustified and insist on performance in accordance with the contractual obligations.

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Czech Republic

Force Majeure under Czech law

The Czech Civil Code does not contain a definition of Force Majeure. Czech legal literature generally describes Force Majeure as all and any circumstances that have arisen independently of the creditor’s or debtor’s will, and which the parties could not have prevented or eliminated in the course of all their efforts.

A similar definition of Force Majeure was given by the ECJ when it stated that “the concept of force majeure must be understood as referring to unusual and unforeseeable circumstances, beyond the control of the party by whom it is pleaded, the consequences of which could not have been avoided even if all due care had been exercised. That concept must be considered in relation to the provisions of each regulation in which the term “force majeure” appears.” (judgement of the ECJ from 5.2.1985, C-145/85, Denkavit). This definition is also applicable to Czech law.

Both aforesaid definitions are based on the same main conditions: (i) extraordinary circumstances originating outside of the sphere of the parties, and (ii) the circumstances could not be prevented. An event has to meet both conditions in order to be deemed a force majeure.

Taking the aforesaid conditions of Force Majeure under Czech law into account, the Coronavirus pandemic as well as the protective measures adopted by the governments in reaction to the pandemic shall meet the conditions of Force Majeure under Czech law, as they are both outside of the sphere of the parties, and are unpredictable.

An announcement by the WHO or other international organizations can be helpful in establishing whether there is a Force Majeure; however, the event and a causal link between the event and the specific duties of the parties to the contract will be assessed on a case by case basis.

Hardship is defined as ‘performance that is more difficult than expected’. However, the difficulty cannot be extreme, otherwise either clausula rebus sic stantibus (see below No. 3), or subsequent impossibility of performance (see below No. 4) shall apply. According to § 1764 Civil Code a hardship does not influence the duty to perform in accordance with the contract.

In certain situations, a force majeure incident causes a contract to be performed with defects. It is a situation where the debtor’s performance is delayed or only partially. As stated in No. 1, the existence of force majeure as a hardship does not change the duty to perform. However, according to § 2913 para 2 of the Civil Code, a debtor can be released to pay damages if the breach of the contract was caused by Force Majeure. The exemption from paying damages is expected to be invoked in various supply chain business relationships unless the respective provision of the Civil Code was excluded from the contract.

Since 2014, § 1765 of the Civil Code, in certain cases, allows one contracting party to ask for the renegotiation of a contract with the other party. The conditions for claiming renegotiation of the contract are:

  • there has been a substantial change in circumstances;
  • this change could have not been reasonably foreseen;
  • this change could not be effected by the party;
  • this change occurred after the conclusion of the contract or the party became aware of it only after the conclusion of the contract;
  • this change creates a gross disproportion in the rights and duties of the parties by disadvantaging one of them;
  • this disadvantage consists either in a disproportionate increase in the cost of performance, or in a disproportionate decrease in the value of the subject of the performance; and
  • the party has exercised the right to renegotiations within a reasonable time limit after the change of circumstances had to be ascertained, that time limit shall be deemed to be two months.

If the parties had not agreed within a reasonable time limit to amend the contract, the court may, at the request of the parties, decide to change the obligation or cancel it. The purpose is to give the disadvantaged party the opportunity to revise the contract, and to oblige the other party to deal with the proposal. Otherwise, there is a risk that the entire contract will be cancelled by the court. Even though this rule could be useful for both parties in the Coronavirus times, in practice it is one of the most excluded provisions in contracts. The consequence of exclusion of this provision is that each contract party has to bear all the negative (or positive) effects caused by the Coronavirus pandemic.

The principle of subsequent impossibility of performance pursuant to § 2006 of the Civil Code affects cases where, after the creation of an obligation, an obligation becomes impossible to be performed. In such cases, the obligation is extinguished due to impossibility of performance. The provision does not apply to the opposite situation, when the debtor is ready to perform, but the creditor cannot accept the service.

The burden of proof to establish a Force Majeure event shall be on the party that wants to rely on one of the situations and concepts described above to prove that there is an event of force majeure.

What to do in case of a Force Majeure notice?

If the contract is governed by Czech law, there are the following steps to consider for the parties to the contract.

  • As soon as you find out that the Force Majeure will affect your rights or duties, notify the other party to the contract in order to prevent damages.
  • Check whether your contract works with the concept of Force Majeure, whether it defines it or sets the conditions of its application.
  • Check whether your contract specifically excludes the applicability of clausula rebus sic stantibus or of the release to pay damages caused by Force Majeure.
  • Check whether it is the buyer, the supplier, or both who are affected.
  • Save any evidence that the lack of your performance, the gross disproportion in the rights and duties, or damage is caused by and only by Force Majeure.
  • In case of clausula rebus sic stantibus situation, exercise the right to renegotiate the contract within a reasonable time and not later than two months after you find out.
  • Both parties shall establish evidence about damages caused to them due to measures adopted by Czech government. There may be a possibility to claim compensation from the Czech government for the damages caused as a result of extraordinary measures adopted by Czech government.
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Denmark

How are Force Majeure and Hardship defined in Denmark?

Pursuant to Danish law, an initial distinction to be made is whether the concept of Force Majeure and/or Hardship is included in the contract or not.

If a contract contains provisions regarding Force Majeure and/or Hardship, the definition and application will always depend on a specific examination and assessment of the wording and circumstances of the particular contract.

However, and if not agreed explicitly in a contract, the concept of Force Majeure will in any event apply as a general legal doctrine pursuant to Danish law if a contract is subject to Danish law.

On the other hand, there is in principle and theoretically no legal doctrine in Denmark concerning Hardship, although the application of Force Majeure may be extended to cover such situations.

However, a variation of Hardship exists, which is often referred to as a “breach of implied conditions”. For the purpose of this overview we will simply apply the term Hardship for easy reference and consistency.

Consequently, the overview set out below only applies to situations where the contract does not contain provisions regarding Force Majeure and Hardship and where the contract is subject to Danish law.

Force Majeure, is a situation where

  • an unpredictable, inevitable and external event
  • makes it impossible for one or more parties to a contract to perform their duties in accordance with the contract either temporarily or permanently.

The first section above implies that the event was not caused by any of the contracting parties and that the situation is beyond the parties’ control. Further, the parties must not have been able to foresee the Force Majeure event when they concluded the contract.

The second section above implies that performance according to a contract must be impossible. Accordingly, the concept does not cover situations where performance is considered economically or commercially impracticable, unsound or bad – such situations may nevertheless be covered by Hardship below.

Typical examples of Force Majeure include war, natural disasters fire, import restrictions, rebellion, blockade, public seizure, fire, etc.

Hardship, is a situation where

  • an extraordinary event
  • which the contracting parties could not have foreseen at the moment of conclusion of the contract
  • the performance by a party in accordance with the contract, would be unreasonable burdensome and contrary to the party’s implied preconditions, e.g. implication of excessive performance difficulties or expose such party to a disproportionate loss.

As there is no separate legal doctrine in Denmark concerning Hardship a performing party is in principle liable for and obliged to ensure performance according to contract.

However, Danish courts have in very few cases established “Hardship”, in cases where performance by a party pursuant to a contract was considered unreasonable burdensome by the occurrence of the items listed in i)-iii) above. This variation of Hardship pursuant to Danish law is referred to as “breach of implied preconditions”.

What are the consequences of Force Majeure and Hardship under Danish Law?

Pursuant to Danish law, the effect of a Force Majeure and Hardship situation is, as a general rule, temporary discharged for the party that is prevented from performing its obligations. Such party can therefore not be held liable for breach of the contract stated by the other party due to non-performance.

In case the Force Majeure situation is of a permanent or indefinite duration, a party’s obligation to fulfill the contract may even cease altogether.

However, the Danish courts have in exceptional cases of Hardship imposed contractual amendments in order to ensure a more reasonable result in alignment with the parties implied preconditions. This could e.g. be an adjustment of terms and conditions regarding price, delivery and/or payment.

A party who wants to invoke Force Majeure or Hardship and be discharged of its obligations according to a contract shall serve a notice to the other party/parties in good faith. Failure to comply with this notice obligation may result in liability, and the right to invoke Force Majeure or Hardship may lapse. Contracting parties should be advised that a party’s invocation of Force Majeure or Hardship is also associated with a certain position of risk and therefore requires a thorough analysis of the particular circumstances prior to such invocation.

How to prove that Coronavirus can be considered as Force Majeure event?

The assessment and proof of whether the coronavirus outbreak constitutes a Force Majeure event primarily depends on a specific assessment of the contractual relationship in question.

First, the situation must be proved an unpredictable and inevitable external event. Of particular relevance here is the timing of the conclusion of the contract since the virus outbreak at its current stage (i.e. primo April, 2020) is assumed well known to the general public and that anyone, as such, should be able to anticipate the potential consequences of the outbreak. If, on the other hand, the contract was concluded at a time preceding the outbreak and particularly before WHO’s official declaration of the coronavirus as an international health crisis, this condition is more likely to be met.

Second, the situations must make it impossible for one or more parties to a contract to perform their duties in accordance with the contract either temporarily or permanently. A contracting party has to wonder and asses how and if the coronavirus outbreak has actually prevented or delayed the performance in question. In this regard, one should keep in mind, that even though the outbreak has in fact made it more burdensome, expensive or even unprofitable to perform in accordance with the contract, this will not necessarily mean contractual discharge due to Force Majeure.

Likewise, fulfillment of the contract will not necessarily be impossible and considered Force Majeure in the event of supplier/subcontractor failure, if the contract can be fulfilled by contracting with alternative suppliers/subcontractors.

Third, the contracting party seeking discharge of its obligations due to Force Majeure must prove that notice to the other party/parties was given in due course and in good faith.

What to do in case of notice of a COVID-19 Force-Majeure event in Denmark?

A party seeking discharge due to a Force Majeure COVID-19 event is recommended to immediately:

  • Inform the other contracting parties in due course and in good faith of the difficulties encountered, their origin, nature and any likely anticipated consequences.
  • Undertake all reasonable steps to mitigate the damages.
  • Seek alternative solutions to ensure performance in accordance with the contract. This may e.g. imply seeking alternative subcontractors/suppliers, replacement goods, logistics etc.
  • Review and analyze the agreement(s) in relation to termination regulation and in order to establish how or if Force Majeure or Hardship is covered. Further, it must be established whether the contract was concluded before of after the coronavirus outbreak and WHO’s official declaration thereon.
  • Review and analyze the facts in light of the above assessment and whether or not the situation would legally be considered Force Majeure.
  • Notice the other party/parties and initiate negotiations in good faith aimed at ensuring an amicable amendment of the contract.
  • Seek guidance with and apply to relevant authorities or NGO’s for a certificate confirming the established facts as Force Majeure. By way of an example the Danish Agency for Government Management (in Danish: Økonomistyrelsen) has on 18 March 2020 proclaimed that the current situation does not allow for the Danish state to invoke Force Majeure.
  • Gather all necessary proof that may be of relevance.
  • Draft any future contracts in light of the current circumstances and ensure adequate protection against future expansion of the pandemic and any other extraordinary events.
  • Verify and/or ensure amendment of insurance policies (if relevant) and make sure that the insurance company is duly notified about the circumstances.
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Dominican Republic

Update as of April 30, 2020

The Dominican Republic declared the state of emergency on March 19, 2020 to prevent the spread of Covid-19. The state of emergency is currently extended until May 17, 2020.

During the state of emergency, court hearings are suspended.  The only hearings taking place, via conference are the continuous criminal service courts, those related to minors, urgent civil right lawsuits and habeas corpus.

The deadlines are suspended while the courts remain closed and until three working days after the state of emergency ceases.

How are Force Majeure and Hardship regulated under Dominican Law?

Force Majeure is considered a cause for exoneration from liability pursuant to the Dominican Civil Code. Force majeure exists when an event is beyond the control of one or more parties, which could not have been reasonably foreseen and are not the result of recklessness or negligence.

 

Force majeure clauses are commonly stipulated in contracts by which the failure of one or both parties to execute is related to a phenomenon beyond their control. These clauses usually provide that in the event of a natural disaster (hurricane, earthquake, others), a general situation of difficulty (war, terrorism, others) or other “acts of God” (situations completely out of control of a party or unpredictable) the affected party may be exempted from fulfilling its obligations under the contract. Those exonerative causes according to Dominican case law must always be unpredictable (unforeseeable) and inevitable.

Hardship refers to unforeseen circumstances that have occurred during a contract, which are equally unpredictable and alien to the parties, but does not create an impossibility of compliance, but rather an economic imbalance of the contract that may entail unreasonable burdens for one of the parties.

Can Covid-19 be considered as Force Majeure and/or Hardship and what are the consequences?

The Dominican Republic declared Covid-19 as a national health and economic emergency on March 19, 2020, declared the state of emergency and quarantine in the Dominican Republic and imposed certain restrictions on transport, transit and association.

Specific restrictions included: (i) daily lockdown between 5pm and 6am; (ii) the closure of non-essential businesses; (iii) social (physical) distancing; (iv) prohibition to travel from one town to another from April 6-13, 2020; (v) closure of borders -land, sea and air-, except for airplanes to allow the entrance of nationals and departure of foreign citizens, cargo and fuel ships. Special permits that allowed the transportation of goods and personnel were given to industries and companies that were considered essential (food supply chain, healthcare, pharmaceutical, IT, press, among others).

Therefore, it depends whether a party can invoke Covid-19 as Force Majeure and hardship and the unforeseeable and inevitable factors to comply with contract obligations. There must be an absolute impossibility in complying with the obligations and a link between this impossibility and the pandemic. We strongly advise parties and their legal counsels to review each contract to mitigate potential claims.

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Egypt

What is Force Majeure according the Egyptian Law?

While the Egyptian legislator respects the parties’ agreement and considers it as the law of the parties, it has provided for exceptions such as Force Majeure as stipulated in article 373 of the Egyptian Civil Code, law no. 131 of 1948 (“ECC”):

“An obligation is extinguished if the debtor establishes that its performance has become impossible by reason of cause beyond control.”

In addition, the legal precedents of the Egyptian Court of Cassation define Force Majeure as follows:

“To consider an event as a force majeure, there are two conditions: This event should be unpredictable and impossible to resist” (Challenge No. 979/47 J.Y.)

Based on the above, for an event to be considered a Force Majeure event as per the ECC and the Court of Cassation’s precedents, the following conditions should be fulfilled:

  • The contract in question should be executed over a period of time,
  • Unpredictable event(s) occur, after the conclusion of a contract, which are
  • Irresistible and beyond the control of the debtor, making
  • the fulfillment of the contractual obligations impossible.

Moreover, as Egypt is one of the United Nations Convention on Contracts for the International Sale of Goods’ (“CISG”) signatories, a party of a contract for the sale of goods may be subject to the definition provided in article 79 CISG, which states the following:

“A party is not liable for a failure to perform any of his obligations if he proves that the failure was due to an impediment beyond his control and that he could not reasonably be expected to have taken the impediment into account at the time of the conclusion of the contract or to have avoided or overcome it, or its consequences.” (emphasis added)

What is Hardship according the Egyptian Law?

The Egyptian Civil Code defines the concept of “hardship” in article 147, para. 2 ECC as exceptional and unpredictable events of a general nature that occurred after the conclusion of a contract and “burdens” the performance of a contract.

An event is exceptional and unpredictable if its occurrence is rare and therefore not usual. The performance of the contractual obligations is further considered to be “onerous” if it would still be possible but would be so disadvantageous to the defaulting party that it would threaten him with serious losses. Paragraph 2 of article 147 ECC provides for an exception for precisely these Hardship cases:

“When, however, as a result of exceptional and unpredictable events of a general character, the performance of the contractual obligation, without becoming impossible, becomes excessively onerous in such way as to threaten the debtor with exorbitant loss, the judge may according to the circumstances, and after taking into consideration the interests of both parties, reduce to reasonable limits, the obligation that has become excessive. Any agreement to the contrary is void.”

Based on the above, and in order to consider a case as a hardship event, the following conditions have to be met:

  • The contract in question should be executed over a period of time,
  • The event has to be exceptional and unpredictable, and of general nature,
  • The execution of the contractual obligation must still possible, but
  • onerous in such a way as to threaten the debtor with exorbitant losses.
What are the criteria to consider when evaluating the Coronavirus as a Force Majeure or Hardship?

To decide whether the Coronavirus crisis is a force majeure or a hardship event, we have to take into consideration whether there is a clause in the contract in question which mentions “epidemic” as a case of force majeure or not?

If the answer is yes, then the parties’ agreement shall prevail as article 147 para. 1 ECC provides, literally, the following:

“The contract makes the law of the parties. It can be revoked or altered only by mutual consent of the parties or for reasons provided for by law.”

Therefore, the parties have to adhere to such clause and follow the mechanism provided in such clause.

If the answer is no, then you should consider the following criteria.

To what extent have you suffered from the Coronavirus epidemic. Is it to the extent that the contract in question is no longer enforceable? If the answer is yes, then the contract execution will be subject to the force majeure theory whereby the obligation of the parties to execute the contract and achieve the contract purpose become impossible and not just onerous. As a result, the debtor may be relieved from its obligation entirely or the parties could agree to postpone the execution of the contract until the end of the force majeure event.

Has the execution of the parties’ obligations become onerous but not impossible? If this is the case, then according to Article 147 para. 2 ECC, which regulates hardship, the judge upon the application of the debtor may reduce to reasonable limits, the obligation that has become excessive. The parties also can reach to an agreement to postpone the execution of the contract or to extend the duration of the contract to get over this hardship, provided that they are not in contradiction to Article 147 para. 2 ECC by burdening the debtor with more than the law requires.

The main difference between “force majeure” and “hardship” is the case of the latter, the fulfilment of the contract is still possible but leads to burdensome disadvantages for the party in breach of contract. In contrast, a “force majeure” event makes the fulfilment of the contract completely impossible, whereby the “objective impossibility” is the decisive factor here. For instance, the Coronavirus may be considered as a force majeure event for airlines and travel agents, because air traffic all over the Egyptian airports continue to be suspended until the end of the pandemic, but hardship may be considered for construction companies.

At the end, whether the coronavirus crisis shall be considered as force majeure or hardship event or not, will be decided on a case by case basis by the courts. In typical cases, debtor may allege force majeure or hardship while creditor shall deny that the event is a force majeure or a hardship.

Should debtor serve a notice of its inability to execute its obligation as a result of a Force Majeure or a Hardship?

To decide whether the debtor should serve a notice of his inability to execute his obligation as a result of a Force Majeure or a Hardship, the relevant clause needs to be reviewed whether it requires such notice or not.

If the answer is yes, then the party in default should deliver such a notice; otherwise, the defaulting party shall not be able to object bases on force majeure or hardship.

If the answer is no, then the ECC does not require the defaulting party to serve a notice to the creditor of its inability to meet its obligation in accordance with the contract, due to force majeure or hardship. However, it is recommended that the defaulting party should serve such notice in order to prove the occurrence of the force majeure or hardship event.  The party in default has to clarify in such notice, how long he expects that the defaulting situation will last, demonstrate the connection between the force majeure or the hardship and his inability to meet his contractual obligations, and his suggested solutions (if any).

What is the respective burden of proof on the parties to prove the Coronavirus outbreak can be/cannot be deemed as an event of Force Majeure or Hardship?

As it is stated above, the ECC respects the parties’ agreement and considers the force majeure and the hardship as an exception. Hence, the party that wishes to invoke “force majeure” or a “hardship” case must demonstrate and prove the concrete, specific effects of the respective event in court. The burden of proof is on the defaulting party.

The debtor must prove the causality for the imminent disadvantage caused by the performance of the contract or the impossibility of performance of the contract due to the occurrence of the unforeseen event. With an abstract reference to the coronavirus crisis, one does not comply with the obligation to present and prove, even under Egyptian law.

Finally, it should also be pointed out that proving the force majeure or hardship due to the corona virus crisis can be done by virtue of the issued Decree of the Prime Minister No. 768 of 2020. The Egyptian government restricted the government’s daily work and imposed a curfew restricting the movement of the citizens to combat the outbreak of coronavirus. All courts are closed until 15 of April 2020, an extension of that date is expected.

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Estonia

How is Force Majeure defined in the Estonian law?

Force Majeure is defined in the Estonian law as circumstances which are beyond the control of the obligor and which, at the time the contract was entered into or the noncontractual obligation arose, the obligor could not reasonably have been expected to take into account, avoid or overcome the impediment or the consequences thereof which the obligor could not reasonably have been expected to overcome.

Force Majeure pursuant to Estonian law can be divided into four parts:

  • the existence of an impediment;
  • the impediment must not have been caused by the debtor’s own conduct or inactivity;
  • the unforseeability of the circumstance; and
  • the inevitability and insurmountability of the circumstance.

The existence of an impediment – the first criteria which shall be met for a person to be exempted from a contractual liability. The impediment should actually prevent the fulfillment of a specific obligation.

The impediment must not have been caused by the debtor’s own conduct or inactivity – only such circumstance which was beyond the control of the obligor may be considered as Force Majeure. Thus, the occurrence of the circumstance shall be objective, i.e. the obligor has not caused it by its own conduct or inactivity.

The unforeseeability of a circumstance – not every circumstance impeding the performance of an obligation and which is beyond the control of an obligor may be considered as Force Majeure. The occurrence of the circumstance needs to be unexpected and it cannot be reasonably expected from the obligor to have taken the circumstance into account. The circumstance which was reasonably foreseeable by the obligor cannot be considered as Force Majeure

The inevitability and insurmountability of the circumstance – the obligor cannot be reasonably expected to be able to avoid the influence of the circumstance on the performance of an obligation or surpass the circumstance or its consequence.

As such, the spread of Coronavirus and the emergency situation followed can be considered as an impediment (the impediment should actually prevent the fulfillment of a specific obligation). The coronavirus outbreak by itself checks also all of the other prerequisites of the Force Majeure e clause pursuant to the Estonian law. As Force Majeure comes from the law, a separate clause regarding Force Majeure does not have to be added to the agreement.

Hardship is not a term that is used in the Law of Obligations Act of Estonia but it resembles under Estonian law the possibility of “Alteration of balance of contractual obligations”. Due to the mentioned possibility of alteration, the amendment of the agreement may be demanded if:

  • at the time of entry into the contract, the injured party could not have reasonably expected that the circumstances might change; and
  • the injured party could not influence the change in the circumstances; and
  • the risk of a change in the circumstances is not borne by the injured party pursuant to the law or the contract; and
  • the injured party would not have entered into the contract or would have entered into the contract under significantly different terms if the party had known of the change in the circumstances.

If the bases for amendment of a contract exist but due to the circumstances amendment of the contract is not possible or would not be reasonable with respect to the other party, the party aggrieved by alteration of the balance of the obligations may withdraw from the contract or, in the case of a long-term contract, cancel the contract.

What are the criteria to invoke circumstances related to Coronavirus as Force Majeure?

In the case of a written agreement, the parties shall firstly review their contract as it may contain specific clauses that exclude or explicitly define the application of Force Majeure. In addition to the Force Majeure clauses in the agreement, e.g. the provisions relating to circumstances allowing extraordinary cancellation shall be analyzed as well.

The other party shall be notified immediately of the occurred impediment after the impediment becomes known. In addition, it must be kept in mind, that the party invoking the Force Majeure clause must have the possibility to prove that the impediment actually prevents the fulfillment of a specific obligation.

Thus, the party should also gather as much evidence as possible about the impediment restraining the fulfillment of an obligation, as proof will be needed in the case of a dispute.

What are the consequences of Force Majeure under Estonian law?

Pursuant to the Estonian law the non-performance could be excused in the case of Force Majeure thus not considering the infringer liable for the breach of its obligations.

In the case the infringer invokes the Force Majeure clause, the legal remedies available to the other party are being limited, i.e. the other party cannot demand the compensation for the caused damages, the performance of the obligation and interest. The injured party still has the possibility to withdraw from or cancel the agreement, to refuse to perform its obligations or demand the reduction of price.

Though it should be kept in mind that at least as of now, the Estonian court practice has deemed that the non-performance of a monetary obligation is not excused even in the case of a Force Majeure. This may change considering the COVID-19 outbreak at hand, if the companies cannot sell their products or services and therefore are not able to pay due to the recession that the virus may cause.

Nevertheless, for a person to be able to invoke the Force Majeure clause in the agreement, the concluded agreement shall have been conducted before the occurrence of the Force Majeure. The obligor cannot rely on a Force Majeure clause in the case the contract has been concluded within the timeframe when the circumstance considered as Force Majeure was already present.
In addition, in the case the effect of the Force Majeure is temporary, the non-performance of the obligation under the agreement is excused only for the period during which Force Majeure impeded the performance of the obligation.

How to prove that the coronavirus outbreak can be deemed as an event of Force Majeure?

Pursuant to Estonian law it is presumed that an obligor is liable for the non-performance of a contractual obligation. Thus, the obligor shall be the one who has the obligation to prove that the non-performance of a contractual obligation is excused due to Force Majeure due to the  Coronavirus outbreak. The obligor may collect and present all possible proof in regard to the fact that the non-performance of the obligation shall be excused due to coronavirus.

What is the best course of actions recommended in case of notice of Force Majeure?

Firstly, collect and keep any and all evidence in regard to the fact that the impediment prevents the fulfillment of a specific obligation.

Secondly, inform the other party about the event of Force Majeure as soon as possible and within the deadlines agreed upon in the agreement. If possible and if needed, try to agree upon an amendment of the agreement.

Thirdly, consider any possible alternatives and try to mitigate the damages from occurring, in addition, try to invoke any available remedies in due time.

In regard to future agreements, make sure that the Force Majeure clause specifies that the outbreak of COVID-19 is covered as well. In addition, conclude an insurance coverage which would in the future cover the risks involved with similar outbreaks as of COVID-19.

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France

Update on April 15, 2020

With the Governmental Order April 15 2020 (n°427), French Government modified some of the rules suspending penalty, termination and forfeiture clauses provided for in the Governmental Order of March 25, 2020 (n ° 306): Two main ideas to have in mind:

For obligations fallen during the PJP, the deadline to comply with the contract after June 24, 2020 (end of the PJP… from the time being, but it could be shortened) will no longer be automatically 1 month (see below), but will be calculated according to the performance period actually affected during the PJP.

The deadline for performance of obligations (other than payment obligations, e.g. delivery of goods or services) which must be performed within a specified period expiring AFTER the PJP, is postponed for a duration equal to the time impacted by the PJP.

The other rules for suspending the penalty, termination and forfeiture clauses of Governmental Order 2020/306 remain applicable.

https://www.legifrance.gouv.fr/affichTexte.do?cidTexte=JORFTEXT000041800899&categorieLien=id

Update on March 25, 2020

French government enacted a governmental order 2020-306 of March 25, 2020 relating in particular to the extension of deadlines during the State of Health emergency.

The provisions of this Order will have a direct impact on the performance / non performance of contracts.

First of all, this Governmental order created a “legally protected period” (“période juridiquement protégée” or PJP) which runs from March 12, 2020 to June 24, 2020 (scheduled to date).

Impact on penalties clauses and termination clauses

The Governmental order provides that liquidated damages (or penalty) clauses, termination clauses or forfeiture clauses, when their purpose is to penalize the non-performance of an obligation within a specified period, are deemed to have not taken effect or to be effective, if this period expired during the PJP.

These clauses will take effect one month after the end of this PJP, if the debtor has not performed this obligation. The debtor must therefore fulfill its obligation no later than July 24, 2020.

Impact on right to terminate or to oppose to a tacit renewal of a contract

This Governmental order allows also the party who could not have terminated a contract before a deadline or object to its tacit renewal within a specified period, if this period or this deadline was to take place during a period which expires during the PGP, to benefit from an additional term to do so.

This period is two months after the end of the PJP. This means that all commercial contracts with an anniversary date or term between March 12, 2020 and June 24, 2020 may be validly terminated or non-renewed until August 24, 2020 at the latest.

How are Force Majeure and unforeseeability defined under French law?

French Civil code distinguishes cases of Force Majeure and of unforeseeability. These legal provisions are applicable to all civil or commercial contracts (except contracts subject to administrative law) whether domestic or international. Contracts for the international sale of goods subject to French law fall under the special regime laid down by the 1980 Vienna Convention.

Force majeure exists (art. 1218 French Civil Code) when an event beyond the control of the debtor, which could not have been reasonably foreseen at the conclusion of the contract and whose effects cannot be avoided by appropriate measures, prevents the performance of its obligation by the debtor:

  • The Force Majeure does not need to be external to the one invoking it, but it must be beyond its control (for example, illness affecting the service provider which is not outside but out of his control).
  • The case invoked by the party must be irresistible from two points of view: It must prevent the performance of the debtor’s obligation and furthermore this case must have effects which cannot be avoided by appropriate measures. Irresistibility is therefore appreciated both at the level of the content (the intensity) and also at the level of the result of this event.
  • Finally, the event must be unpredictable. It being specified that this unpredictability is assessed on the day of the conclusion of the contract. It is not appreciated in abstracto to but concretely because the Civil Code requires that the event could not simply be “reasonably” anticipated. The time of conclusion of the contract, its place of performance, the experience and skills of the parties are therefore to be taken into account.

Force majeure is implemented as follows:

  • if the impediment is temporary, the performance of the obligation is suspended, unless the resulting delay justifies termination of the contract. So, if one of the contracting parties (the Civil Code does not specify which one) considers that the impediment is too long or makes the contract not anymore relevant, this party can decide to notify the termination of the contract, at its risk. Failing to define more precisely this rule, it will be up to the judges to determine whether the resolution was justified.
  • if the impediment is final, the contract is terminated as of right and the parties are released from their obligations.

French Civil Code (art. 1195) states also a mechanism specific to unforeseeability (“imprévision”), which exists if a change of circumstances, unforeseeable at the conclusion of the contract, makes the performance excessively onerous for a party which had not agreed to assume the risk. Three conditions must therefore be met:

  • an unforeseeable change in circumstances. Thought the circumstances could be known from the beginning, it is indeed the change thereof which must has been unpredictable when the contract was concluded.
  • the performance of the contract becomes excessively expensive: unlike force majeure, it is not the impossibility to perform the contract that is at stake but a major financial impact.
  • when concluding the contract, the party affected by this excessive financial burden did not agree to bear such a major risk.

Unless otherwise agreed, parties will stick to a four-stage implementation:

  • first, the party which undergoes the change of circumstances can request a renegotiation of the contract to its contracting partner while having to continue to perform its obligations during the renegotiation,
  • then, if the renegotiation fails (or the other party refuses) the parties can agree (either beforehand, in the contract, or when the event occurs) the termination of the contract, at the date and under the conditions they agree on,
  • alternatively, the parties may also jointly ask the judge to adapt the contract,
  • finally, if there is no agreement to jointly ask the judge, one of the parties may take the dispute to court to ask it to adapt the contract, or to terminate it, at the date and under the conditions it will fix.

The UN 1980 convention on the international sale of goods provides (art. 79) for an exemption of responsibility of one party when the non-performance is due to an impediment beyond its control and that one could not reasonably be expected to have taken the impediment into account at the time of the conclusion of the contract or to have avoided or overcome it, or its consequences. Consequently, in international contracts for sale of goods subject to French law, force majeure will be recognized if the following criteria are met:

  • Independence of the event with regard to the debtor of the obligation,
  • Unpredictability of the event, at the time of conclusion of the contract,
  • Irresistible nature of the event.

Contractual clauses

As the here above legal provisions are not overriding mandatory rules, parties may adapt the regime and definition in their contract through a Force Majeure clause and a Hardship clause.

Parties (or one of them) are allowed to undertake expressly to perform their obligations even in case of Force Majeure and can also limit Force Majeure events to a precise list of events or define some events as Force Majeure even though legal criteria are not met.

So-called “Hardship clause” can also rule and limit the nature of the unforeseeable event and / or its impact on the contract, or adapt the different stages. Observations from practice show that very often the parties waive the full article 1195 or at least exclude or limit the powers of the judge thereof (or at least denies him the power to adapt the contract).

As far as international contracts for the sale of goods are concerned, article 79 can, like any other provision of the Vienna convention, be excluded or amended by the contract (which is not that common as regards French party).

Is the Covid-19 considered as Force Majeure or Unforeseeability in France?

The French Minister of Economy and Finance declared on February 28, 2020 that the Coronavirus was considered to be a case of Force Majeure for companies within the framework of public contracts (i.e. concluded with entities such as the State or local authorities). In the case of private transactions, it will be up to the judge, if necessary, to determine whether a party may, because of the Covid-19 outbreak and its consequences, invoke a case of Force Majeure or invoke unforeseeability. Each party will therefore have to determine on the one hand whether it can meet the criteria of Force Majeure or unforeseeability and on the other hand if it is better to invoke one or the other.

Regarding Force Majeure

Unpredictability of Covid-19 will mainly depend on the date on which the agreement in question was concluded. Concerning a French contracting partner, it is certain that a contract concluded before January 1, 2020 would respect this criterion. While the World Health Organization stated on January 30, 2020 that the Covid-19 outbreak was an “international public health emergency”, it should not be too quickly assumed that before that date, the unpredictability would be acquired and that after this date the event would be foreseeable.

It depends above all on the quality of the parties (nationality, location, skills, etc.) and the subject of their contract. It might be still unforeseeable for a contract concluded directly with a Chinese entity in early January 2020 involving shipping from China. But it is all a matter of circumstances considering that if today the epidemic has a huge and global impact on the economy, its knowledge and control in early January 2020 was not so obvious.

The predictability of this outbreak must be assessed as regards time and space, especially if we consider an international contract or a purely domestic contract. Considering the difficulties for political, scientific and economic actors to understand its development and its potential impact on the economy and populations, the contracting party can easily (or not) prove the unpredictability of this epidemic, depending on the circumstances and the time (almost day-to-day) of conclusion of the contract.

French case law has already, in recent decades, ruled on several occasions on the impact of epidemics on the performance of contracts: dengue, chikungunya, avian flu, plague or H1N1. If the epidemic pre-exists to the contract and is therefore known, it cannot constitute a case of Force Majeure. A court of appeal thus found that there was no unpredictability when a contract was concluded six months after the appearance of the chikungunya. What about Covid-19 outbreak and a contract concluded for instance between European companies in February 2020?

As far as contracts concluded by French entities are concerned, official information will be obviously taken into account, in particular and at the latest, the here above communication from the Minister of the Economy and Finance on 28 February 2020, then the governmental decisions and orders of restriction of activities and containment on March 12 and 16, 2020.

Is the Covid-19 outbreak irresistible? Again it is necessary to question on a case-by-case basis the obligations whose performance is prevented by the Covid-19 outbreak. The French definition of Force Majeure requires proof that not only the Covid-19 epidemic prevented the performance of an obligation, but also that there are no alternative measures. The assessment of this result and these measures therefore depends mainly on the subject of the contract, in particular, the origin and destination of the goods or the nature of the services.

Again with regard to epidemics, French courts have already ruled on the irresistible nature of an epidemic. In some cases, it was rejected as Force Majeure as soon as the epidemic was endemic or non-lethal. As regards Covid-19 outbreak, it might be necessary to look at the immediate effects of the Covid-19 outbreak on the performance of contracts (for example due to illness of employees, logistical or economic blockages observed in China or even individual decisions taken under the precautionary principle), and also at the differed legal effects of the Covid-19 epidemic as per the French government decisions and orders affecting the movement of people, their working conditions and the closing of certain commercial and industrial activities.

Even though the debtor of an obligation (to deliver goods, to provide services or to pay) would prove the unpredictability and the dual character of irresistibility of Covid-19 outbreak as a Force Majeure, is it really worthy to invoke it?

Is it possible to invoke unforeseeability for Coronavirus in France?
  • it is perhaps easier to prove because it is not necessary to prove an impossibility to perform the contract but simply an increase of the cost of performing the contract.
  • in addition, it could be possible to consider that even if the Covid-19 epidemic were known at the time of the conclusion of the contract, its global and rapid spread as well as its scientific uncertainties and its various impacts could be assimilated to an unforeseeable change of this initial circumstance.
  • finally, the implementation of this rule may allow the affected party not to be a binary position (temporary suspension or final termination), but in a case where it can trigger the other party to renegotiate in good faith or, at the very least, it can go (jointly or not) to the judge for an adaptation; for example, claiming for a financial contribution to the costs necessary to implement of an alternative plan performance of the contract.
What to do in case of a Force Majeure notice for Coronavirus in France?
  • Keep proof of the conditions and context in which they negotiated their contract,
  • Determine the law applicable to their contract then identify in this national law the different rules that may be invoked,
  • Check the clauses of the contract and identify their articulation with the applicable legal rules,
  • Determine in advance an objective and a strategy to end the crisis (termination, contract readjustment, damages, extension of deadline etc.),
  • Act transparently and in good faith with your partner in order to notify him the difficulties encountered and invite him when the time comes to enter the process of suspension of the renegotiation contract thereof, which would be provided for by legal or conventional rules,
  • Keep proof of the blockage and of extra costs incurred and of assessment of optional plan B,
  • Do not underestimate the difference in information and appreciation (political and cultural) of the risk by the foreign partner and consequently justify in a substantiated manner the different criteria of existence of force majeure or unforeseeability,
  • Check the possible existence of a mediation clause in the contract and in the absence of a stipulation, spontaneously propose a mediation center.
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Germany

How are Force Majeure and Hardship regulated under German law?

Force Majeure is a term used in German law in several places within and outside the German Civil Code (Bürgerliches Gesetzbuch = BGB), such as in § 206 BGB, § 651 h para. 3 BGB, § 703 para. 1 BGB and § 7 para. 2 StVG. However, the legislator has not defined “Force Majeure” itself.

According to the jurisprudence of the highest German court, the Federal Court of Justice (BGH), Force Majeure is:

  • an external event
  • that has no operational connection
  • and cannot be averted even by the utmost care that can reasonably be expected,
  • so it is beyond the control of the parties.

Hardship is not a term that is used in the BGB, but it resembles a concept named “Wegfall der Geschaeftsgrundlage”, which means the discontinuation of the legal basis of an agreement. This concept applies, if:

  • unforeseen circumstances,
  • which have become the basis of a contract,
  • have changed substantially after the conclusion of the contract
  • and the contract would have been concluded with a different content if the contracting parties had foreseen this change.

However, it does not apply if the unforeseen circumstances fall into the usual contractual risks of one of the parties. This concept can result in the possibility to terminate the contract or demand a change of the contractual conditions.

Can the Coronavirus be considered as a Force Majeure or Hardship in Germany?

The most important criterion to consider is whether a contract contains a Force Majeure clause.  

If positive, it must first be examined whether the clause is applicable for events related to the Coronavirus outbreak.

  • The situation is clear if the clause refers to an epidemic or pandemic.
  • On the other hand, the clause cannot be deemed applicable if it exhaustively lists cases that are to be considered as cases of Force Majeure, but does not list an epidemic or pandemic.
  • If the Force Majeure clause is rather general, a pandemic is to be understood as a case of Force Majeure under German law, because it is an unforeseeable and unavoidable event. In this respect, the term Force Majeure includes not only events such as war, riots and natural disasters but also epidemics and therefore even more so pandemics. This has already been pointed out by the German legislator in the statement of reasons for a law which used the concept of Force Majeure. Also in German jurisdiction, especially in the area of travel, it is already recognized that diseases can fall under the concept of Force Majeure. This is to be assumed in particular if the infection spreads rapidly and is associated with considerable health risks. Moreover, the Federal Foreign Office has also already issued a virus warning, which is to be regarded as a further significant indication of Force Majeure.

Usually the agreed Force Majeure clause will be worded very similarly to this understanding in German law. Therefore the Force Majeure clause normally contains the following content:

  • First, the event is beyond the control of the parties.
  • Second, the circumstance affecting the fulfillment of the contractual obligation (here: the Coronavirus) was an unforeseeable event at the time the Force Majeure clause was contractually agreed upon. In the case of the Corona pandemic, this will certainly apply to all contracts concluded before December 2019 (the first time a Coronavirus infection in China became known). For contracts concluded after this date, this is not certain.
  • And last but not least, some clauses add as a third condition the inevitability and/or insurmountability of the situation

A pandemic such as the Coronavirus should, therefore, be covered by a standard Force Majeure clause, at least if the contracts are not from the recent past.

If there is no Force Majeure clause in the contract, the concept of Force Majeure is not applicable. On the other hand, if it is impossible to fulfill the respective contractual obligations, the debtor is released from his duty to perform pursuant to the general regulations in the BGB, and is not obliged to compensate for damages, provided he is not responsible for the impossibility of performance of the contract.

However, it has to be ascertained on a case by case basis  whether the fulfilment of the contractual obligation is really impossible or, for example, can be postponed.

The Coronavirus outbreak may be considered also an event of Hardship (as explained above), which shall lead to a fair and reasonable settlement between the parties in the event of unforeseen circumstances.

This only does not apply if it can be inferred from the contract that one of the parties had assumed the contractual risks affected by the virus outbreak, or if the contractual consequences are of a minor nature.

How to prove Coronavirus as Force Majeure in Germany?

In general, each party must prove the facts that are favorable to it before German courts. According to this rule, therefore, the debtor who wishes to suspend his contractual obligations on the grounds of Force Majeure must be able to prove that the Coronavirus is to be regarded as a case of Force Majeure or that the conditions of “WGG” are met.

The situation is usually simple if a Force Majeure clause refers to an epidemic or pandemic: The Coronavirus falls within this category, and given the current facts, there is no need to provide further evidence regarding the applicability of the clause. However, the party invoking Force Majeure needs to prove that the performance of the respective obligation was objectively impossible because of the circumstances.

If a pandemic is not listed explicitly, the party invoking a case of Force Majeure must prove that the Coronavirus meets the conditions of the clause. In the case of a standard clause, this proof can usually be successfully provided, at least if the contract was concluded before December 2019 and the outbreak of the virus was therefore unforeseeable.

If there is no clause in the contract and the statutory concept of impossibility applies, the debtor of a contractual obligation must also prove that the performance of the respective obligation was objectively impossible because of the circumstances. Regarding damage claims, the law provides for the assumption that the party who does not perform a contractual obligation is at fault, which means that the debtor needs to prove that the damage could not be avoided by reasonable precautions.

What to do in case of notice of Coronavirus Force Majeure in Germany?
  • Contact your business partners at an early stage and discuss the current situation and your arrangements, to avoid delivery bottlenecks. For this purpose, it is advisable to draw up customer information letters that communicates whether the company can regularly fulfill its obligations or not and explains the measures you have specifically taken to face the emergency (ban on business travel, conversion to home office, replenishment of inventory, etc.).
  • The contract should also immediately be checked for the existence of a Force Majeure clause, as the further procedure will depend on this.
  • If a Force Majeure clause exists, the further steps depend to a large extent on the legal consequences provided for in the clause. Usually, the postponement of contractual obligations (such as the postponement of fixed delivery dates), liability exclusions or rights of withdrawal are agreed here. Under certain circumstances, possible termination of the contract may also be provided for. It should also be examined whether the clause contains certain procedural provisions, such as an obligation to notify the contractual partner about the Force Majeure case, the written form of the assertion or giving notification within a certain period. This is important, as a breach of this could harm the perception of the debtor’s rights.
  • If a Force Majeure clause does not exist, it should be examined whether the principles of the impossibility to perform the contractual obligations or the concept of Hardship (as explained above) can help.
  • In general, it is advisable to take all possible measures to minimize damages, as stipulated by German law in § 254 para. 2 sentence 2 BGB. This may make it necessary to seek alternative sources of supply for the period of delayed deliveries if this can prevent the entire production from failing otherwise.
  • There are also some things to consider when concluding new contracts: it is no longer possible for contracts concluded around February 2020 and onwards to invoke Force Majeure. The supply shortages threatened by the virus were already foreseeable at that time. Since February 2020, the contracting parties have thus had the possibility and the obligation to contractually hedge the risk of delivery difficulties. This means that neither German law nor a clause can cover the case of Force Majeure for these contracts. In order to contractually secure the current uncertainty, from the supplier’s point of view delivery dates should be non-binding with immediate effect and delays due to the Corona pandemic should at least be excluded from negative contractual consequences. Contractual penalties should also be avoided in case of a violation of fixed delivery dates.
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Greece

How are Force Majeure and Hardship regulated under Greek Law?

The term “Force Majeure” is not foreseen in the Greek Civil Code (hereinafter: “GCC”), but has been developed by jurisprudence, as follows :

  • any unforeseeable event in a specific situation
  • any fortuitous event
  • any event which is unavoidable even when the highest measures of prudence and due diligence have been taken.

Examples of Force Majeure are:

  • natural disasters, such as earthquakes, landslides, floods and tempests
  • sudden and unforeseen illness
  • orders of authority
  • strikes
  • public order declarations of national emergency, state of siege or war

Hardship

The term “Hardship” does not occur in Greek Civil Law. Instead the doctrine of “altered circumstances”can be found. According to the doctrine of altered circumstances it is possible the exceptional release of a debtor from an obligation which, while in itself not wholly impossible to perform, as a result of an unforeseeable event, would involve exceptional financial or moral hardship.

Exceptional Hardship therefore may be treated as impossibility for which the debtor is not liable for damages.

How to prove that the Coronavirus can be considered as an event of Force Majeure?

Article 336 of the GCC rules that the debtor is exempted from any obligation due to the impossibility to perform, if he proves that the impossibility is due to an incident for which he is not responsible.

Impossibility of performance exists if the performance cannot be fulfilled for actual/natural or legal reasons.

Impossibility of performance for legal reasons can also apply where performance is actually possible, but its fulfilment would require incalculable or extremely high and disproportionate costs.

In the case of the Coronavirus outbreak a legal reason of impossibility to perform might occur in case of administrative orders severely limiting everyday life, transport and business. The applicability of article 336 GCC would however depend on the merits of each case.

Arguably, an epidemic or a pandemic could reasonably be considered a natural condition of impossibility to perform. But Greek jurisprudence, and in particular the Greek Supreme Court “Areopagos”, appear to have not decided such a case so far.

The regulation of impossibility of performance can be derogated by the parties to a contract, who  may specify in a clause of the agreement which cases fall into the category of impossibility of performance. Where no such clause in the contract exists, the courts have power to decide.

The prerequisites for the exemption of the obligation are the following:

Subjective or objective, actual/natural or legal impossibility of performance

  • Objective impossibility exists if the performance is impossible for everyone
  • Subjective impossibility exists if the performance is impossible for the debtor, but could be performed by someone else
  • Actual/natural impossibility exists if the performance is impossible due to natural reasons such as the object to be sold is destroyed
  • Legal impossibility applies if the performance cannot be executed due to legal reasons, such as binding administrative orders

Subsequent impossibility means that the impossibility takes place after the obligation arose, but not after the due date. The impossibility of performance shall be permanent.

Non-culpable impossibility (without fault)

The impossibility is due to an event for which the debtor or those who were assisting him to perform were not responsible.

The main consequence of non-culpable impossibility is that the debtor is exempted from the obligation to perform. The exemption of the obligation occurs automatically without any declaration of intention by the parties or judicial order.

According to Art. 336 para. 2 of the GCC the debtor is then obliged to inform the creditor without due delay and within a reasonable time justified by the circumstances of the situation.

The informing of the creditor by the debtor is a unilateral, formless and declaratory document.

The debtor is also obliged to return any consideration already received.

Omission or delay to inform the creditor does not nullify the exemption. In this case though, the debtor remains liable for damages to the creditor arising from the debtor’s failure to comply with his duty to timely inform the counterparty.

In case of “Altered circumstances” (Hardship) article 388 of GCC reads (in part) as follows:

If the circumstances under which the parties have agreed subsequently change, for extraordinary and unforeseeable reasons, and having regard to good faith and business usage and mainly in the case of a two-sided contract, and if, as a result of this change, fulfilment of the obligation, taking into account the counter-obligation / consideration, became unduly burdensome for the debtor, the debtor may request the court to reduce his obligation at its discretion to a reasonable extent, or to rescind the whole contract or the part not carried out.”

This means that the courts are entrusted with the power to not only terminate the contract but also to let the contractual relationship continue, while modifying the terms of the contract to address the changed circumstances.

This regulation is mandatory law, meaning it cannot be derogated or waived by the parties in their contract.

The doctrine of Altered circumstances applies if the changed scenario related to the main elements of the contract, it occurs after the conclusion of the contract and before its fulfilment, the change is  due to extraordinary and unforeseeable reasons, not attributable to the will of the parties and performance would be excessively onerous.

Extraordinary reasons are such which under the normal course of events do not usually occur, but arise from exceptional events such as natural disasters, wars, earthquakes, revolutions, strikes, major devaluation of currencies et al.

Unforeseeable are future events which at the time of concluding the contract nobody could foresee or calculate. The inability of prediction shall be considered on the basis of the principles of good faith and business usage.

The consequence of altered circumstances may be the adjustment of the contract by the court on the basis of the principles of good faith and business usage.

How to prove that the Coronavirus is an event of Force Majeure in Greece?

The general rule in Greek Civil Procedure Law is that each party has to prove the facts which give rise to their claim or objection.

Therefore, the claim of the creditor for fulfilment of the performance of the debtor will be dismissed by the court if the debtor proves the impossibility of performance based on legal reasons, for instance an administrative order of shutdown of business operations to face the outbreak of Coronavirus.

What to do in case of notice of COVID-19 Force Majeure in Greece?

First, the parties have to check if there is a Force Majeure clause in their contract and what it stipulates. Where an epidemic or pandemic is included in the list of events of Force Majeure, then it is important to check what procedure and consequences arise out of the contract and the situation for the parties.

In case no Force Majeure clause exists, the debtor should inform his counterparty as soon as he knows about the impossibility of performance as stipulated Article 336 GCC.

In all cases the parties are obliged to inform each other without delay of their inability to perform and on the possible alternatives to mitigate the damages. Article 300 GCC stipulates that failing to inform or otherwise to mitigate or prevent the damage excludes the claimant either in whole or in part to claim for damages.

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Hungary

Update on March 31, 2020

On March 11, 2020 WHO declared COVID-19 as a pandemic and the Hungarian Government declared a constitutional state of emergency related to the Coronavirus situation during which governance will mainly be made through Government decrees.

On March 30, 2020 the Hungarian Parliament passed a new law (Act XII of 2020 on the Protection against the Coronavirus) approving the protective and restrictive measures of the Government (public events have been prohibited, institutions have been closed, the entering of foreign citizens to Hungary has been limited, a payment moratorium has been put in place, the Labor Code can be derogated from, etc.).

Under the new law, in a state of emergency the Government – in addition to the measures and rules passed under the Act on Disaster Management – may, by decree, suspend the application of certain laws passed by the Parliament, derogate from statutory provisions of such laws, and take other emergency measures. Additional measures are expected, and Government decrees may overwrite the rules of the Civil Code, including the provisions relating to Force Majeure and hardship clauses as well.

How is Force Majeure regulated under Hungarian Law?

Under Hungarian law, there is no straightforward statutory definition of “Force Majeure” (in Hungarian the term “Vis maior” is used), however, Hungarian judicial practice has developed its own concept which describes Force Majeure as:

an irresistible force, an event that no human and no one can resist. There are certain natural disasters, but this also includes human movements that are of human origin and also have irresistible, elemental power (i.e. war, revolution, or the disappearance of currency without replacement). Events of “force majeure” do not only make the performance of a valid contract difficult but they make it absolutely impossible for the human force.”

Natural disasters (i.e. pandemics, earthquakes etc.), certain political and social events (i.e. war, riots, sabotage, the closing of airports, drastic economic changes etc.) can be considered as basic cases of Force Majeure. State measures for example (i.e. boycotts, bans, export and travel restrictions etc.) can be considered as such circumstances that fall outside of the control of the parties and can be considered as a Force Majeure in certain cases, if other criteria such as foreseeability, preventability and the exhaustion of other alternatives are met. It is also clear from the jurisprudence that there is no general Force Majeure, but in each case it has to be verified individually whether the conditions of Force Majeure are met.

The fact alone that there is a pandemic does not alter contracts in place between parties. In such a case, if the performance of the contract is still possible, neither party is freed of their obligations. However, governmental measures adopted during the fight against the epidemic could result in making the performance of many contracts legally impossible.

The parties can define Force Majeure in their contract, i.e. what should or should not be considered as a circumstance where exemption from liability is possible. In addition, any liability limitation or exclusion clauses in the contract must be carefully considered. Thus, the first step is always a thorough examination of the individual agreement of the parties. If there is no written contract, or it does not mention anything about Force Majeure, the parties will have to rely on the judicial practice of the Hungarian courts regarding cases with Force Majeure.

How is “Hardship” regulated under Hungarian Law?

Hardship” is not recognized as such in Hungarian law, although the amendment of the contract by the court is a similar mechanism. It means that any of the parties may request the court to amend the contract if, in the permanent legal relationship between the parties, and due to a circumstance that occurred after the conclusion of the contract, the performance of the contract with unchanged conditions would harm the substantial legal interest of the party. In addition to the above, the following criteria must be met as well in order to amend the contract:

  • the possibility of a change in the circumstances was not foreseeable at the time when the contract was concluded;
  • the change in circumstances was not caused by the party; and
  • the change in circumstances falls outside the normal business risk of the party.

Professional economic operators will likely not be exempt from performing their obligations or their liabilities in the case of non-performance, as according to certain court cases they must bear the risk of changes in the economy.

Hungary is a contracting state to the Vienna Convention on Contracts for the International Sale of Goods (CISG) and if Hungarian law applies to the contract the text of the treaty also applies, unless it is explicitly excluded. Thus, through this treaty the concept of hardship will be applicable to international sale of goods contracts. The Vienna Convention considers market changes as an obstacle to performance and not as an economic impossibility. The related case law has never considered market changes as being out of control in the event of market price changes below 100%.

It is rather unlikely that the courts would amend the contract and therefore free the parties of their obligations based on the economic hardships and market changes caused by the pandemic, as the whole economy is affected now, not only a few sectors. However, it is hard to correctly guess what is going to happen in the courtrooms of Hungary in litigation connected to the Coronavirus situation.

In addition to Force Majeure and modification by the courts, according to the Hungarian Civil Code, if the performance of a contract becomes impossible, the contract terminates and if the reason for that is not attributable to any of the parties, each party shall bear its own costs and already occurred services  are to be compensated by the other party.

Are there any other possibilities in addition to Force Majeure and Hardship clauses for avoiding liability?

According to Section 6:179-182 of the Hungarian Civil Code, if the performance of a contract becomes impossible, the contract terminates and if the reason for that is not attributable to any of the parties, the monetary value of the services already provided shall be compensated. The already paid monetary compensation shall be returned by the party if no services were provided in exchange.

We note that, in this case, according to the text of the law the contract terminates, which may not be the result the parties would like to reach in the event that they have a longstanding, permanent legal relationship. This provision works fine for contracts providing services on one occasion, but Hungarian legislation does not settle situations where the parties do not intend to end their relationship upon the impossibility of performance or when they do not want to renegotiate the contract. In such a case, it is up to the courts to resolve this issue.

What shall the debtor prove in order to avoid liability for a failure to perform?

According to Hungarian law, a party causing damage to the other party by breaching the contract will be required to compensate the latter for it. In order to be exempted from liability, the party is required to prove that the circumstance that gave rise to the breach of contract:

  • was outside of the control of the breaching party (i.e. the party had no control over it whatsoever due to its irresistible, elemental or legally binding power);
  • it was unforeseeable when concluding the contract (the party should not have foreseen such circumstance – standard of care is that of the bonus et diligens pater familias); and
  • the party could not be expected to have avoided this circumstance or to have averted the damage (one must evaluate alternative methods to avoid such a circumstance or at least mitigate the damage).

If all three of these criteria are met, the party shall not be liable for breaching and not performing the contract pursuant to Section 6:142 of the Hungarian Civil Code.

In the current situation, if someone recently concluded or will conclude a new contract and the epidemiological measures (i.e. prohibitions, restrictions) prevent them from complying with the contractual obligations, we do not think that they will have a good chance of excusing themselves by claiming that they had not foreseen the circumstances beyond their control.

How can it be proved that the Coronavirus is an event of Force Majeure in Hungary?

It is not the Coronavirus alone that prevents millions of contracts from being performed, but rather the consequences of the virus and the reactions of governments during the fight against the virus which could possibly qualify as unforeseeable, irresistible, binding, Force Majeure-like circumstances that fall outside of the control of the contracting parties.

Therefore, in the case of non-performance, one should prove that a circumstance caused by or connected to the Coronavirus was in fact an unforeseeable, irresistible, out-of-control circumstance which could not be avoided, and that it prevented the party from performing its contractual obligations.

What steps should be taken in the event that you experience a COVID-19 Force Majeure event in Hungary?
  • Check the contracts immediately for the existence of a Force Majeure clause and its content. The parties can define Force Majeure in their contract, e. what should or should not be considered as a circumstance where exemption from liability is possible. In addition, any liability limitation or exclusion clauses in the contract should be carefully considered. Thus, the first step is always a thorough examination of the individual agreement of the parties. If there is no written contract, or it does not mention anything about Force Majeure, the parties must rely on the judicial practice of the Hungarian courts regarding cases with Force Majeure.
  • Notify or contact your business partners as early as possible to discuss the situation and possible solutions or contract modifications. Even if any circumstances are likely to prevent the parties from performing their contractual obligations, the parties should notify one another of them, unless the other party should have been aware of such impediment even without notification. In the event of a failure to communicate an impediment, the negligent party will be held liable for damages caused by not notifying the contracting party in accordance with the provisions on liability for non-performance of an obligation.
  • Take all possible measures to minimize damage (seek alternative sources of supply, look for second best solutions, ).
  • Safeguard all elements of proof that may be needed later.
  • Check whether there are any extraordinary governmental remedies in place that can be relied upon.
  • Check your insurance policies to see if damages would be covered.
  • When concluding new contracts, carefully draft force majeure clauses to explicitly deal with the consequences of the pandemic.
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India

How is Force Majeure regulated under Indian law?

Force Majeure has been defined in the Manual for Procurement of Goods, 2017, which is a manual used by the Government of India to procure goods. The manual specifies what constitutes as Force Majeure, the implications of the clause, such as:

  • A Force Majeure clause in the contract frees both parties from contractual liability or obligation when prevented by such events from fulfilling their obligations under the contract.
  • A Force Majeure clause does not excuse a party’s non-performance entirely, but only suspends it for the duration of the Force Majeure event.
  • Notwithstanding the punitive provisions contained in the contract for delay or breach of contract, the supplier would not be liable for imposition of any such sanction so long as the delay and/or failure of the supplier in fulfilling its obligations under the contract is the result of an event covered in the Force Majeure clause.

The clause also specifies the procedural conditions which have to be fulfilled while invoking the Force Majeure clause. These conditions are:

  • The firm has to give notice of Force Majeure as soon as it occurs and it cannot be claimed after undue delay.
  • There may be a Force Majeure situation affecting the purchase organization only. In such a situation, the purchase organization is to communicate with the supplier along similar lines as above for further necessary action.
  • If the performance in whole or in part or any obligation under this contract is prevented or delayed by any reason of Force Majeure for a period exceeding 90 (Ninety) days, either party may at its option terminate the contract without any financial repercussion on either side.
What is the Doctrine of Frustration and is it applicable under the Indian Law?

The Doctrine of Frustration is based on the impossibility of performance of a contract. In other words, due to factors outside the control of the parties to the contract, it becomes impossible to fulfill. The Doctrine of Frustration is a common law principle which is inherently applicable in India. Indian courts have upheld the idea time & again. This doctrine is used as an alternative to the Force Majeure clause, as Force Majeure meagerly delays the performance of the contract, whereas through the invocation of the Doctrine of frustration, the contract can be considered as void.

Under the Indian law, a contract to perform an impossible act is considered as a void contract. The same principle is extended to a contract wherein the contract was initially made to perform an act but eventually, after the contract is made, the act becomes impossible or illegal to perform. In such cases, the contract becomes void as well.

Is Coronavirus considered as a Force Majeure event in India?

On 19 February, 2020, the Government of India, through the Department of Expenditure, Procurement Policy Division, issued an Office Memorandum clarifying that the disruption of the supply chains due to the spread of Coronavirus in China or any other country will be considered as a case of natural calamity and Force Majeure clause may be invoked, wherever considered appropriate, following the due procedure. The Office Memorandum made a clear reference to the Manual for Procurement of Goods, 2017, for this purpose.

How to prove a Coronavirus Force Majeure event in India?

Generally, the burden of proof is on the party claiming the application of a Force Majeure clause. For the purpose of the Coronavirus outbreak, the government of India has already issued a memorandum clarifying that the outbreak will be considered as a Force Majeure event. Additionally, the party invoking the Force Majeure clause must provide evidence which proves that the delay in the performance of the contract occurred due to the outbreak of the Coronavirus and that alternative measures have been taken to ensure that the contract would be fulfilled within 90 days.

In the case of the plea of frustration, the burden of proof is more extensive. Since the Indian government has not recognized the outbreak of Coronavirus as a reason for invocation of the Doctrine of frustration. However, the courts in India can be moved to consider the Frustration of a contract. For this purpose, the onus is completely on the party to prove that the obligation defined under the contract has become impossible to perform, due to the outbreak. The party invoking the Doctrine of Frustration will have to prove the following:-

The obligation under the contract has become impossible (or unlawful in certain cases) of being performed.

  • If a condition was required to be fulfilled for the performance of the contract, then the condition has become impossible to be fulfilled. This will also be applicable in case of Contingent contracts.
  • The party invoking the Doctrine of Frustration could not possibly prevent the event, which leads to the obligation being impossible to perform.
  • No other recourse is available for the performance of the obligation.
What to do in case of notice of Force Majeure in India?

In case of the invocation of Force Majeure, the parties have different courses of action to pursue.

The first step is to make sure that a Force Majeure clause has been defined in the contract and what are the implications of the clause specified in the contract. It is imperative that the parties comply with the arrangements contemplated in the contract as regards Force Majeure, if this clause has to be invoked. The parties can mutually decide on alternative solutions for the execution of the contract. The parties must ensure that all reasonable efforts are taken to execute the contract, despite the Force Majeure event. Evidence signifying that such efforts were taken must also be put on record. The parties can further mitigate the damages and additional costs that may be incurred while exercising the alternate solutions. The parties must mitigate the significant or radical change from the obligation originally undertaken and collect evidence of the same to be put on record. The parties must ensure that they fulfill the burden of proof which is imposed upon them while invoking the Force Majeure clause, as specified in this article.

Additionally, the buyer may have obligations under subsequent contracts, or towards other buyers. They buyer should mitigate the same to the seller and insist that the contract be executed. This can be done in writing to ensure that the same comes on record. The buyer must collect evidence that the seller failed to perform their obligations and invoked the Force Majeure clause, and due to the same, the subsequent contracts have been affected.

The same steps can be taken while exercising Frustration of the contract. Additionally, it is also imperative to check the insurance policy and make sure that the contracts are covered by the relevant insurance policies. Usually the insurance policies disclaim liabilities in case of Force Majeure events, but it may differ on a case-to-case basis.

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Iran

How is Force Majeure regulated in Iran?

There is no specific definition of Force Majeure under the laws of Iran. However, according to Article 227 of the Civil Code of Iran:

“The party who fails to carry out the undertaking will only be sentenced to pay damages when he is unable to prove that his failure was due to some outside cause for which he could not be held responsible.”  

Article 229 of the Civil Code of Iran foresees that:

“If a person who has an undertaking is prevented from fulfilling it by some elements not within his control, he shall not be convicted to compensate for losses.

And according to Article 386 of the Commercial Code of Iran:

“If the goods have perished or are lost, the carrier is responsible for their value, unless he can establish that the loss or destruction resulted … from conditions that no caring carrier could prevent it…”

Therefore, although the concept of Force Majeure has not been specifically defined under the laws of Iran, elements of this concept and circumstances under which the event of Force Majeure will result in releasing liability of the committed party, are defined.

Force Majeure under the laws of Iran follows the same standards as it should refer to circumstances that are unpredictable (at the time of concluding the contract), inevitable and outside will of Parties. Other factors such as establishing the causality are normally referred in interpretation of the Force Majeure event.

Is the Coronavirus outbreak an event of Force Majeure under laws of Iran?

The Coronavirus is not considered as act of God, however it contains other elements that face the contracting Parties with inability in performance of their obligations.

As to the element of unpredictability, time of conclusion of the contract is fundamental: Coronavirus has been first recognized in December 2019 in China. Although the seriousness and danger of the virus outbreak was broadly reported in the media since the start, the global spread of the virus and its consequences in other countries was not a clear conclusion until several weeks later.

Therefore, while the unpredictability character of the conditions is applicable to the contracts that are concluded before December 2019, this is controversial for the contracts that have been concluded after December 2019: this should be ascertained on a country by country basis.

Therefore, those contracts that have been concluded after the outbreak of the virus in China but before the pandemic was declared by the WHO or started to affect a certain country, might invoke the Coronavirus outbreak as an event of Force Majeure in the contract, while this might not be possible for agreements concluded at a later stage.

It should be then verified if performance was indeed impossible and the consequences inevitable and if the event happened outside the will and actions of the contracting parties. This would be the case, for instance, in case of measures by the government for quarantine or lockdown or general shutdown of industrial, transport, business activities and governmental entities.

One other element that is not specifically mentioned in the regulations but should be taken into account for interpretation of the Force Majeure events is if the obligation could not be fulfilled by the obligated Party even without the situation caused by the outbreak, as in such case Force Majeure cannot be invoked.

In spite of above, normally the events of Force Majeure are listed in the Force Majeure Clause of a contract, so a first step the Parties should verify the content of the clause.

One good example in this regard, is sanctions against Iran that have resulted in cease of operation of many economical entities and rendered impossible the transfer of money: if such sanctions had not been listed as an event of Force Majeure, this would likely result in a dispute between the Parties. The same would happen for the Coronavirus disease, in case epidemic or pandemic were not listed specifically as a matter of Force Majeure in the contract.

What are the consequences of Force Majeure on Contracts?

Force Majeure circumstances will have direct effect on cease of operation of the contract and freezing obligations of both sides. Depending on the agreement of the Parties in the contract and in Force Majeure Clause, different scenarios could be predicted.

One possibility is that the contract would be automatically cancelled, as if it had not been concluded from the first instance.

As an alternative, the Force Majeure event may result in suspension of the contract, so that as soon as normal conditions are returned, the contract shall resume its enforceability.

Finally, another option could be that the Parties agree on new conditions for their contract by taking into account the Force Majeure conditions.

Disputes are likely to arise when there is no agreement by the Parties on the consequences of Force Majeure, or when the Force Majeure Clause is not present or is unclear. Under these circumstances, one should refer to the applicable law mentioned in the first part of this report.

What are the best practices in case of notice of Force Majeure?

Sending Notification: Giving timely notice to the other Party regarding occurrence of the Force Majeure event is essential. Normally the Force Majeure Clause establishes strict deadlines for the notice, on pain of forfeiture; late notice may in any case be interpreted as a  violation of the duty to mitigate damages deriving from the event.

Collection of Records: The Party who invokes the Force Majeure event has the burden of proof of the existence of the circumstances that make performance of the contract impossible: all relevant information and records, therefore, should be collected and shared with the counterparty.

Can the Force Majeure be excluded in the contract?

Is it possible that Parties specifically exclude Force Majeure events in their contract?

Even if under the laws of Iran, Force Majeure is not one of the mandatory requirements and agreement opting out of its application is theoretically possible according to Article 10 of the Civil Code of Iran and to the principle of freedom of contracts, it is arguable if this would be considered valid in case of impossibility of performance with the features summarized in the first part of this report.

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Ireland

How is Force Majeure defined and regulated in Ireland?

There is no legal presumption of Force Majeure under Irish law. A contract must expressly contemplate a Force Majeure event to be relied upon. Other provisions that anticipate events beyond the control of the parties and that affect the parties’ performance of the contract will also operate in the same way as a labelled Force Majeure clause. Force Majeure clauses are a common feature of commercial contracts in Ireland.

The contract will define what events are captured by the Force Majeure clause. The relevant clause will list events that will constitute a Force Majeure event, typically including acts of God, natural disasters, acts of Government, war, terrorist attacks and strikes. In the context of the Covid-19 outbreak, parties should look for specific references to epidemics, pandemics or disease control activities in its contracts, although it may also be arguable that the Covid-19 outbreak is also an act of God. Counterparties to Irish contracts should also consider the Irish government’s actions to legislate for restrictions on peoples’ movements and forced temporary closures of businesses unless they provide ‘essential services’, which would constitute an “act of Government” thereby satisfying the Force Majeure definition in most contracts.

Widely drafted Force Majeure clauses may also provide that the contract is not limited to prescribed Force Majeure events. Consideration of the breadth of the Force Majeure definition in the contract and whether it covers the event in question will be the first step for the parties to consider.

Coronavirus and the doctrine of Frustration in Ireland

Where the contract does not expressly contemplate a Force Majeure event or an event beyond the control of the parties, an affected party may seek to rely on the common law doctrine of frustration. A contract may be frustrated where performance of the contract is rendered impossible, without default of either party, due to a supervening event that was not within the contemplation of the parties when the contract was agreed. However, the doctrine of frustration has been construed narrowly by the Irish Courts and is therefore difficult to successfully establish.

The doctrine of frustration does not apply where the parties in some way contemplated the supervening event. For example, the existence of a Force Majeure clause precludes the contract from being frustrated because it indicates that the parties were aware of the risks when negotiating the contract and expressly agreed to allocate that risk between them.

How to prove that Covid-19 is as an event of Force Majeure in Ireland?

The party seeking to rely on the Force Majeure clause must demonstrate that:

  1. a Force Majeure event, as defined in the contract, has occurred; and
  2. that Force Majeure event has prevented it from performing its obligations under the contract.

Where a Force Majeure event occurs, both parties should consider whether the event in question is covered by the Force Majeure definition in the contract. For example, specific references to epidemics, pandemics or disease control activities would likely cover the Covid-19 outbreak.

The party seeking to rely on the Force Majeure event must then show that it has been prevented from performing its obligations under the contract. Other Force Majeure provisions may be satisfied where the party’s obligations are simply hindered or delayed. For example, a supplier may be prevented from supplying goods if the goods manufacturer has closed due to Covid-19. However, if the goods manufacturer simply reduces production due to Covid-19, thereby delaying production and making the goods more expensive, the supplier would be delayed or hindered, rather than prevented, from supplying the goods.

Once the party seeking to rely on the Force Majeuree vent has satisfied these conditions, it is likely that the contract will require further procedural steps to be taken, as follows:

  1. serve a notice of the Force Majeure event in writing on the other party, outlining the estimated extent and duration of the Force Majeure event;
  2. take all reasonable precautions to avoid the Force Majeure event; and
  3. take all reasonable endeavours to mitigate the effect of the event.
What is the best course of actions recommended in case either party issues a notice of Force Majeure?
  • The party should issue the notice promptly when it becomes aware that it cannot comply with its obligations under the contract.
  • Both parties should mitigate the effect of the Force Majeure event and minimise any loss incurred.
  • Both parties should check whether there is a termination provision in the Force Majeure clause. Contracts will often provide for termination by the other party where the Force Majeure event persists for a specified period.
  • The paying party (i.e. the party in receipt of the services or goods) should review the contract to establish whether it is obliged to continue making payments, notwithstanding the Force Majeure event. Contracts may expressly require payments to continue during a period of Force Majeure even though the services or goods cannot be supplied.
  • The cessation of the Force Majeure event should also be notified promptly to the other party.
  • Both parties should review all its contracts and compile a table of key provisions to consider whether there is a Force Majeure clause, whether that clause includes pandemic, epidemic or similar terms that would capture Covid-19 and whether there are notice and termination provisions arising from a Force Majeure event.
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Israel

How are Force Majeure and Hardship regulated in lsrael?

In Israel, the main reference to Force Majeure is  to a contractual protection/disclaimer for non-performance of a contractual obligation due to unexpected occurrences beyond the control of contracting parties  (see for instance section 18 of the Israeli Contract Law – Remedies for Breach of Contract -1970).

However, the said doctrine although enshrined in a specific act of law, is applied in a very limited manner, rarely providing Force Majeure protection especially while dealing with cases of acts of war, terrorism, militant hostilities etc. that were usually referred to a foreseeable in Israel and thus not a justification for breach of contract, same as per extreme weather conditions unless in totally unexpected time or place or even extreme changes in prices of goods for any reason.

Nevertheless, the Coronavirus phenomenon might be referred to and dealt with differently as indeed an unexpected and unavoidable event, in cases it has in fact objectively affected the ability to perform (such as in light of binding orders by the authorities), as  provided  by the Force Majeure doctrine.

In general, the key under Israeli law – would be to review whether the matter involves:

  • Actual non-foreseeability of Coronavirus event or its possible consequences, during the contractual engagement;
  • Actual and objective inability and impossibility to perform the contract in any manner because of the Coronavirus event – or manifest unbalance of the parties’ obligations.
  • Inability to perform based on binding orders or restrictions by the authorities that objectively affected the performance of the obligation in direct manner .
  • Good/bad faith in conducting the contract during the period of the circumstances and/or Good/bad faith regarding the non-performance or demand for compensation.

Said criteria would be used also to determine and evaluate the Coronavirus as a Force Majeure or as a breach of contract or hardship that would rarely provide exemption from liability in case of non-performance.

The respective burden of proof to prove that the Coronavirus outbreak can be / cannot be deemed as an event of Force Majeure is based on the civil adversary 51% proof and persuasion doctrine, under which the party claiming exemption from liability of breach of contract based on Force Majeure would have to prove the existence of the facts which meet the above criteria, whereas the opposing party would need to rebut said arguments or prove that the obligation could have been performed or that the event  should have been known or expected.

Orders by the Ministry of Health, such as the one of 2nd February 2020 banning any gatherings over 5000 people (further on updated to any gathering of over 10 people), banning any international congresses in Israel, and ordering 14 days isolation for any arriving travelers from certain countries, might be useful to prove the existence of an event of Force Majeure, yet additional prove would be needed to  discharge the burden of proof of the objective impossibility to perform the contract.

Nevertheless, If a party to a contract has decided on his own discretion (not based on an  order of the authorities) , to refrain from performing the contract obligations, such conduct or misconduct might not grant the Force Majeure  protection.

What is the best course of action in case of notice of Force-Majeure in Israel?

Supply side: to obtain proof of the Force Majeure event and its effect upon the performance, to send a timely warning to the buyer, to take all possible measures to perform the obligation, and gather evidence of such effort to overcome the effects of the event.

Buyers side: to act in good faith to adapt the contract terms to the situation (e.g. accepting a delay of performance ), to timely inform of the event the other links downstream in the supply chain, to seek alternative solutions/providers.

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Italy

Update on March 25, 2020

Law decree 17.03.2020 n. 18 the so called Save Italy Decree, at art. 91 stipulates that compliance with the measures taken due to the spread of Coronavirus might be considered as non-attributable cause i.e. Force Majeure in order to exclude liability of the debtor pursuant to articles 1218 and 1223 c.c. in case of delays or breach of contract. The assessment on whether or not it recurs Force Majeure, though, should be conducted by the Judge on a case by case basis.

The said provision represents a recommendation to the judge to evaluate with benevolence a Force Majeure defense raised because of the Covid-19 pandemic.

Art. 91 clearly supports the debtor even in terms of burden of the proof but the simple provision might not be enough in the international context where the counterparts increasingly demand to receive certificates issued by public entities attesting Force Majeure as a result of Covid-19’s spread and the measures taken to contrast it.

In the light of the above, on March 25th, 2020 the Ministry for the Economic Development (MISE) has issued a communication whereby it envisions the possibility for the local Chambers of Commerce, to issue a certification of Force Majeure resulting from the epidemic and the restrictions imposed by the Law for its containment.

The Chambers of Commerce will then be able to certify that they have received a declaration from the company stating that they were unable to fulfil their contractual obligations previously undertaken for unforeseeable reasons beyond their control due to the restrictions imposed by the authorities. The certification shall be issued in English at the request of the companies whose activity has been affected and with reference to contracts with foreign counterparts.

The companies shall then submit to their counterpart the certification in order to support the impossibility of fulfilling contractual obligations already undertaken within the time limits, for unforeseeable reasons beyond the company’s control and capacity and due to the restrictions imposed by the law for the containment of the epidemic.

Two seem to be the legal issues and limits concerning the certification issued by the Chamber of Commerce.

  • The first one regards the legal value from a formal point of view of the certification issued by the Chamber of Commerce whose role is simply to attest that a mere declaration coming from the party has been received without any confirmation the truthfulness of its content.
  • The second regards the fact that the certification might relate only to nonperformance or delays due to the restrictions imposed by the authorities excluding other cases where, for example, suspension of the activities has not been ordered.

Due to the said limits it is rather questionable whether or not the declaration issued by the Chamber of Commerce will serve as evidence to support a Force Majeure defense.

Update on March 22, 2020

Due to the urgent measures incessantly enacted by the Italian government, it is necessary to constantly update the report. The last piece of regulation i.e. a Decree of the President of the Ministers’ council “DPCM” has been published on the 22.03.2020 and shall be effective on the 25.03.2020.

Pursuant to letter (a) of art. 1 of DPCM, in theory, all industrial and commercial activities are suspended with the exception of those listed in the Annex 1 to the said decree.

I underscored, in theory, because beside the exceptions specifically enumerated the provisions of DCPM further specifies other exceptions in a more subtle way.

Now the order issued by the authority to suspend all industrial and commercial activities, in principle, reasonably represents an impediment that make it impossible the fulfilling of the obligations either temporally of definitely. In those cases, respectively a non-attributable-cause shall justify either the delay or the non-performance. The occurrence of the impediment, furthermore, shall assure the immunity od the debtor insulating it from damages’ claims pursuant to article 1218 c.c.

In sum, except for the debtor’s obligation to inform the creditor promptly, (a) a definitive impossibility due to non-attributable cause leads to the termination of the obligation; (b) the temporary impossibility excludes the debtor’s liability for damages pursuant to art. 1218 c.c.

Nevertheless on should point out that, according to case law, the discharge of the debtor in the event that the performance becomes impossible due to an order of the authority (Factum Principis) does not free the debtor to act in any way, according to ordinary diligence, to overcome or remove the impediment (C. 14915/2018).

In this respect DPCM goes on and at letter (c) further specifies that the activities which would be suspended “may nevertheless continue if organized in remote or smart working mode”. This statement is likely to impact on performance or non-performance in the sense that if fulfillment might be achieved when the work is organized in remote or smart working modem, then the debtor has a duty to perform or at least to try to perform its obligations acting in such a way.  As a consequence, one should construe letter (c) as it follows: where possible remote and smart working should be implemented in order to fulfil the obligations of the pending contracts and overcome the order of suspension issued by DPCM.

Moreover, letter (d) postulates that the activities which are functional to ensure the continuity and the chain of the activities listed in Annex 1 (the activities not suspended), as well as public utilities and essential services referred to at letter (e) are permitted subject to prior notification to the Prefect of the province where the activity is located.

Letter (d), in other words, suggests that if the activity is not specifically allowed but is functional to the activities listed in the Annex 1 one should file an application to the Prefect in order to have a permit so as to avoid suspension. Even in this latter case filing the application can be considered a necessary step to be taken in order to eventually invoke later on the impediment consisting in the denial of the Prefect’s authorization. In addition, letter (d) stipulates that if the application is filed then the business entity can run its activities until the possible Prefect’s denial. The application is therefore a condition precedent in order to avoid at least temporarily the suspension of the activity. The said application should be filed pursuant to DPCM should be filed immediately i.e. before the 25.03.2020 when DPCM shall be effective.

The same applies according to letter (g) for continuous production cycle companies where the interruption results in damages to the plants or in accidents. Even in this hypothesis one should immediately apply to the Prefect in order to avoid suspension unless the activity is aimed at ensuring the supply of an essential public service.

How are Force Majeure and Hardship defined in the Italian Civil Code (“c.c.”)?

Under Italian law pursuant to article 1218 c.c. a party to a contract who does not perform exactly its obligations shall be held liable to pay damages if it fails to demonstrate that the non-performance or the delay were due to the impossibility of performance resulting from non-attributable causes.

Having put forward the overall principle, one should investigate what does it mean “a non-attributable cause” which is corresponding in general terms to the tenet of Force Majeure.

The principle of Force Majeure which under Italian is intimately accompanied by the notion of Fortuitous Event are not clearly defined by the Italian Legislator.

In other words, under Italian law, there is no precise definition of Force Majeure or Fortuitous Event since there is no provision explicitly describing the cases at hand.

The expressions Fortuitous Event and Force Majeure are nonetheless mentioned throughout the c.c. for instance at article 1693 c.c. regarding the responsibility of the carrier or at article 1785 c.c. concerning the boundaries of the innkeeper’s liability. Because of the inadequacy of the description of their characteristics, the scholars have made converge those two notions in the unifying concept of “non-attributable causes”. Moreover, the notion of “non-attributable causes” should not be construed as a mere absence of fault but should be considered as a positively identifiable fact (better impediment) capable of preventing liability in case of non-performance.

The events/impediments in which the Force Majeure and Fortuitous Event can be exemplified in a sort of troika:

  • of the natural fact (Force Majeure), as for the impediment consisting in a natural fact; in order to exempt from liability, the impediment must be unpredictable at the time the contractual obligation has been undertaken and unavoidable (see Cassation Court (“”) n. 09/23412);
  • the so-called Factum Principis, as for the impediment consisting in an order or in a prohibition issued by the administrative, judicial or governmental authorities (see C. n.14/18880). For instance, in this respect, the embargo declared by the United Nations against Iraq has been considered as a Factum Principis preventing the fulfillment of contractual obligations towards subjects having their headquarters or premises in that country.
  • of the fact of the third such as, for example, the abandonment of dangerous objects on the road (see C. n. 783/2013).

Clauses of Force Majeure or Fortuitous Event, both at national and international level, are invariably inserted in contracts especially with continuous, periodic or deferred performance, commonly as boilerplate.  The most standard clauses provide that the nonfulfilling party in case of exceptional and unforeseeable events is discharged from liability for non-performance and may suspend performance and, if such events persist, may eventually terminate the contract.

“Hardship” under Italian law the notion of Hardship is akin the “disproportionate overcoming onerousness” doctrine. Art. 1467 c.c. states that in contracts with continuous, periodic or deferred performance, if performance of one of the parties has become excessively burdensome due to the occurrence of extraordinary and unforeseeable events, the party who owes such performance may terminate the contract.

Furthermore, the said provision specifies that termination may not be required if the onerousness of the contract falls within the normal scope of the contract.

The party against whom termination is sought may avoid such termination by offering to modify the terms of the contract in an equitable manner.

The excessive burden incurred is due to extraordinary and unforeseeable events. Economic burdens that fall within the normal risk of the contract, e.g. ordinary and foreseeable market fluctuations, cannot be invoked by the debtor. Those normally excluded by insurance policies are typical extraordinary events.

A specific application of the tenet under question is the one regarding construction contracts. Art. 1664 c.c. provides that if as a result of unforeseeable circumstances, there has been an increase or decrease in the cost of materials or labor force such as to result in an increase or decrease of more than one tenth of the agreed total price, the contractor or the client may request an adjustment of the price. The adjustment may be granted only for that difference exceeding one tenth. Furthermore, the provision at stake provides that if, in the course of the work, due to geological, water and similar causes not foreseen by the parties, performance difficulties arise which make the contractor’s performance considerably more expensive, the contractor is entitled to fair compensation. Even article 1672 c.c., always regarding construction contracts, is an application of the principle of Force Majeure.

Additionally, the principle of good faith and fair dealings encompassed in articles 1175 c.c. and 1375 c.c. which permeate our legal system suggests that the parties should renegotiate the clauses which have become excessively burdensome, regardless the provisions inserted into the contract.

At the international level contrary to what happens in the national sphere, Force Majeure is generally defined. For instance Article 79(1) of the Convention on the International Sale of Goods (the so-called Vienna Convention of 1980 or “CISG”) provides that a party is not liable for a failure to perform the obligations undertaken if he proves that the failure was due to an impediment beyond his control and that he could not reasonably be expected to have taken the impediment into account at the time of the conclusion of the contract or to have avoided or overcome it or its consequences.

In the international context Force Majeure clauses are aimed at excusing a party from liability if some unanticipated event beyond the control of that party prevents it from fulfilling its obligations. Hardship Clauses, on the other side, essentially mandate a re-negotiation of the original conditions of the agreement if the performance of one of the parties has become excessively burdensome due to unpredictable and unavoidable circumstances.

The International Chamber of Commerce (“ICC”) has developed in 2003 a Force Majeure Clause and a Hardship Clause, Force Majeure is defined in the opening formula of the template clause as an impediment beyond the reasonable control that it could not reasonably have been expected to occur at the time of the conclusion of the contract and be avoided or overcome.

The template caluse is rather interesting since it itemizes the impediments commonly accepted in the international context as causes of Force Majeure.

Can the Coronavirus be considered as a Force Majeure in Italy?

The increasing spread of the Covid-19 in Italy over the last few weeks has pushed the government to issue several Decrees of the President of Council Ministers (“DPCM”) so as to provide for urgent measures in order to contain and handle the emergency. The latest decree issued on the 11.03.2020 orders specific measures applicable to the entire Italian territory.

The above-mentioned urgent measures consist in the nation-wide suspension of certain types of the businesses, while in the so-called “red zones”, it has been imposed also the suspension of any transport of goods.

Those measures, if applicable to the contract in question, represent a Factum Principis i.e. one of the cases of Force Majeure and are able to affect negatively the correct performance of the contract.

If the urgent measures taken by the DPCM directly impact performance and cause an impediment to the performance, one has to look at the contract and verify whether or not it contains a Force Majeure clause.

Where the contract contains a Force Majeure clause, the contractual provisions on Force Majeure shall apply: typically, as see above, first the suspension of the performance and, if the impediment is protracted, termination.

Where the contract does not contain a Force Majeure clause the general principles as set forth above on the impossibility of performance resulting from non-attributable causes i.e. Force Majeure or disproportionate overcoming onerousness i.e. Hardship shall apply (depending on the specific case).

As far as the impossibility of performance resulting from non-attributable causes i.e. Force Majeure is at stake, one has to distinguish:

  • the case when the impediment is not reversible and where the impossibility is therefore absolute: the contract shall be automatically terminated;
  • the case when the impediment is transitory and where the impossibility is only temporary:

(i) if the fulfilling party has no longer an interest in performance the contract shall be automatically terminated, (ii) if not the contract shall not be terminated and the delay in the performance shall not produce any consequence.

By contrast Force Majeure cannot reasonably be invoked if the urgent measures taken by the DPCM merely perturbate the ordinary course of business without directly impacting performance and without causing an impediment to the performance. In other words, the contract might not be terminated if a party’s performance has become more problematic or less profitable as a result of the measures taken by the government and more in general of Covid-19. On the other side, as previously mentioned, based on the principle of fair dealing and god faith, one may try to renegotiate in a more balanced way the obligations undertaken or invoke the disproportionate overcoming onerousness doctrine i.e. Hardship.

The last piece of legislation that has been enacted i.e. Law decree 17.03.2020, n. 18 at art. 91 provides that compliance with the measures taken due to the spread of Coronavirus might be considered as non-attributable cause i.e. Force Majeure in order to exclude liability of the debtor pursuant to articles 1218 and 1223 c.c. in case of delays or breach of contract.  The assessment on whether or not it recurs Force Majeure should be conducted by the Judge on a case by case basis.

The said provision is also aimed at excluding debtor’s liability with regard to the application of any forfeiture or penalties resulting from delays or breaches of contract due to the measures taken against Covid-19.

Is the Coronavirus unpredictable and its consequences unavoidable?

An unpredictable and inevitable impediment is not enough in order to exempt from liability the non-fulfilling party in case of non-performance due to Force Majeure, the party invoking this remedy has also to demonstrate that the impediment is not due to his or her fault. In sum, the impediment must be objective and absolute. According to the case law an impediment is objective and absolute when a person endowed with normal or qualified diligence (depending on the type of contractual relationship) would not have foreseen its occurrence and could not in any way have counteracted it after the impediment occurred. (see C. n. 7293/1996).

  • The cause of the hindrance was foreseeable at the time the contract was entered into

If at the time the contract was entered, the circumstances in which the impediment occurred were such as to make it foreseeable and avoidable, Force Majeure cannot be invoked.

  • Insolvency

As seen above the impediment that justifies the non-performance must be absolute and objective and must find its source in a case not attributable to the parties, thus excluding personal events such as insolvency (C. n.21599/2010). Insolvency therefore does not justify invoking Force Majeure.

  • Illness

In order for the illness to constitute a case of Force Majeure, it must be so serious as to prevent any kind of activity on the part of the non-fulfilling party. That assessment must be carried out on case by case basis in order to examine whether in the specific circumstances the use of ordinary diligence, could have prevent the impediment (C. n.214/2016).

  • Risk to life, health, freedom, etc.:

Under the Italian legal system in torts it has been settled the so called state of necessity doctrine (see art. 2045 c.c. which states that when the party committing a tort was forced to do so by the necessity to save himself or others from an incumbent danger of serious personal injury, and the danger was neither intentionally caused by him nor otherwise avoidable, the injured party is awarded with an indemnity and not with damages).

The amount of the indemnity to be awarded is left to the fair evaluation of the judge. In the Italian Legal System, the state of necessity doctrine responds to a notion of equity that allows the judge to reduce the damages to a mere indemnity, after having compared the conflicting interests.

The scholars have debated whether the state of necessity doctrine might have been extended to the liability in case of breach of contract, case law by contrast has simply denied such a possibility (C. 2660/1971).

It should be noted that in torts atmospheric events might be considered Force Majeure if they are exceptional and unpredictable in this respect a state of emergency declaration alone does not constitute in itself an exceptional and unforeseeable event (C. n.14861/2019).

  • The debtor’s inexperience

Force Majeure is an unpredictable and imponderable impediment that suddenly becomes part of the causal sequence of factors determining non-performance, nevertheless the exceptional character of the impediment is not sufficient alone, to configure an exemption and excuse non-performance, but its predictability should be excluded on the basis of the so-called common experience.

What are Unforeseen circumstances (Hardship) under Italian law?

The “disproportionate overcoming onerousness” doctrine as we have seen above is applicable in case of extraordinary and unforeseeable events. The economic burdens that fall within the normal risk of the contract cannot be invoked by the non-fulfilling party to justify the breach. Those events whose occurrence cannot be assessed at the time the contract was entered can be considered as extraordinary and unforeseeable.

According to the case law, in contracts that entail continuous, periodic or deferred performance, each party bears the risk of events that might alter the economic value of the respective obligations, within the confines of the normal scope or risk of the contract.

It follows that the occurrence of foreseeable circumstances that make the performance of the obligation excessively burdensome – and therefore unprofitable – is not relevant in this regard (C. 12235/2007). Likewise, when the debtor, negligently, has not foreseen an event, or when he has contributed with his conduct to determine the disproportionate overcoming onerousness the said doctrine does not apply (C. 2661/2001).

In sum, so as to be able to raise a disproportionate overcoming onerousness defense, two requirements must be met: (i) on the one hand, a superseding imbalance between the obligations of the parties, which was not foreseeable at the time the contract was entered, and (ii) on the other hand, the occurrence of extraordinary and unforeseeable events, which do not fall within the scope of the normal contractual risk.

As far as the notion of normal contractual risk the case has defined it as the economic risk concerning the value of the obligations in a situation that is neither extraordinary nor unforeseeable (C. 6616/1991).

Furthermore, it is important to point out that the extraordinary nature of an event must be objective. In order to determine whether or not and event is extraordinary in nature, one has to take into account and evaluate through quantitative and statistical analysis elements, such as the frequency, the size, the intensity, etc.  The character of unpredictability, by contrast, has a subjective nature and one as to look at the so-called common experience (C. 22396/2006).

The remedy in case “disproportionate overcoming onerousness” is the termination of the contract. A viable alternative is the so-called equitable modifications of the contractual conditions. The fulfilling party who is facing a possible termination is offered the possibility to avoid it proposing to modify the contract’s conditions in a fair manner so as to remove the excessive onerousness that has occurred. This alternative remedy stem from the principles of good faith and fair dealing that are profoundly embedded in the Italian legal system.

How to prove a Coronavirus event of Force Majeure in Italy?

The burden of the proof rests with the debtor raising either (i) a Force Majeure defense in order to justify the non-performance or the delay due to the impossibility of performance resulting from non-attributable causes or (ii) a disproportionate overcoming onerousness defense seeking termination or as alternative the possibility to renegotiate in a fair way the conditions of the contract.

Covid-19 might be considered an extraordinary and unforeseeable event whose consequences are not avoidable for instance where performance is barred by the decrees issued by the Government or by other pieces of legislation.

Moreover, the debtor may also argue that at the international level the 2003 ICC Force Majeure clause explicitly lists “plague and epidemic” as typified impediments. Again, from a statistic point of view, the occurrence of a such epidemic is very rare. A problem might arise if the obligations were undertaken when the virus was at the onset but not yet widely spread or for the obligations undertaken clearly after the outbreak of the epidemic.

Those elements might be taken into consideration by the debtor in order to support a disproportionate overcoming onerousness defense in order at least to try to renegotiate the conditions of the contract.

A state of necessity defense might be raised in torts.

What is the best course of action in case of notice of Force Majeure in Italy?

In conclusion, the assessment to verify whether or not Force Majeure or Hardship apply must be carried out on a case by case analysis to be conducted for each matter in order to examine whether the requirements of foreseeability and unavoidability in the specific circumstances are recurring and if the use of ordinary diligence, could have prevent the impediment or its consequences.

The following countermeasures and actions are in any case recommended:

  • First of all, one should verify whether the obligations undertaken in the contractual relations are affected by the spread of Covid-19 and whether or not performance is jeopardized more onerous or ultimately became impossible.
  • Secondly, one should examine the contract in order to verify whether or not clauses of Force Majeure or Hardship are present. Having done that, one should closely look at the clause, review its scope pursuant to the governing law of the contract.
  • Thirdly, the party non-fulfilling its obligations, or the party facing a possible non-performance or a disproportionate burden should inform in a timely and proper manner the contractual counterparts about possible delays and increasing difficulties in performance or eventually impossibility to perform describing the causes for non-performance and explain why they are non-attributable.
  • Make a list of the clients that should be supplied first and in a more effective manner notwithstanding restrictions and difficulties.
  • Consider viable alternatives and take all the necessary actions so as to limit potential and actual damages.
  • If entering into new commercial contracts, checking whether occurrences such as Covid-19 are adequately covered by the clauses inserted in the agreement.
  • Check whether damages are insured, either with the debtor or the creditor.
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Japan

How is Force Majeure defined in the laws of Japan?

Force Majeure and its elements are not expressly defined in Japanese law. Therefore, if an agreement contains a provision regarding Force Majeure, the relationship and the rights of the parties on that issue will depend on the specific language of the provision. However, if an agreement does not contain a Force Majeure provision, the issue will be governed by the Civil Code.

Under the Civil Code, a party may be liable for non-performance of its obligations, such as delay in performance, incomplete performance, or impossibility of performance, if the party acted willfully or negligently. The applicability of Force Majeure is narrower than the absence of negligence (i.e., no fault), so if a Force Majeure event occurs, a non-performing party would not be liable for a contractual default because there would be no fault. Force Majeure is generally understood to be a basis for an exemption from legal liability, as reflected in judicial court precedents.

Academic theories differ as to the elements of Force Majeure, but a common thread is whether the Force Majeure incident is caused by external factors that cannot be avoided even by taking reasonable preventative measures. Force Majeure has also been defined by reference to the following elements in international rules, such as the United Nations Convention on Contracts for the International Sale of Goods (CISG):

  • There is an obstacle that is not within the control of the obligor;
  • The obstacle could not have been taken into account when the contract was executed; and
  • The obstacle is difficult to avoid or overcome.
How is Hardship defined in the laws of Japan?

While not specifically defined in Japanese law, the concept of hardship is understood to mean the situation in which the performance by a party to an agreement has become extremely burdensome or complicated due to the occurrence of unforeseen events.

The Civil Code, however, contains a legal principle that applies to a change of circumstances based on the occurrence of unexpected events after the execution of an agreement (the Changed Circumstances Principle). Under this Changed Circumstances Principle, a party is permitted to cancel or change the terms of an agreement upon the occurrence of a change in circumstances that the parties could not have foreseen at the time of execution of the agreement and that is not attributable to any party, if requiring performance in accordance with the terms of the agreement would be contrary to the principles of good faith. However, very few judicial precedents have permitted cancellation or change to the terms of an agreement based on the Changed Circumstances Principle.

In practice, and depending on the specific changed circumstances, if an agreement contains clauses relating to amendment of the agreement or requiring parties to operate in good faith, then those clauses would control the parties’ relationship, and the parties must conduct good faith discussions to try to reach a reasonable resolution relating to changed circumstances.

Can the COVID-19 emergency be considered to be a Force Majeure event?

Whether a party’s default caused by COVID-19 constitutes a Force Majeure event will depend on a case-by-case analysis. In some cases, the impact of COVID-19 may result in a party’s failure to perform an obligation, in which case the default may qualify as a Force Majeure event, and the non-performing party may not be liable for the default. If a party seeks to invoke a Force Majeure clause to avoid liability for a default, a key issue will be whether the default was caused by the Force Majeure.

What is the recommended course of action for invoking a Force Majeure clause?

In Japan, a party seeking to avoid liability for default based on the occurrence of a Force Majeure event will commonly argue the absence of the party’s willful or negligent conduct, rather than claim that the event actually constitutes a Force Majeure. Thus, pursuant to Paragraph 1, Article 415 of the Civil Code, the party claiming the existence of a Force Majeure event must prove that the party’s default was caused by events that were not attributable to that party. Given the difficulty of proving the negative fact that a default was caused by events not attributable to the party, in practice, a party will attempt to prove that a default was caused by outside events other than that party. Thus, a party invoking a Force Majeure clause based on COVID-19 must prove that it could not have performed its contractual obligations due to the effects of COVID-19. A key legal point will be whether there is a causal relationship between COVID-19 and the party’s default.

However, if a party seeks to cancel an agreement based on the other party’s non-performance of its obligation, the Civil Code of Japan does not require proof of a party’s willful or negligent conduct. Therefore, if a default is attributable to a Force Majeure event, an agreement may be cancelled regardless of whether the party’s liability based on the default is established.

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Lithuania

How are Force Majeure and Hardship defined in the Lithuanian Civil Code?

Force Majeure is defined as the circumstances which are beyond the control of a party and which could not have been reasonably expected by the party at the time of the conclusion of the contract, and the occurrence of such circumstances or consequences could not have been prevented by the party.

The law explicably states that Force Majeure shall not include such circumstances as absence in the market of goods needed for the performance of the obligation, or lack of the necessary financial resources, or the circumstance that the contrahents of the party violates their obligations.

Hardship under Lithuanian Civil Code is defined as a fundamental change in circumstances when the performance of a contract becomes more onerous for one of the parties. The performance of a contract shall be considered obstructed under such circumstances which fundamentally alter the balance of the contractual obligations, i.e. either the cost of performance has essentially increased, or the value thereof has essentially diminished, if:

  • these circumstances occur or become known to the aggrieved party after the conclusion of the contract;-
  • these circumstances could not reasonably have been foreseen by the aggrieved party at the time of the conclusion of the contract;
  • these circumstances are beyond the control of the aggrieved party;
  • the risk of occurrence of these circumstances was not assumed by the aggrieved party.
What are the criteria to invoke circumstances related to Coronavirus as Force Majeure?

Each situation should be investigated individually, the first step for the party wishing to establish whether Force Majeure applies in regard to its or its partner’s obligations is to examine Force Majeure clauses stipulated in the contract.

The principle of freedom of contract allows the parties to agree on what they specifically consider (or do not consider) to be Force Majeure circumstances, also the contract could provide rules of conduct of the party wishing to invoke Force Majeure must follow (i.e. a specific term to provide notification, etc.). It should also be verified whether the party has not assumed the risk of such circumstance or its consequences in the contract.

If there are no Force Majeure clauses present in the contract, the party can rely on the Force Majeure provision stipulated in the Civil Code of Lithuania.

According to the case law of the Supreme Court of Lithuania, in order to rely on Force Majeure, the following conditions must be established:

– the event did not happen before  the time of conclusion of the contract and its occurrence could not be reasonably foreseen;

  • due to the event, the contract cannot be performed objectively (i.e. State restrictions related to COVID-19 directly resulted in non-performance of the contract);
  • the party who has not performed the contract could not control those circumstances or could not prevent them;
  • the party has not assumed the risk of the occurrence of the event or its consequences.

The party wishing to invoke Force Majeure must immediately (or within the time period stipulated in the contract) inform the other party about Force Majeure event  and its impact on the performance of the contract. In the event of failure to report in time, the defaulting party shall be liable for damages that occur due failure to inform.

When is debtor not liable for failure to perform due to Force Majeure?

The basis to be exempt from liability arises from the moment of the occurrence of the Force Majeure event (or from the moment of notification – if not reported in a timely manner) and lasts until the circumstances of Force Majeure disappear.

Force Majeure means that there is no civil liability, i. e. default interest and penalties are not paid, the party shall be exempt from damages and other penalties provided for in the contract (except for the obligation to pay interest).

Can the Coronavirus constitute a situation of Hardship in Lithuania?

Under the Civil Code of Lithuania, if the cost of performance has essentially increased or the value thereof has essentially diminished, for a reason which could not be foreseen before the conclusion of the contract and is beyond the control of the aggrieved party (who had not assumed the risk of occurrence of these circumstances), then the aggrieved party shall have the right to make a request to the other party for the modification of the contract.

Such circumstances shall be deemed to be a constraint on the performance of the contract and shall be notified as soon as they occur by submitting a reasoned and well-grounded request for the modification of the contract.

Quarantine in the country due to Coronavirus and related restrictions are a valid reason to request for the modification of the contract if they cause a Hardship situation. Of course, such a referral itself does not give a party the right to unilaterally modify the contract – the other party must accept the proposed changes. In the absence of a consensus, the dispute may be submitted to a court which will decide either to terminate the contract or to modify the terms of the contract in order to restore the balance of the parties’ contractual obligations.

How to prove that the Coronavirus outbreak can be deemed as an event of Force Majeure?

As mentioned before, the party wishing to invoke Force Majeure due to Coronavirus outbreak must prove that such circumstances (i.e. quarantine in the country, specific restrictions imposed by the state) are the direct reason why the certain obligation cannot be performed and all the elements of a Force Majeure event are present in the specific case.

As an additional measure, the party can apply for a certificate on Force Majeure to the Lithuanian Chamber of Commerce, Industry and Crafts.

Given the consequences of the Coronavirus for many business sectors, the Lithuanian Chamber of Commerce, Industry and Crafts has officially identified COVID-19 as one of the circumstances that could be considered as Force Majeure. However, in order to obtain certificates of Force Majeure, the Chamber will need to be convinced not only that there are circumstances related to the Coronavirus that have made it impossible for the company to fulfil its contractual obligations, but also it has to be argued that such circumstances have caused the failure of performing the contract. This means that in each case the existence of Force Majeure is determined on a case-by-case basis, taking into account the facts.

What is the best course of actions recommended in case of notice of force Majeure?

The party wishing to invoke Force Majeure should first of all examine the contract and its individual situation and make sure that Force Majeure actually applies. I case of doubts – legal advisor’s consultation is recommended.

The party wishing to invoke Force Majeure should provide the notification thereof (as well its influence on the performance of the contract) to the other party as soon as reasonably possible.

It should also gather evidence proving that certain circumstances make it impossible to perform the party’s obligations. Applying for a certificate on Force Majeure to the Lithuanian Chamber of Commerce, Industry and Crafts is advisable.

If the party intends to invoke Force Majeure, at least for temporary defaults, it should first consider to perform the contract by alternative means, i.e. modify the terms of the contract (on the basis of hardship, negotiate different terms, change the price, suppliers, etc.), and, if there is such a possibility, try to perform the obligations arising out of the agreement under the updated terms.

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Malta

How is force majeure defined and regulated in Malta?

Malta is generally defined as a Civil Law jurisdiction with significant contaminations deriving from Common Law, by virtue of its being a former British colony and still today a member of the British Commonwealth.

Perhaps the most significant example of such hybridisation is the institution of the Maltese trust, the eponymous creation of Equity, eventually inserted as an fiduciary obligation under the Maltese Civil Code (Chapter 16 of the laws of Malta), as well as its more relevant regulations under the Trusts and Trustees Act (Chapter 331).

The Maltese Civil Code is the main source of law for contracts, provides under article 1134 that “The debtor shall not be liable for damages if he  was prevented from giving or doing the thing he undertook to give or to do, or if he did the thing he was forbidden to do, in consequence of an irresistible force or a fortuitous event”.

The mentioned article, however, fails to provide statutory definitions of “irresistible force” and “fortuitous event, thus resulting in the party wishing to rely on the plea of force majeure to prove such circumstances and thus to base its plea on case law. Bases on notable cases Mizzi noe. vs. Attard noe. case (Court of Appeal 08/02/1969) and George Farrugia et. vs. Pacifika Masini noe. case (First Hall, Civil Court, 07/01/2008), scholars come to the conclusions that:

  • the impossibility of non-performance has to be absolute

and

  • the event must be unpredictable;
  • the event must be external/comes from a third person; and
  • the debtor cannot have any fault in what happens, in the sense that the event could not have been prevented and was absolutely beyond the debtor’s

In the absence of legal precedents, the definition of force majeure falls back to the will of the parties and boils down eventually to how accurately and clearly the relevant contractual provision has been drafted.

How to prove that the Coronavirus can be considered an event of Force Majeure?

There is no single way to determine whether Covid-19 per se constitutes a circumstance of Force Majeure.

Various elements must be taken into account, preferably through the aid of a legal expert, such as:

  • governing law (Maltese?);
  • the foreseeability of the event of Force Majeure (e.g. where the parties working domestically only? could they make contingency plans before or after the outbreak in Malta? are their businesses present in other (high risk) areas? where they fulfiilling their duty of being informed? etc.);
  • the presence of a properly drafted clause;
  • the exact wording of such clause (e.g. “epidemic” is different than “pandemic” – at the time of writing, Malta, paradoxically, is being spared the epidemic, but is indeed coping with the effects of the pandemic);
  • if no proper clause is present, examine analogous court cases and, even if no relevant precedent is found, apply the mentioned principles drawn by scholars, particularly the absoluteness of impossibility of non-performance;
  • the industry in which the parties operate (e.g. tour operators will, at a first glance, have a better chance at invoking Force Majeure);
  • exceptional measures introduced by the government (e.g. mandatory quarantine affecting people vested with the powers to execute certain contractual obligations) and their relevance (e.g. working from home per se does not prevent the fulfilment of certain obligations), including on third factors which influence the performance of obligations (e.g. if suppliers are themselves affected and, in such case, if alternative suppliers could be used).
What is the best course of action is recommended in case either party issues a notice of Force Majeure?

Since there is no general automation that makes Force Majeure trigger simply by the happening of Covid-19, either party should, ideally, follow this course of action:

  1. Consider all the relevant facts;
  2. Determine whether the case is governed by Maltese laws;
  3. Evaluate if the emergency procedures, such as mandatory quarantine, work from home, shutdowns etc. apply to the case and to what degree;
  4. Examine the exact wording of the Force Majeure clause, if present, in the relevant contract(s);
  5. If no proper clause is present, examine relevant judicial precedent and the interpretation of article 1134 of the Civil Code;
  6. Evaluate the consequences of a legal action, such as clawback provisions, should the other party face bankruptcy proceedings.
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Mexico

How is Force Majeure regulated in Mexico?

If a Force Majeure clause was established under the contract, it is necessary to determine whether the Covid 19 spread and its effects can be considered covered within the scope of said clause.

It is advisable to give notice of the Force Majeure event to the other contracting parties.

If a Force Majeure clause was not incorporated to an agreement, then, the matter shall be analyzed in view of the provisions in Mexican law.

According to doctrine and legal precedents, unforeseeable circumstances and Force Majeure can be classified as follows:

  • Acts of nature, which includes natural disasters, such as earthquakes, hurricanes, fires, floods, storms, among others.
  • Human deeds, such as blockages, crimes, wars, invasions, among others.
  • Acts of authority, including all those impediments deriving from an order or prohibition issued by an authority, provided that the debtor has not given rise to such determination.

From a technical standpoint, the difference between unforeseeable circumstances and Force Majeure is that the first one refers to those acts of nature, while the second one refers to acts of men.

In order to exercise the exceptional release of liability for breaching contractual obligations due to unforeseeable circumstances of Force Majeure, two essential requirements must be met:

  • Unpredictability, understood as the impossibility of the debtor to be able to anticipate the situation, in order to prevent it.
  • Generality, which means that no person, under the same circumstances, could have prevented the event(s) considered as unforeseeable circumstances or Force Majeure.

The Civil Code for Mexico City and the Federal Civil Code state that no one is obligated in unforeseeable circumstances or Force Majeure except when i) it has contributed to it; ii) it has expressly accepted that liability; iii) or in case of mandate of the law.

On the other hand, the Commercial Code states that: in the absence of provisions of such Code and other commercial laws, those of common law contained in the Federal Civil Code shall be applicable.

From a systematic interpretation of said laws, there might be grounds to assert that the unforeseeable circumstances or Force Majeure exceptions can also be argued in commercial matters.

Under International Law, in the United Nations Convention on Contracts for the International Sale of Goods, particularly in its section on exemption from liability for non-compliance, it establishes a series of requirements and steps to be met and taken, to evidence the applicability of the exemption:

Requirements:

  • Unpredictability, if the event could not have been anticipated by the affected people.
  • Uncontrollability, when there is no possibility of controlling the results.
  • Impossibility of avoiding or remedying the consequences, referring to the fact that the consequences of said act or event cannot be avoided.

Action steps to invoke the non-compliance exemption:

  • Communicating the impediment to the other contracting parties.
  • In the event that the non-compliance is due to a third party breach, the obliged party will only be exempted from liability if the “second third party[1]”, also evidences that its non-compliance is due to the same Force Majeure cause.

[1] In this case, the second third party is in a multilateral relationship, whereby the non-compliance of one of them produces the default of another.

Hardship under Mexican Law

The legal treatment of Hardship is based on the General Principle of Law: “rebus sic stantibus” which sets forth that, as long as the circumstances remain the same, the contractual conditions shall remain the same.

Under Mexican law, Hardship is defined as extraordinary events of national nature that, being impossible to foresee, cause the obligations of one of the parties to become more onerous. In this case, the affected party may attempt a legal action aiming to recover the balance between the obligations of the parties.

In order to request the modification of an agreement under Hardship, please note the following:

  • The request must be made within 30 days of the extraordinary event.
  • In case that the parties thereto do not reach an agreement within 30 days of receiving the request, the applicant may request judicial assistance to solve the dispute.
  • The defendant in its case, may choose between adjusting the agreement to restore the balance of the obligations of the parties, or the termination of the contract.
What to do in case of notice of Force Majeure in Mexico?

Contractual relationships and business operations must be analyzed to evaluate if they fall within the scope of unforeseeable circumstances, Force Majeure or Hardship, to minimize exposure to liabilities deriving from breaching obligations. The aforementioned in order to avoid jeopardizing the business continuity.

Generally speaking, there could be grounds to argue that the situation the world is currently facing consists of an unforeseeable circumstances or Force Majeure from a Mexican Legal standpoint.

However, many other aspects shall be taken into consideration, such as: a) the moment in which such situation generated and b) if a modification of the obligations of the parties could be justified, if applicable. To determine the aforementioned, it is necessary to review the specific details of each contract, the conduct of the parties, and governmental notices or decrees, among other relevant legal matters.

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Netherlands

How are Force Majeure and Hardship defined in the Dutch Civil Code (DCC)?

 “Force Majeure” essentially means nonattributable nonperformance. Parties are virtually free to contractually limit or expand legal effects and can agree on the circumstances that will be deemed Force Majeure. Failing a specific arrangement, by default, a breach of agreement may as per Dutch law not be attributed to the debtor if: (1) reasonably not the debtor’s fault, (2) not attributable by either law, legal act or generally accepted principles (common opinion).

“Hardship” is most similar to the Dutch tenet of “unforeseen circumstances”. The term refers to circumstances not considered at the time of conclusion of an agreement, having such an impact that it’s unacceptable to require a party to perform it on agreed terms (please also see below for Dutch law key elements of “reasonableness and fairness” as they may also affect the interpretation of agreements).

While the Netherlands is a Contracting State Vienna Convention on Contracts for the International Sale of Goods (CISG), the treaty may be (and often is) excluded in trade agreements.  The CISG’s provision on force majeure and hardship is very similar to the DCC’s provisions hereon. The practical importance of the distinction between Dutch law and the CISG on this subject is therefore negligible.

Can the Coronavirus be considered as a Force Majeure in the Netherlads?

Whether or not a Force Majeure can be invoked primarily depends on the wording of the Force Majeure clause or, by default, the law. Parties can extend liability up to an abstract guarantee of performance or its limit is as long as it does not exclude performing the key obligations in advance.

We illustrate it with two examples of contractual force majeure clauses often seen in Dutch Agreements:

Example 1: Force Majeure shall mean: prevention of fulfillment of the Agreement as a result of fire, explosion, embargo, uprising, riot, war (whether or not declared), natural disasters (excluding disease) and flood, all other occurrences shall not constitute a force majeure.

Example 2: Force Majeure shall mean: any circumstance which is independent of the will of the parties, as a result of which performance of the contract cannot reasonably be required of Party A, whether temporarily or permanently and shall in any event include: (civil) war and the threat of (civil) war, natural disasters, an epidemic, strikes, excessive absenteeism of Party A’s employees, transport problems, fire, lack of raw materials, government measures by any government whether in the Netherlands or elsewhere, in any event including import and export prohibitions, quota schemes, and breakdowns at Party A or at suppliers of Party A, as well as nonperformance or force majeure on the part of suppliers as a result of which Party A is not or no longer able to meet its obligations to the Customer.

The Corona Virus would probably not be regarded as force majeure in example 1. Whilst example 2 explicitly mentions an epidemic so it’s safe to say – given substantial impact – it’s an example of force majeure. If the parties have not included a force majeure clause, the default article 6:75 of the DCC will apply.

What does it actually mean that a debtor cannot be blamed if he could not have reasonably foreseen and prevented the event that led to nonperformance and hereby avoided its consequences?

We illustrate it with the important generally accepted principles in Dutch law likely to be relevant in relation to the Coronavirus outbreak:

The cause of the hindrance was foreseeable at the time the contract was entered into

If at the time the obligation was entered, the impediment was such that a normal, prudent debtor with the same knowledge and experience as contracting party would have taken this into account, Force Majeure cannot be invoked.

Insolvency

Insolvency does not justify invoking Force Majeure, even if entirely beyond the control of the debtor and even if this would have been unforeseeable at the time.

Illness

Unless the debtor is the only one that is able to perform (e.g. a vocal artist), illness does not have to – generally – constitute Force Majeure as it only hinders one of the possible ways of performance.  In general, the debtor of a – personal – service does not guarantee that the service will also be performed in the event of illness on his part. The creditor who stipulates such a performance must in turn consider the possibility of personal impediments which may affect everyone equally.

It will be different in case of an epidemic and the shortfall of labor forces a party to choose which creditor to serve first. Here it will also be key in which industry a case plays out.  It’s for example highly likely that e.g. a B2B food supplier has to very carefully consider which customers to serve when. Typically, large retailers have very strict rules, that are penalized when not kept, on timely supply and detailed arrangements on rolling forecasts (more often than not unilaterally binding on for the supplier) and mandatory contingency plans. In such case it’s urgent to check whether or not the contingency plan is effectively in place, because the supplier will in that case probably not be able to immediately fall back on the Force Majeure clause in the agreement, or even not on the default regulation of Dutch law, as parties have considered a sudden supply shock (for whatever reason) that should have been covered.

Risk to life, health, freedom, etc.

In accordance with the same principles, the question whether Force Majeure is invoked is to be answered if the debtor, in fulfilling the obligation, would expose himself or his family to danger to life, health, honor, freedom or subsistence. Provided, again, that the conditions discussed (nonperformance, nonattributable, unforeseeable) are met, a claim to Force Majeure will generally be possible. For example, a seller may invoke Force Majeure vis-à-vis his buyer if, by concluding the sale, he would run the risk of being placed on a ‘black list’, which would actually put him out of business. Provided that the debtor’s fear in this example was objectively well-founded. In case of an epidemic with sudden lockdowns, one of the risks is also a limitation in the freedom of movement. Given what is possible in most jurisdictions when a state of emergency is declared, invoking Force Majeure because it is likely that a party will not be able to enter or leave an area, is very plausible and should be considered with urgence. Of course, this is typically also closely linked to the legal obligations and general duty of care an employer has towards his employees. In many cases the, employment, health and safety laws that have a mandatory character will have an overriding influence. In theory a sole entrepreneur could e.g. still be lawfully allowed to perform an obligation under an agreement. If however the same entrepreneur acts via his employees, the assessment will likely have a different outcome.

The debtor’s inexperience

The debtor will be held liable for mistakes which are the result of a lack of experience, even if he cannot be blamed for the fact that he carried out the conduct in which the error was contained, and even if the error was unforeseeable for him. The newly graduated doctor will be liable for the consequences of a malpractice that an experienced colleague would not have made.

Unforeseen circumstances – Hardship under Dutch law

The term ‘unforeseen’ does not refer to what parties had foreseen or not, but only to whether the possible occurrence of circumstances have been considered (explicit or implicit) in the agreement. For example: parties may agree that an export restriction for strategic purposes of surgical masks is the risk of one of the parties. Even though the occurrence is an unfortunate surprise it would not be considered Hardship.

What risks parties have accepted, must be determined by interpretation of the agreement. The law states that the court may modify the effects of a contract (even set it aside), in whole or in part when according to standards of “reasonableness and fairness” a party cannot be expected to perform the agreement in unmodified form.

The reason for such action could be that performance has become extremely difficult or an event completely disrupts the balance of a reciprocal agreement. The event may even render the agreement meaningless or its purpose unattainable. Finally, an event could make a claim for actual performance of an obligation under an agreement unacceptable (again reasonableness and fairness come into play as well, also it’s an objective review and not merely that the debtor is of the opinion it’s unacceptable) and the creditor should e.g. have to settle for damages.

Any dispute about silence on Hardship in the agreement will result in a review based on content and goal of the agreement, how, when and by whom it was entered into as well as the principles and reasonableness and fairness. The court has discretionary power (it may modify the effects of a contract or may set it aside, in whole or in part) but the hurdle to do so in practice is high, in particular when professional parties are involved.

Reasonableness and fairness in the first place require loyalty to the written word of an agreement and allow deviation from it by the court only in exceptional cases. Finally, please note not only circumstances of a special nature affecting only the parties are considered, but also to unforeseen circumstances of a general nature. Dutch courts have decided that e.g. natural disasters, armed conflicts, are to be considered unforeseen circumstances. It is entirely likely that based on developments of the Coronavirus outbreak, it will qualify as unforeseen circumstances as well in specific cases.

How to prove that the Coronavirus outbreak can be an event of Force Majeure?

It is key to sort out whether the relevant contract contains provisions on Force Majeure or Hardship, since the DCC does not expressly prescribe what constitutes either of the two and because parties may limit or expand certain legal effects contractually. The creditor does not have to prove that there was no Force Majeure, he only has to claim non-performance and prove damage. It is up to the debtor to prove that his non-performance was the result of a cause that cannot be attributed to him by agreement, law, or generally accepted principles (common opinion).

What is the best course of action in case of notice of Force Majeure in the Netherlands?
  • Inform in good time about delays, are there replacement products or can other logistic modalities or routes be used?
  • If you are the debtor check where effective Force Majeure arrangements are in place and consider this when utilizing scarce resources or deciding who to supply.
  • Consider alternatives and take the necessary measures to limit damages.
  • When entering into new agreements, check whether occurrences such as the Coronavirus are adequately covered in the agreement from your perspective.
  • Check whether the damage is insured, either with the debtor or the creditor.
  • Check your key agreements and critical customers or suppliers pro-actively and plan accordingly.
  • At all times consider the role and position of employees when deciding on a course of action, not just from the practical perspective of their needs but also from the perspective that their protected position will affect assessments regarding Force Majeure or Hardship
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Norway

Force Majeure, Hardship and other relevant rules under Norwegian law

“Force Majeure” is not explicitly defined in Norwegian law. However, based jurisprudence and legal theory Force Majeure relates to extraordinary external events that are unavoidable and unforeseeable for the parties, making it impossible for one or more of the parties to perform in accordance with the contract either temporarily or permanently.

Force Majeure is a general contractual principle, meaning that it applies even if the contract between the parties makes no reference to Force Majeure.

It should be stressed that the parties are free to define Force Majeure in the contract, and that this will prevail if it contradicts the general principles above. Force Majeure clauses can vary greatly in their drafting. A simple reference to Force Majeure in the contract should be understood as a reference to the general understanding of the principle.

“Hardship” is understood as a contractual hardship-clause meaning that in given situations, the parties are obliged to renegotiate the contract in order to avoid unreasonable imbalance due to changed circumstances. Thus, Hardship is only relevant if the specific contract contains such a clause, and the consequences must also be governed in the clause. Very often the hardship clause only stipulates an obligation to renegotiate but might also include the consequences of failure to renegotiate, such as a right for the affected party to terminate the contract or a right to submit the question to court/arbitration.

Other rules relevant for the contracting parties in relation to Covid-19

In addition to Force Majeure and Hardship clauses, other rules may be relevant and overlapping when discussing whether a contracting party may be relieved from contractual obligations due to Covid-19 and/or the contractual obligations may be altered as a consequence of Covid-19.

With respect to sale of goods, article 79 of the Vienna Convention on Contract for the International Sale of Goods (CISG)  states that a contractual party is not liable to perform any of its obligations if it proves that the failure was due to an impediment beyond its control and that could have not reasonably been expected at the time of the conclusion of the contract. CISG applies for international sales contracts unless excluded in the contract (which is quite often the case).

The Norwegian Sale of Goods Act and Consumer Sales Act contain a quite similar regulation to that of CISG article 79 in article 27:

However, this does not apply to the extent that the seller proves that the delay is due to impediments beyond his or her control, which the seller could not reasonably be expected to have taken into account at the time the agreement was entered into or avoid or overcome the consequences of.

If the delay is due to a third party who the seller has commissioned to fulfil the purchase in whole or in part, the seller is free from liability only if the third party would also be released therefrom under the provisions of paragraph 2 above. The same applies if the delay is due to a supplier that the seller has used, or to some previous intermediary in the sales chain.

Freedom from liability applies for as long as the impediment exists. If the impediment ceases to exist, liability may be invoked if the seller then undertakes to fulfil the obligation but fails to do so.

The main requirements are that the seller must be able to prove that the delay is caused by impediments beyond the seller’s control and also beyond the control of third parties acting on behalf of the seller, and furthermore that the impediments could not reasonably be to be taken into account when the contract was entered into. It these requirements are met, the purchaser is prevented from claiming damages, but only for as long as the impediment exists.

Thus, article 27 of the Sale of Goods Act is somewhat less strict than the traditional Force Majeure principle and makes the use of traditional Force Majeure with respect to sale of goods obsolete.

The article is not mandatory and can be derogated.

Similar provisions can be found in some other legislation as well.

More generally, article 36 of the Contracts Act may be relevant in case of Covid-19. This general principle states that an agreement may be set aside or altered if it would be unreasonable or a breach of good faith to apply the agreement (or specific clauses of the agreement). When applying article 36 it is also relevant to look at factors that have occurred after the contract was entered into. Even though it should be stressed that article 36 is very rarely applied by Norwegian courts in commercial agreements between professional parties, it might be applicable if Covid-19 makes it unreasonable to demand that the affected party performs in accordance with the contract. Article 36 gives the court the option between setting aside the agreement and altering it to avoid unreasonableness.

The general principle of Frustration of purpose can also be found in Norwegian law.

Conclusion

To summarize, the parties must begin by examining the specific contract. Does it contain a Hardship clause or a Force Majeure clause and if so, what are the specific consequences? That might vary to a great extent.

If the contract does not contain such a clause or the Force Majeure clause only refers to Force Majeure as a general principle, it is necessary to scrutinize the content of the Force Majeure principle as it is understood from jurisprudence and legal theory.

It is also important to separate sale of goods from other contractual obligations. For sale of goods, Force Majeure is obsolete and replaced by the specific regulation in article 27 of the Sale of goods Act, which is quite similar to CISG article 79. Thus, Force Majeure is only really relevant for other contractual obligations (for instance lease agreements) unless the contract regarding sale of goods includes a Force Majeure clause.

In addition, article 36 of the Contracts Act and the general principle of Frustration of purpose can be relevant and also overlapping.

Can the Coronavirus be considered as Force Majeure and what are the consequences?

Whether or not Force Majeure can be invoked as a result of the Coronavirus depends on the wording of the specific Force Majeure clause. In the absence of such a clause or if the clause only refers to Force Majeure without any definition, the understanding of the concept is based on jurisprudence and legal theory.

As seen above, Force Majeure must relate to 1) extraordinary external events that are 2) unavoidable and 3) unforeseeable, 4) making it impossible to perform in accordance with the contract.

The existence of the Coronavirus in itself does not qualify as a Force Majeure. The question must be if the virus causes obstacles for the contracting parties that qualify to the conditions above. For instance, the following circumstances should qualify in general, save for the situation that the contract is entered into after the parties should have been aware of the Coronavirus and its effect on society:

  • An involuntary temporary closure of manufacturing facilities as a result of public orders to shut down
  • Temporary export restrictions of goods in question
  • Transport interruptions, for instance closing of borders

If the situation qualifies as Force Majeure, the legal consequence again depends on whether or not this is addressed in the specific contract. Without specific regulation, the consequence is that the performing party cannot be held liable for breach of contract due to non-performance during the duration of the Force Majeure situation. If the situation is permanent or of an indefinite period, the party’s obligation may cease altogether.

With respect to article 27 of the Sale of Goods Act, the consideration will be quite similar. However, the legal consequences are not identical. The legal consequence would rather be that the seller is not liable to pay damages due to the delay and that the customer may not demand delivery as agreed, but that other remedies due to breach of contract are available to the customer, such as termination if the delay is material.

How to prove that the Corona Virus can be considered as Force Majeure event?

In the absence of a Force Majeure clause that allocates the burden of proof to one of the parties, the burden of proof lies with the affected party. The affected party must be able to prove that all conditions mentioned above are met in order to qualify as Force Majeure.

A similar burden of proof follows directly from article 27 of the Sale of Goods Act.

What is recommended in case of notice of Force Majeure?

The affected party (debtor) should begin by analyzing its relevant contracts in order to assess the specific terms applicable for the individual contracts, if such a clause exists. The Force Majeure clauses might vary. Based on such individual assessments of the applicable Force Majeure clause or the general principles if no clause is present in the contract, the affected party must consider whether or not the conditions are met (and can be proved) in order to invoke Force Majeure, including the situation with regard to subcontractors/suppliers. The affected party must also consider what other steps that are necessary to perform. This includes notification to the other party and seeking alternative solutions to ensure performance, e.g. finding other subcontractors/suppliers etc.

In addition to the above, the following steps should be taken:

  • Inform the contracting party as soon as possible of the situation and expected consequences. The affected party should also continue to inform the other party of the development and, if the Force Majeure is limited in time, when performance is likely to resume.
  • Undertake all reasonable steps to mitigate damages.
  • Initiate negotiations if desirable to reach amicable amendments
  • Gather necessary proof that the conditions necessary to invoke Force Majeure are met.
  • Draft future agreements in light of the situation and spend time on considering and negotiating Force Majeure clauses in agreements that you consider entering into. Ensure that the clauses are similar towards customers as they are towards suppliers/subcontractors.
  • Reflect on the consequences of the current situation when accepting contractual obligations that might be difficult to perform because of the Corona Virus. As mentioned above, Force Majeure cannot be invoked if the obligation was not unforeseeable.
  • Check if insurance policies are applicable, and if so, contact the insurance company as soon as possible. One should also consider if insurance policies are available for future needs.

The non-affected party (creditor) should in a similar way assess the contract and object in writing as soon as possible if it is of the opinion that Force Majeure cannot be invoked by the other party. Furthermore, the non-affected party should consider how its possible contractual obligations towards third parties are affected and act accordingly.

A quite similar approach should be taken if article 27 of the Sale of Goods Act is applicable.

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Poland

How are Force Majeure and Hardship defined in Poland?

It is essential to underline that many contracts contain Force Majeure and Hardship clauses. They usually contain definitions as well as the due course of action in such a case. In particular, the parties may extend or limit the catalogue of cases of Force Majeure and Hardship, may shape the liability of the debtor as less restrictive or more restrictive than it is provided by the Polish law.

Therefore, the below regime is applicable only in case if the contract does not contain a Force Majeure and Hardship clause, whether it be tailor made or a boilerplate one.

The below characteristics applies to the domestic contracts (where both parties are domiciled in Poland) and to those international contracts which are governed by the Polish law.

It also needs to be exposed that to many contracts of international of sale of goods where one of the parties is domiciled in Poland the Convention on the International Sale of Goods (1980 Vienna Convention) shall be applicable.

Polish civil Code does not provide for a definition of Force Majeure. It has been developed by the jurisprudence. Force majeure is defined as an event which:

  • is external with regard to the parties to a contract – the event was not caused by any of the parties
  • is unforeseeable – the parties could not have foreseen the event of Force Majeure at the moment of conclusion of the contract
  • is unavoidable – beyond control of the parties
  • causes impossibility of performance

Some examples of  events of Force Majeure are:

  • natural disasters (floods, fires, explosions)
  • an epidemic,
  • acts of authority (embargo, regulations or directions, seizure of works, requisition, nationalization, curfew restrictions, import and export prohibitions)
  • military conflicts, civil riots, insurrections, rebellions, uprisings,
  • strikes, lockouts

The Coronavirus epidemic may therefore constitute an event of Force Majeure.

An event of Force Majeure renders the fulfillment of a contractual obligation totally or partly impossible. In case delivery is still possible but commercially impracticable or causes extraordinary expenses for the party –  such a situation cannot be identified as an event of Force Majeure but an event of Hardship.

A Hardship is a situation where:

  • due to an extraordinary event,
  • which the parties could not have foreseen at the moment of conclusion of the contract,
  • the performance by a party encounters excessive difficulties or exposes this party to a glaring loss

In other words the contracting party theoretically still might deliver its performance because the delivery is not impossible (like in case of Force Majeure); however, expecting that such a party performs its obligation would be deemed unfair and unjust from the point of view of equity.

Examples of Force Majeure

A supplier cannot deliver the goods because the place of delivery is situated in a region closed by public authorities for quarantine and the trucks cannot enter.

A supplier cannot deliver the goods because the public administration of the country where the delivery is to take place has issued a temporary import prohibition.

A supplier cannot produce goods because of the lack of raw materials on the market or import restrictions.

Examples of Hardship

The supplier encounters economic difficulties due to the fact that certain raw materials or semi-finished products have become scarce or their prices have increased.

Such a supplier can still perform its obligation although the performance would trigger a substantial additional effort and expense.

It is important to remember that the protection of Force Majeure and Hardship mechanisms will only apply if the contract had been signed before the Coronavirus epidemic outbreak. The contractors who had signed the agreement before the epidemic of coronavirus may get protection against the other party claims. However if an entity concludes an agreement at present, when the general public is well aware of the virus and its impact on the economy – such an entity will not be protected unless the contract contains the Force Majeure and Hardship clauses which specifically regulate the consequences of the epidemic and its ramifications.

What are the Consequences of Force Majeure and Hardship under Polish Law?

In case of a failure to perform due to impediment which constitutes an event of Force Majeure a party to an agreement is relieved from the liability for the non-performance. The other party cannot claim damages from the defaulting party and is released from its reciprocal obligation to  perform its obligation. The most obvious example is when the supplier does not deliver the goods, and the buyer is not obliged to pay the price. If an advance payment was paid, it needs to be reimbursed to the buyer.

Under Polish law the contract does not cease to be binding automatically because of the event of Force Majeure and it is up to the interested party to declare  terminatation.

It is also important that the parties act in good faith and undertake all reasonable steps to mitigate the damage deriving from the event of Force Majeure. For example, by seeking another supplier in order to substitute the goods which cannot be delivered as a result of the epidemic or acts of public administration.

In case of Hardship , the party affected by the event is entitled to initiate court proceedings and demand that the court either modifies or terminates the agreement. The court should weight the interests of all parties and apply the rules of equity. The court may impose different prices, delivery terms, payment terms, and introduce any other alterations in order to adapt the contract to the new situation. In some cases the court will put an end to the contract. Taking into account that usually the court proceedings are long lasting it is essential to demand from the very beginning that the court decides on injunction relief.

How to prove that a Coronavirus can be considered as a Force Majeure event?

A party which did not perform its obligation needs to prove before the court the existence of the event of Force Majeure or Hardship. Any possible proof is allowed, however the certificates issued by public administration, chambers of commerce or other independent and reliable bodies will constitute an important evidence. Among others, the announcements of World Health Organization shall be helpful to prove the event of Force Majeure or an event of Hardship.

The party which wishes to shield itself from the liability for the non-performance needs also to demonstrate before the court a causal link between the epidemic and the non-performance. In other words such a party will have to demonstrate that the cause for which it did not perform was a result of the epidemic which could not have been foreseen. In some situations, where the link between the epidemic and the non-performance is distant, it may be difficult to prove the event of Force Majeure. The general disturbance that probably will take place in the global economy will not be deemed a Force Majeure in all situations.

What to do in case of notice of a COVID-19 Force-Majeure event in Poland?

In case of any difficulty in performance of a contract a party thereto is obliged to act with due diligence and undertake all reasonable steps in order to mitigate the adverse results of the extraordinary situation. It is therefore recommended to:

  • Inform timely the other party of the difficulties encountered, their nature and anticipated consequences,
  • Seek alternative solutions: other suppliers, providers, replacement goods, logistics, routes etc.
  • Undertake all reasonable steps to mitigate the damage,
  • Analyze the agreements and check if they can be terminated by either party and on which grounds
  • Analyze the agreements and establish how they regulate the events of Force Majeure and Hardship. This will allow to select the clients who should be served first (in case if the resources are scarce) and thus reduce future liability.
  • Initiate the negotiations in good faith with the other party aimed at modification of the contract,
  • Apply to relevant authority or non-governmental organization (e.g. chamber of commerce) for a certificate confirming the facts invoked as force majeure or hardship,
  • Gather all necessary proofs that may be necessary at a further stage (documents, photos, witnesses’ testimonies)
  • Carefully draft any future agreement in order to get protection against the future expansion of the epidemic and other extraordinary events
  • Verify the insurance policies and make sure that the insurance company is duly notified about the problem with the prescribed time
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Portugal

How are Force Majeure and Hardship regulated in Portugal?

In the absence of a legal definition in the Portuguese Civil Code (PCC), Portuguese courts have been defining Force Majeure as any natural event or human action that, although predictable or even preventable, cannot be avoided, either in itself or in its consequences.

This means that Force Majeure is any unforeseeable, unavoidable and out of control event that will render the obligations of one of the parties absolutely impossible to perform. If the event could have been predicted by the parties, it would have prevented them from entering into the contract or they would have entered into a different contract.

Force Majeure is therefore treated as a situation of non-attributable non-performance of the contractual obligations, resulting in the termination of the contract without indemnity or compensation for damages.

Hardship is defined in the PCC as a situation where supervening events fundamentally changed the circumstances under which the contract was entered into by the parties, affecting the equilibrium of the contract in such a way that severely hurts the principles of good faith. This triggers a change to the contract to restore the equilibrium or a termination without indemnity or compensation for damages.

Portugal has not ratified the Convention on Contracts for the International Sale of Goods (CISG), but the provisions on Force Majeure and Hardship are similar to the rules on the PCC. 

Is the Coronavirus a Force Majeure Event in Portugal?

A detailed examination of the facts and circumstances is always required, but we can assume that the multiple constraints caused by the Coronavirus pandemic are very likely to be considered in some situations Force Majeure or Hardship events. The distinction between Force Majeure and Hardship lies on the effects over the performance of the contractual obligations.

If the performance of the contract has become absolutely and definitely impossible, a constraint caused by the Coronavirus pandemic will be deemed a Force Majeure event, i.e., a situation where the non-performance is not attributable to defaulting party.

This should be the case when a factory is not able to deliver because it was shut down as a result of mandatory orders by the Government (for instance, a declaration of state of emergency) or other competent authorities (for instance, due to a Coronavirus outbreak among the factory workers).

If the performance of the contract is still possible, but a constraint caused by the Coronavirus pandemic fundamentally affected the equilibrium of the contract, representing an extraordinary and unreasonable burden for one of the parties, it will be deemed a Hardship event.

This should be the case when the cost of production skyrocketed because new suppliers of raw materials had to be found in other countries at a much higher cost in order to still be able to perform the contract.

How to prove a Coronavirus Force Majeure event under Portuguese law?

The standard or burden of proof lays upon the defaulting party, who has to be able to establish the facts that support the case.

The mere existence of the Coronavirus pandemic is not in any case an automatic relief from the performance of contracts, even in the most severely affected countries. General claims that non-performance of contracts arise from the pandemic will not be enough to  establish a Force Majeure or Hardship event.

The defaulting party will have to very clearly establish

  • the event occurred (for instance, the factory was shut down as a result of mandatory orders by the Government),
  • that this event could not have reasonably been predicted when the contract was entered into  and was unforeseeable and unavoidable (for instance, that will not be the case if the contract was already agreed in the context of the pandemic, when the parties should have known that this was a inherent risk to the contract), and
  • that there is a connection between the event and the non-performance (for instance, as the factory was shut down, it was not possible to complete the production or to ship the products), or
  • that there is a connection between the event and a fundamental change of the equilibrium of the contract resulting in an extraordinary and unreasonable burden for the party (for instance, moving the production to another factory would unreasonably affect the cost of production).

It is therefore crucial to establish whether the Coronavirus absolutely prevented the defaulting party from performing the contract obligations (Force Majeure) or that it caused an unreasonable burden to perform (Hardship). It will not be enough to claim that performance has become more difficult or costly.

Even if the contract includes a pandemic situation in a clause of Force Majeure and even if there is insurance attached to the contract, it is important to be thorough in establishing and proving all the facts.

How to manage the Coronavirus Emergency in Portugal?

From a risk management perspective, both parties should first perform an assessment of the situation, identifying the contracts in risk of default or already defaulting and the affected suppliers and clients, and identifying the potential damages that can arise and the existing insurance agreements.

Afterwards, the parties should consider the available alternatives to mitigate the risk of default or the potential damages arising from default, in order to decide which is the best way to manage the overall situation.

Finally, clear and timely communication with affected suppliers and clients is key to solve problems, mitigate damages and  avoid litigation. In any case, it is important to organise and keep documental records to prove the facts.

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Romania

How are Force Majeure and Hardship defined in the Romanian Civil Code (RCC)?

In articles 1351 and the following, the RCC foresees several cases in which a party to a contract is no longer held liable for the non-observance of its obligations, out of which of particular interest are Force Majeure and Fortuitous case (“exoneration cases”).

While “Force Majeure” is defined as any external event, unpredictable, absolutely invincible and inevitable, the “Fortuitous Case” is an event that cannot be predicted nor prevented by the one held liable if the event did not occur.

Although the two exoneration causes seem to overlap, there are some significant distinctions between the two, namely, while Force Majeure always implies the occurrence of an external event, the Fortuitous Case can also apply in situations related to the party or to the good that is sold through the contract. Also, the Fortuitous Case does not need to be “absolutely invincible and inevitable”, the requirement for the party invoking it is being to be able to demonstrate that it could not have prevented it or predicted it, the standard for this latter exoneration case being lower than in the case of the Force majeure.

In practice, the courts have held that:

  • natural phenomena such as: floods, landslides, earthquakes, lightning and so on, due to the fact that such events cannot be imputed to anyone, they are exonerating causes of liability (High Court of Cassation and Justice (HCCJ) decision no. 358/1965);
  • The Fortuitous Case is a simple internal causal obstacle arising from the conditions of exercising the prerogatives over of goods and which is only relatively possible to remove. For example, breaking the steering bar of a vehicle, tire explosion and so on, they are fortuitous cases, not cases of force majeure (HCCJ decision 766/1981);

What is important to underline is that the existence of a situation that could amount to an exoneration case does not excuse from its obligations a debtor who has not been directly affected by such case, so there must be a nexus between the exoneration case and activity of the latter and the burden of proof lies on the party invoking the exoneration event.

In the case of the Force Majeure, the assessment whether an event is unpredictable, absolutely invincible and inevitable, is done in abstract, according to the objective type of a sufficiently diligent man and not for the particular case, that is to say as a certain person who has a certain training in one area, preparation that would, in a given case, allow him to foresee, to avoid or defeat the effects of Force Majeure.

With respect to the modality the exoneration cases shall become applicable and if there are any preconditions, if the contract is silent, the provisions of RCC shall be applicable, which in art. 1634 foresee that the steps to be followed are:

  • Notify the other party with respect to the occurrence of the event as soon as reasonably possible (otherwise the party shall be held liable to the damages caused to the other party);
  • Consequently, the contract shall be suspended either up until the situation leading to the exoneration case has ended, either up to the date the contract is terminated through the parties’ will – should they decide so through an addendum to the contract;
  • Conversely, if the event is one whose effects cannot disappear/be remedied in time (eg. the total destruction of an office building in which the party invoking the Force Majeure had its office) the parties shall immediately be released from their obligations;

Notably is the fact that for the obligations that were already outstanding when the exoneration case occurred (for example payments that were overdue) the party can’t invoke Force Majeure/Fortuitous Case to avoid being obliged to perform the payments or the applicability of penalties.

Also, in the case of occurrence of an event that does not amount to an exoneration cause but unbalances the contract, the RCC has regulated the situation of Hardship (Impreviziune): according to the definition from art. 1271 RCC, Hardship is the situation in which the execution of the contract became excessively onerous to one of the parties due to an exceptional change of circumstances, which would make it manifestly unfair for the party who is obliged to perform the obligation. Should Hardship occur the parties, or in the absence of their agreement the court of law may: adapt the contact distributing equitably between the parties the losses and benefits resulting from changing circumstances or terminate the contract.

As the definition provides, there are 3 conditions that need to be met in order for a party to be able to rely on Hardship in order to request the rearrangement of the contract, namely:

  • the contract became excessively onerous in the sense that although the parties may still continue to execute their obligations, continuing to do so would place one party in a very difficult economical position
  • exceptional change of circumstances: in order for an event to qualify as exceptional it must surpass the inherent risk that either party undertakes, under the contract. For example, a tenant of a shopping mall undertakes the risk for its activity to be stopped a couple of times per year (eg. In case of works to be performed or in case of shortages of utilities) but it will be exceptional for him to foresee that its entire activity will be shut down for months in a row. Also, it is implicit that the change should occur after the signing of the contract. In the case of COVID – 19 pandemy, from our perspective, the parties shall have difficulties invoking Hardship for the contracts signed after January 2020 when the World Health Organization declared a international health emergency. The assesment whether the character of the change is exceptional shall be done, by analizing the actual facts of the case and the ability of the party to foresee the event, depending on its knowledge, level of preparation etc.
  • which would make it manifestly unfair to oblige the debtor to execute the obligation: this condition is very subjective and shall be analyzed by making a parallel between the intention of the parties at the date the contract was concluded and the situation when Hardship is invoked, and generally is considered as being met in circumstances in which the party invoking Hardship would be deprived of the benefits it wanted to obtain when concluding the contract, and its financial situation would be deteriorated while the other party would continue to obtain benefits from same contract.

Resorting to Hardship implies a threefold procedure, namely: Firstly the party invoking Hardship should notify the other party and request the renegotiation of the contract, if the other party replies positively to the notification, the second stage shall be initiated in which negotiations shall take place for the adaptation of the contract. Conversely, if the other party does not reply to the negotiation request or if the negotiations fail, the third stage shall commence through the filing of a judicial claim for the modification of the contract in order to distribute equitably the losses and benefits of the contract or the termination of the contract.

If the parties did not exclude the applicability of Force Majeure/ Fortuitous Case / Hardship from their contract, either party may rely of the provisions of RCC and request either exoneration from liability or the rebalancing of the obligations. However, if the contract does contain a provision regarding the exoneration cases and/or Hardship, the latter shall prevail.

If the contract in connection to which the party wants to invoke any of the exoneration causes or Hardship is one for sale of goods between parties headquartered in different countries, then the Vienna Convention on Contracts for the International Sale of Goods (“CISG”), to which Romania is a contracting state, shall apply (if the parties did not expressly derogate from its provisions).

The CISG does not specifically define Force Majeure or Hardship but merely sets forth in art. 79 of the Convention, the cases in which one of the parties may be exonerated from its obligations, namely if the following conditions are met:

  • the occurrence of an impediment beyond his control
  • the event could not reasonably be expected to have taken the impediment into account at the time of the conclusion of the contract
  • the event or its consequences could not have been avoided or overcame

The exoneration case from article 79 of the CISG is a combination between the elements of the Force Majeure and the Hardship from Romanian national legislation, but the wording is more permissible since it does not require the party to prove an absolute invincibility and inevitability of the event but just to prove that it was is out of its control.

Should an international contract, regulated by Romanian law not contain any exoneration clause, the provisions of CISG shall prevail because it constitutes Lex specialis by comparison with RCC that is Lex generalis.

The mechanism through which the exoneration clause is triggered is the same as in the case of the Force Majeure/Hardship, namely the party invoking it must send a notification within a reasonable time after the occurrence of the impediment.

Can the Coronavirus be regarded as a Force Majeure or Hardship in Romania?

The outbreak of the COVID – 19 pandemic in Romania has lead the state authorities to:

  • Declare a state of emergency through Presidential Decree published in the Official Gazette no. 212/16.03.2020 for a period of 30 days, with the possibility of its extension;
  • Adopt the Decision no. 9 from 14.03.2020 in order to establish measures to prevent the spread of COVID-19, which foresees the restriction of cultural, scientific, artistic, religious, sports and entertainment activities, which involve the participation of more than 50 persons, carried out in confined spaces (Restricted activities);
  • Adopt Order no. 2/21.03.2020 through which the activity of the shopping malls is suspended temporarily, and quarantine mesures are enacted, limiting the free movement of the individuals;
  • Adopted several measures amongst other a Government Emergency ordinance no. 29/2020 published in the Official gazette no. 230/21.03.2020 (GEO no. 29/2020) through which it is stipulated that the small and medium entreprises (SME) that have stopped their activity in whole or in part due to a decision of the state authorities and that hold a situation of emergency certificate issued by the Ministry of Economy, Energy and Business, shall benefit from postponement of the payment term for the following services: utilities, internet, electricity, gas as well as from the postponement of the payment term for the rent of the headquarters and the working points. For contracts other than the ones indicated above, the SMEs can invoke Force Majeure only if they prove (through any written evidence – including electronic correspondence) that they have attempted to renegotiate the contract and adapt its provisions considering the current situation.
  • The same GEO no. 29/2020 mentioned above, stipulates that the party is presumed to be in a Force Majeure case as defined in art 1351 RCC, following the activity of the authorities that have enacted measures to prevent and fight COVID – 19 and have affected the activity of the company, as ascertained through the certificate of situation of emergency. The presumtion can be overturned by the other party through any type of evidence.The unforseable character of the event is assessed at the date the contract was signed. Also the ordinance provides that the measures taken by the authorities following the presidential decree declaring the state of emergency cannot amount to Force Majeure. In other words, for the contracts concluded after 16.03.2020 – when the decree passed, the parties could not rely of Force Majeure to be exonerated from their obligations.
  • However, the procedure for the issuance of the situation of emergency certificate has not been adopted yet.

The problem with the provisions of GEO no. 29/2020 is that in article X second paragraph, it adds a precondition for the SMEs that want to invoke Force Majeure that did not exist in RCC, namely to demonstrate through any written evidence – including electronic correspondence, that it has attempted to negotiate the modification of the contractual clauses before invoking the exoneration clause. Imposing a precondition only to a particular type of companies seems discriminatory and abusive.

Hence, in the case of the SMEs that obtain a certificate for the situation of emergency – the prorogation of the payment terms for the utilities, internet, electricity, gas as well as from the postponement of the payment term for the rent of the headquarters and the working points is automatic, and for the other types of contract they benefit from a Force Majeure presumption.

Conversely, the companies that are not SMEs or the SMEs that do not work in sectors of the industry that have been restricted in whole or in part by the authorities should rely on the provisions of the contracts and the RCC to invoke an exoneration cause or hardship.

Regarding the criteria to consider Coronavirus as Force Majeure, the Chamber of Commerce and Industry of Romania (CCIR) which is the entity that ascertains on request the occurrence of a Force Majeure case for Romanian companies, has published a press release, accessible here detailing what are the elements based on which they reply favorably to a certificate request, namely: “Some force majeure clauses may even be provided to include epidemics or pandemics. When a force majeure clause is provided in a more general sense – even without including epidemics or pandemics, but provides for any act or fact that has occurred beyond the control or will of the affected parties, then the spread of the epidemic or pandemic may be considered a force event majeure. However, an insufficiently defined force majeure clause, which refers only to natural events, weather, etc. or just mentioning the phrase a force majeure event, could be considered insufficient to be able to exempt from liability.

 In other words, the fact that a force majeure clause explicitly covers the situation of outbreaks or pandemics, as is the case with Coronavirus, is not enough by itself. The person attempting to rely on it must demonstrate that it cannot perform the contract because of circumstances beyond its control (generated by the virus). It must also demonstrate that reasonable steps could not be taken to avoid or mitigate the event or its consequences.”

It is to be mentioned that the Chamber of Commerce and Industry of Romania cannot state if a certain situation amounts to a Force Majeure, but checks and ascertains if any of the cases defined as Force Majeure in the contract have occurred. For example if the contract contains a provision according to which a state of emergency constitutes Force Majeure, the CCIR shall check whether indeed the state of emergency was declared and if so it shall issue the certificate.

In a case (HCCJ decision no. 4916/2012), a party had successfully requested in court the annulment of a certificate issued by the CCIR through which a strike was acknowledged as a Force Majeure event, and the court has held that since the force majeure clause did not contain strikes as one of the cases that were defined as such, the CCIR cannot extend the scope of the contractual provisions.

On the other hand, invoking Coronavirus as a cause for Hardship should follow the same logic, namely the pandemic itself does not constitute a good enough reason for the renegotiation of the contract, but the party shall have to also register a more onerous contractual obligation that in most cases is due to external cases such as: shortage of supplies, blocking of the activity and decrease of the sales, absence of personnel due to quarantine etc., and also to meet the other criteria detailed above.

How to prove a Coronavirus event of Force Majeure in Romania?

The general rule is that the burden of proof when invoking an exoneration event lies with the party that attempts to avoid its contractual obligations. Consequently, the party whishing to invoke an exoneration case or Hardship is the one that must demonstrate that all elements foreseen by the contract/law are met. In order to do so, the party may use any means of evidence from documents deriving from the public health organizations/authorities up to excerpts from their statutory documents that attest that the activity is affected by authorities measures for the prevention of COVID – 19. From our perspective, even if the contract does not specifically request a certificate issued by a chamber of commerce or another public authority to ascertain the Force Majeure, it is advisable to obtain one.

Nevertheless, in the matter of the COVID – 19, GEO no. 29/2020 reverses the burden of proof in the case of the companies that obtain a situation of emergency certificate, that shall no longer be requested to prove to the other party how their activity was affected or that the event was unpredictable, absolutely invincible and inevitable.

What is interesting is that fact the state authorities considered as force majeure not the COVID- 19 pandemic but the actions of the authorities that have been directed towards the prevention and fight of the spread of the virus.

What is the best course of action in case a party invokes an exoneration event or Hardship?
  • Should an event occur that could amount to an exoneration case or to an adaptation of the contract, one must make sure that it documents the facts. For example:

if the suppliers increase the prices due to shortages of stocks, a manufacturer should make sure that it has correspondence with the supplier to justify the price increase to its end clients, and not only rely of telephonic negotiations;

If a party that unrolls activities in a shopping mall has noticed a decrease of clients traffic in the mall starting with February 2020 it should immediately notify the landlord of the facts and indicate the decrease it had in its turnover;

  • The party that wishes to invoke an exoneration case must firstly check the provisions of its contract to see if the exoneration case is regulated by the contract and if the answer is positive, see if it does strictly fit under the situations covered by the clause or not. Also, attention must be given to the contractual mechanism that should be activated to invoke the Force Majeure.
  • For example, courts (HCCJ 2584 from 14.04.2005) have held that the non-observance of the term the contract put forth for notifying the Force Majeure event renders the notification ineffective and the party that sent the notification cannot be exonerated from its obligations.
  • The notification must contain the explanation why the fact amounts to an exoneration case or Hardship and should be documented and must be sent through a mean that can certify the receipt.
  • If the contract foresees that Force Majeure must be certified by a chamber of commerce or a state authority we would recommend firstly sending a notification as soon as the event occurs, in which it shall be mentioned that a certification from a third party has been requested and shall be provided and subsequently after the certificate is obtained (which usually takes around 10-15 days) a new notice shall be sent to which the party shall attach the evidence obtained.
  • In the situation of an exoneration case and or Hardship due to COVID – 19 make sure that you check all the remedies and measures that the state has made available to the companies and resort to them in order to mitigate the damages both to your activity as to the activity of the other contracting party.
  • The SME should check the procedure allowing them to obtain a situation of emergency certificate to benefit from the automatic postponement of the payment terms for the rent and utilities and try to renegotiate the other contracts, as foreseen in the GEO no. 29/2020 indicated above.
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Russia

How are Force Majeure and Hardship defined in Russia?

Force Majeure

The following circumstances can be considered as Force Majeure under the Russian law (article 401(3) of the Civil Code): unless otherwise provided by law or contract, a person who has not performed or improperly performed an obligation in the course of entrepreneurial activity shall be liable, unless he/she proves that the proper performance was impossible due to force majeure, i.e. extraordinary and unavoidable circumstances under these conditions. Such circumstances do not include, in particular, breach of obligations on the part of the debtor’s counterparties, lack of goods on the market necessary for the performance, the debtor’s lack of the necessary funds.

Material change of circumstances

According to Russian law (article 451 of the Civil Code) it is possible  to amend and terminate a contract due to a material change of circumstances, if :

  1. There is a material change in the circumstances based on which the parties concluded the contract, unless otherwise provided in the contract or arises from its substance. A change in circumstances shall be deemed material when such circumstances have changed to such an extent that, had the parties reasonably foreseen it, the contract would not have been concluded or would have been concluded on substantially different terms.
  2. The parties have not reached an agreement to bring the contract in line with the materially changed circumstances or to terminate it. In this case the contract may be terminated and or modified by the court at the request of the interested party, provided that the following conditions are simultaneously met:
    • at the time of conclusion of the contract the parties proceeded from the assumption that such change of circumstances would not occur;
    • the change in circumstances is due to events which the affected party could not overcome after the change occurred, taking into account the extent of care and diligence required from such party by the nature of the contract and the cause of events;
    • the performance of the contract would have substantially harmed the affected party, so that it would have largely lost what it was entitled to when concluding the contract;
    • the contract does not foresee that the risk of change of circumstances is borne by the affected party.

In case of termination of the contract due to material change of circumstances, the court at the request of either party shall determine the consequences of termination of the contract, based on the need for fair distribution between the parties of the costs incurred by them in connection with the performance of the contract.

Change of the contract in connection with a material change of circumstances is allowed by court decision in exceptional cases, when the termination of the contract is contrary to the public interest or will cause damage to the parties that significantly exceeds the costs needed to perform the contract on terms and conditions changed by the court.

Can the Coronavirus be considered as a Force Majeure or as Hardship in Russia?

The Supreme Court of the Russian Federation provided the following clarifications on evaluation of Force Majeure (Resolution of the Plenum of the Supreme Court of the Russian Federation dated March 24, 2016. No 7 “On application by courts of certain provisions of the Civil Code of the Russian Federation on liability for breach of obligations”).

The requirement of exceptionality implies the exclusivity of the circumstance in question, the occurrence of which is not usual in specific conditions.

Unless otherwise provided by law, an event shall be deemed to be unavoidable if any party engaged in similar activities could not have avoided the occurrence of that event or overcome its consequences.

How to prove COVID-19 as a Force Majeure in Russia?

The right to certify the existence of Force Majeure circumstances that affect the performance of a foreign trade transaction belongs to the Chamber of Commerce and Industry of the Russian Federation.

According to the regulation on the procedure for certification by the Chamber of Commerce and Industry of the Russian Federation, Force Majeure is defined as  extraordinary, unforeseen and unavoidable circumstances that occurred during the implementation of contractual obligations, which could not reasonably have been expected when concluding the contract, or avoided or overcome, as well as those beyond the control of the parties to such contract.

In particular, such circumstances include: natural disasters (earthquakes, floods, hurricanes), fires, mass diseases (epidemics), strikes, military operations, terrorist acts, sabotage, transportation restrictions, prohibitive measures of states, prohibition of trade operations, including with specific countries due to international sanctions and other circumstances beyond the control of the parties to the contract.

Entrepreneurial risks, such as breach of contract on the part of the debtor’s suppliers or sub-contractorss, lack of goods necessary for the performance of the obligations, currency exchange rate fluctuations, devaluation of national currency, criminal acts of unidentified persons, unless otherwise provided by the terms of the contract, cannot be deemed force majeure.

What is the Certificate of Force Majeure issued by the Chamber of Commerce?

On February 5, 2020 the Chamber of Commerce and Industry of the Russian Federation made a statement that the entrepreneurs whose business has been affected by the situation with Coronavirus in China may obtain a Certificates of Force Majeure confirming their inability to fulfil contractual obligations due to circumstances beyond their control.

In order to obtain the Certificate of Force Majeure the interested Party needs to  file an application with the relevant supporting documents at the Chamber of Commerce and Industry of the Russian Federation in accordance with requirements set forth in the Regulation.

What to do in case of notice of COVID-19 Force Majeure?

First of all, to review the Force Majeure and Hardship (Material Change of Circumstances) clauses in the contract, including the notice period, the timeframe of suspension of performance, any event  excluded.

Secondly, to do whatever is necessary to mitigate damages deriving from the possible non-fulfillment of the other party, for example by seeking alternative ways to fulfill its obligations towards the other companies that form part of the supply chain.

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Singapore

How is Force Majeure defined and regulated in Singapore?

Singapore is a member of the British Commonwealth and a quintessential Common Law jurisdiction to the extent that the very third paragraph of its “Civil Law Act” is entitled “Law and equity to be administered concurrently”

There is no stone-carved definition of Force Majeure, which is usually referred to not as an institution but simply as a clause that allows a party to be excused from performing its obligations (on time), when some unforeseen outside event beyond the parties’ control prevents or delays performance.

The absence of a definition of Force Majeure, albeit vague, renders it necessary that a foce majeure clause be present in contracts, to be invoked.

Therefore, a court in Singapore will not imply the presence and extension of a force mandeure clause, which therefore should be (i) present and (ii) accurately written, i.e. encompass all possible events do so clearly. Additionally, Singaporean courts conduct two separate tests:

  1. A commercial impracticability test, aimed at defining in concrete terms in the specific case treated the definition of the disruption caused by the Force Majeure event;
  2. A test on the conduct of the party wishing to rely on the force mandeure clause, aimed at ascertaining that such party has done everything in its power to avoid relying on said clause.

Where the Force Majeure clause is missing, the parties may resort to seek the application of the institution of frustration, as per the Frustrated Contracts Act (Chapter 115), (Original Enactment: Ordinance 6 of 1959), 2014. The mentioned Act does not define specific triggering events for frustration, meaning that there is more scope to argue that a certain event causes frustration and therefore a contract should be cancelled. In case of dispute, courts would adopt equitable measures to adjudicate the case.

The legal test of frustration is whether the triggering event was reasonably foreseeable (in which case frustration cannot be easily invoked), and, if not, whether it makes the contractual obligation so fundamentally different from what has been agreed in the contract itself, that it would be unjust to pretend that parties abide by the contract.

It should be noted, however, that Singapore has introduced an ad hoc measure, the COVID-19 (Temporary Measures) Act, in force from 7 April for a period of six to twelve months. Such Act  introduces:

  1. Temporary relief from non-performance of contractual obligations under certain contracts, if that inability is materially caused by a COVID -19 event;
  2. Temporary changes to bankruptcy and insolvency laws to increase the debt thresholds for winding up and bankruptcy, and give a safety net to allow businesses to continue to trade while technically insolvent.
  3. Allow the conduct of certain meetings, such as AGMs, to continue using alternative arrangements other than personal attendance.

As the name suggests, these are temporary measures and, at the end of the pandemic, unless the situation worsens badly, the ordinary insolvency and other rules will apply.

As this article focuses con contractual matters, it is worth examining, albeit briefly, the measures pertaining relief from non-performance of contractual obligations under certain contracts.

Firstly, it should be noted that the relief period is six months from the entry into force of the Act, although this time-frame may be extended to twelve months.

Secondly, the relief applies only to certain contracts entered into before 24 March 2020.

Such contracts are:

  • Certain secured-loan facilities granted by a bank or a finance company to small- to medium-sized enterprises;
  • Performance bonds or equivalent that are granted pursuant to construction or supply contracts;
  • Hire-purchase agreements for commercial vehicles, or plant, machinery or fixed assets located in Singapore;
  • Contracts for the provision of goods and services for events (e.g. venue or catering for weddings, business meetings);
  • Tourism-related contracts (e.g. cruises, hotel accommodation bookings);
  • Construction or supply contracts;
  • Leases or licences for non-residential immovable property.

A party to any of the above-listed contracts may be temporarily relieved from some or all its obligations.

The obligations in questions are limited to those to be performed on or after 1 February 2020, not earlier.

Non-performance must be materially caused by either the pandemic or any law made because of it by any national government, not just Singapore’s.

If all the above requisites and condition apply, the party in question must speedily serve notice to all its counterparties, sureties and guarantors.

Upon receiving such notice, the counterparties are prohibited from:

  • Commencing or continuing any court or arbitral proceedings against the party or their guarantor or surety;
  • Enforcing any security over any immovable property or over any movable property being used for the purpose of trade, business or profession;
  • Taking bankruptcy or insolvency action against the party or their guarantor or surety;
  • Seeking to repossess goods under a leasing, hire-purchase agreement or retention of title agreement;
  • Terminating a lease or licence of immovable property for the non-payment of rent or money:
  • Any action to enforce a court judgement, arbitral award or adjudication under the Security of Payment Act.

Specific measures of relief are implemented for each time of scheduled contract and similar provisions are in place, as mentioned, for bankruptcy and insolvency.

Evidently, a counterparty may object to the party’s claim to be temporarily relieved. In such event, the Ministry of Law has been empowered to appoint a panel of independent assessors to determine any such disputes, in order to save time and money on ordinary legal proceedings.

Finally, breaching the prohibitions contained in the Act is a serious offence, which could result in a fine, a criminal conviction and also for the party in breach to lose its substantive right to enforce the contract at all in case of dispute related to the contract.

How to prove that the Coronavirus can be considered an event of Force Majeure?

There is no single way to determine whether Covid-19 per se constitutes an event of Force Majeure.

Various elements must be taken into account, preferably through the aid of a legal expert, such as:

  • governing law (Singapore?);
  • the presence of a properly drafted clause;
  • the foreseeability of the event of Force Majeure, or at lease of a triggering event for frustration (e.g. where the parties working domestically only? could they make contingency plans before or after the outbreak in Singapore? are their businesses present in other (high risk) areas? where they fulfilling their duty of being informed? etc.);
  • exceptional measures introduced by the government (e.g. mandatory quarantine affecting people vested with the powers to execute certain contractual obligations) and their relevance (e.g. working from home per se does not prevent the fulfilment of certain obligations), including on third factors which influence the performance of obligations (e.g. if suppliers are themselves affected and, in such case, if alternative suppliers could be used);
  • the temporary relief provisions contained in the COVID-19 (Temporary Measures) Act.
What is the best course of action is recommended in case either party issues a notice of Force Majeure?

It is most likely that a party, under the current circumstances, invokes the application of the reliefs included in the COVID-19 (Temporary Measures) Act. Naturally, a party may also invoke Force Majeure or frustration.

In any of such cases, it is recommendable to follow this course of action:

  1. Consider all the relevant facts;
  2. Determine whether the case is governed by Singaporean laws;
  3. Evaluate if the case falls into the scope of the COVID-19 (Temporary Measures) Act and what are the consequences (e.g. on bankruptcy);
  4. Examine the exact wording of the Force Majeure clause, if present, in the relevant contract(s);
  5. If no proper clause is present, evaluate if frustration can be invoked.
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Slovakia

How is Force Majeure regulated under Slovak law?

Regulation in the Commercial Code: in general, in business relations, if a party breaches its contractual obligation, the breaching party is liable for damages caused to the other party due to the breach of the obligation. However, unless agreed otherwise, if a party in breach proves that the breach of obligations was due to “circumstances excluding liability” (Slovak legal term for the force majeure events), the (breaching) party shall be released from its liability for damages. Provisions on circumstances excluding liability, i.e. force majeure events, are regulated in the Commercial Code [1].

The circumstances excluding liability are defined in the Commercial Code as obstacles, which:

  • occur regardless of the liable party’s will; and at the same time,
  • prevent this party from fulfilling its obligation,

unless it can be reasonably anticipated that:

  • the liable party could prevent or overcome the obstacle or its consequences, and
  • the (breaching) party had anticipated the obstacle at the time when the obligation (contract) was agreed.

The obstacle, which occurs only during the time when the liable party was already in delay with the fulfilment of its obligation, shall not be considered as the force majeure event.

Contractual Freedom

Parties to a contract may exclude the general application of the statutory definition of the force majeure event. They may also agree their own Force Majeure clauses. If the parties agree their own Force Majeure clause, the contractual definition of a Force Majeure can be:

  • very general and applicable broadly to almost any delay that is beyond control of the liable party, or
  • it can be explicitly limited to very specific events that constitute a force majeure event (e.g. earthquakes, floods, strikes, or acts of terrorism).

Contractual Penalties

Even a valid force majeure event does not release the obliged (liable) party from its duty to pay a contractual penalty if the contractual penalty was agreed in the respective contract for the particular breach of the respective obligation. In other words, while the (breaching) party may be released from its liability for damages (caused due to the breach of its obligation), the party would still have to pay the contractual penalty, unless otherwise agreed in the contract in this regard.

If there is no written contract, or the contract in place does not mention anything about Force Majeure, the statutory provisions of the Commercial Code will apply to the contract.

[1] Act No. 513/1991 Coll., the Commercial Code, as amended.

Can the Coronavirus be considered as a Force Majeure in Slovakia?

Having regard to the various nature and extent of several consequences of the spread of the Coronavirus, it is not possible to make a conclusion – that would be generally applicable to all situations – whether the spread of the Coronavirus would be considered as a Force Majeure event under the Slovak law.

In each particular case (in addition to other relevant circumstances) it is necessary to analyse, whether the current extraordinary situation indeed “prevents the contractual party to fulfil its obligation” under the respective contract, and whether, at the same time, it cannot be reasonably anticipated that the liable party could prevent or overcome this obstacle or its consequences”.

In our view, there may be cases where the unpredictable negative consequences of the spread of the Coronavirus, such as mandatory closing of a plant or operation by governmental decisions or obligatory quarantine of employees, could be considered as the circumstance excluding liability.

The assessment would have to be made on a case by case basis, taking into consideration also the nature of the obligation that was violated, and the nature of the very particular consequences of COVID-19, which particularly prevent the party to fulfil its contractual obligation. Finally, only courts are entitled to decide, in each particular case, whether the liability of a party in breach is excluded due to COVID-19.

How to prove that the Coronavirus outbreak can be deemed as an event of Force Majeure?

The evidential burden of proof is borne by the party affected by the negative consequences of the Coronavirus, who must prove that the Coronavirus (or its particular negative consequences) meets the conditions of the Force Majeure event. In order to do so, it is recommended to use evidence adopted or issued by relevant authorities, e.g. documents issued by the public health authorities or government, certificate of Force Majeure issued by the Slovak Chamber of Commerce and Industry, etc.

To be excluded from liability, it is also necessary to prove the causal link between the Coronavirus and the breach of the contractual obligation. In other words, the party will have to demonstrate that the current situation indeed prevents the party to fulfil its contractual obligations and may, therefore, be considered as a circumstance excluding liability.

What is the best course of actions recommended in case of notice of Force Majeure?

If the party has difficulties to fulfil its contractual obligations due to the Coronavirus outbreak and its negative consequences, it should take all reasonable steps in order to mitigate the possible damages. First of all, the other contractual party should be timely informed about the existence of these extraordinary circumstances preventing the party to fulfil its contractual obligations.

If it is not possible to fulfil the contractual obligations or find some other alternative solutions, it is recommended to try to agree with the other party on the amendment or termination of the contract. All of the evidence (proving existence of the circumstances excluding liability) that may be required later, e.g. in court proceedings, should be carefully gathered by the party in breach.

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Spain

Update on March 17, 2020

RD-Law 11/2020 has amended Article 40 of Royal Decree-Law 8/2020 of 17 March with regard to “Extraordinary measures applicable to legal entities governed by private law”. Here a brief summary of the 9 most relevant aspects:

  • Although the Bylaws did not provide for it, during the alarm period: (i) the meetings of the governing and administrative bodies of the companies may be held by videoconference or telephone conference provided that the necessary means are available, the Secretary recognises the identity of those attending and this is recorded in the minutes; (ii) the provisions of the previous paragraph shall also apply to meetings of shareholders; (iii) the resolutions of the governing and administrative bodies may be adopted by written vote without a meeting, provided that the Chairman so decides or at least two of the members of the body so request.
  • The obligation to formulate the annual accounts and other documents required by company law is suspended until the end of the State of Alert, and the period resumes for a further three months from that date (in any case, both the formulation and the verification of the accounts may take place during the State of Alert).
  • In the event that the accounts have already been formulated  in the previous financial year, the period for accounting verification, whether the audit is mandatory or voluntary, shall be understood to be extended by two months from the end of the State of Alarm.
  • The Ordinary General Meeting to approve the accounts will necessarily meet within the first three months following the end of the period for formulating the annual accounts.
  • The Administrative Body is authorised to modify the place and time of the meeting already called or even to revoke the agreement to call the meeting; in the latter case, the new call must be made within the month following the end of the State of Alarm.
  • Companies that have already drawn up their annual accounts and call the Ordinary General Meeting from the date this rule comes into force may replace the proposal for the application of the result, with the justification that must be provided by the Administrative Body in this respect and must be accompanied, where appropriate, by a letter from the auditor stating that he would not have modified his audit opinion if he had known of the new proposal when it was signed. The Administrative Body may withdraw the proposal for the application of the result from the Agenda (under the terms and conditions detailed in the regulation itself).
  • The attendance of a Public Notary to record the Minutes of the meeting may use remote communication means in terms that guarantee the fulfilment of his notarial function.
  • The right of separation may not be exercised, even in the event of circumstances arising, until the end of the State of Alarm.
  • The deadlines for promoting the dissolution of the company, when the legal or statutory causes foreseen in this respect concur, are suspended until the end of the State of Alarm.  If the legal or statutory cause has occurred during the period of the State of Alarm, the Directors will not be liable for the corporate debts incurred during that period.
How are Force Majeure and Fortuitous Event regulated in Spain?

The principle of freedom of covenants referred to in art. 1255 of the Civil Code allows the parties signing the contract to agree (i) which scenarios and situations should be determined as constituting cases of Force Majeure and/or fortuitous event and (ii) what should be the consequences of those situations.

Should the Contract not expressly regulate those scenarios, then the provisions of the Civil Code must apply. Although  in the Spanish Civil Code there are many references to both figures, Force majeure and Fortuitous event, the fundamental precept that applies is article 1,105 which establishes:

“Outside of the cases expressly mentioned by the law and those in which the obligation states so, no one is liable for those events that could not have previously been foreseen or that, foreseen, were inevitable”

These unpredictable or inevitable events, in the terminology of the Civil Code are those that are usually called as cases of Force Majeure or Fortuitous even.

The jurisprudence has required for the application of art. 1,105 the following requirements:

  • It must be an event not attributable to the party liable to fulfil the obligation (the debtor).
  • It must be unpredictable, or if it is predictable, it must be inevitable.
  • The event must be caused by and have as a consequence the breach of the obligation, this means there must be a causal link.

As stated in the doctrine of the Supreme Court, Force Majeure means an unexpected event that, even if it could be avoided, could not be resisted. That is, what cannot be prevented or in the case it can be prevented, cannot be avoidable or resisted, and this without the intervention of any fault of the agent as it comes from an event not foreseen or unpredictable, insurmountable and inevitable.

The distinction between Force Majeure and Fortuitous Case does not appear in the Spanish Civil Code but the jurisprudence has defined it as follows: the Fortuitous Case would be the unpredictable event, and the Force Majeure the inevitable; in short, a matter of graduation, but in both cases, with application of article 1,105 and without significance for the purposes of this note.

In any case, the occurrence of an event that can be classified as Force Majeure or Fortuitous event directly affects the core of the contract, that is, the fulfillment and enforceability of the obligations and their consequences could be:

  • They can cause the total and definitive impossibility of complying with the obligations, freeing the debtor from its obligations,
  • They may cause partial inability to comply; in this case the debtor would only be released in the part that is impossible to fulfill, but would still be bound by the part that can be carried out.
  • They may cause temporary impossibility to comply; then the debtor would be released from the responsibility for default as long as the exceptional situation persists.

Therefore and in conclusion,

(i) If the contract includes Force Majeure or Fortuitous event clauses, the contractual text must be in place to determine a) if the event can be characterized as such and b) what are its consequences. It is frequent in the contractual clauses regulating Force Majeure to foresee that if it subsists for a certain period of time, any of the contracting parties may terminate the contract. The following is a broad standard clause model without blocked number :

“For the purposes of this Agreement,” Force Majeure “means any act or fact that is unforeseeable or that, if foreseeable, is inevitable. The Parties agree that the following events shall constitute, including but not limited to, cases of force majeure: (i) natural disasters such as earthquakes or volcanic eruptions, (ii) war, riots, civil revolt, acts constituting rebellion or revolution, terrorist acts , (iii) actions or orders of any government or authority (including denial or revocation of any license or permit), (iv) fire, explosion, floods, or exceptionally adverse weather circumstances, (v) failure in the electrical supply or in the telecommunication lines, (vi) attacks, theft, intentionally caused damages, general strike or strike of a specific sector, excluding specific strikes of a company, lockout (viii) declaration of a state of siege of exception or alarm due to epidemics, pandemics or in general situations of health risk for the population.”

(ii) If the contract does not include the aforementioned clauses, article 1,105 of the Spanish Civil Code will apply and if the case meets the requirements listed above, then it will have the potential to free the debtor from complying fully or partially, definitively or temporarily with the obligation.

Is COVID-19 a possible event of Force Majeure or Fortuitous Event in Spain?

Once the Force Majeure concept has been defined, we will now analyze whether the Covid 19 can be considered as a suitable case in this figure and with what consequences.

Again we have to consider the double scenario: (i) that the contract regulates cases of Force Majeure or Fortuitous Event, and foresees their consequences or (ii)  that the Contract does not regulate any case of Force Majeure or Acts of God.

In case of contract that regulates the Force Majeure and Acts of God events, there are still several situations:

  • Contracts that expressly regulate pandemics and health epidemics as cases of Force Majeure. Of course, in our experience it is not the usual situation. But if it were, as in the example above, the COVID 19 scenario that we are analyzing would undoubtedly constitute a case of Force Majeure, specifically foreseen and with the contractual consequences that the clause itself regulates.
  • Contracts in which the Force Majeure clause identifies a plurality of assumptions but does not make express reference to situations of extreme alarm or health emergency, such as the one we are experiencing, but includes some mention that such a list of cases are not limited. In such a case, it should be assessed how and to what extent the health emergency is affecting the contractual obligation in question in order to conclude if an integrative interpretation of the contract allows the consideration as COVID 19 as a Force Majeure event, although the contractual text did not expressly refer to pandemics or epidemics.

For example, a contractual obligation borne by one party that involves the supply to another party of non-essential items, in a scenario in which the mobility of people has been restricted by the authority, would easily and logically qualify as Force Majeure despite not having been the object of a specific reference in the contractual text, through an integrative interpretation of the contract.

  • Contracts with a blocked number  definition of cases of Force Majeure without including pandemics or epidemics. It would be harder to defend the case when the assumptions identified in the contract as Force Majeure, constitute a blocked number and do not include the reference of “or other similar” or that of “included but not limited to.”

This assumption, in our opinion, would be similar to the case in which the contract does not include any specific regulation for Force Majeure. In both, then, article 1,105 of the Spanish Civil Code previously transcribed would apply.

  • Contracts without reference to Force Majeure

We are already in the field of article 1,105 Spanish Civil Code; in the case of COVID 19, there is no doubt that the first two applicability requirements of the article are met: it is foreign to the contractual part that does not or cannot comply; and it is an unpredictable and inevitable event.

It must therefore be analyzed whether the third requirement is met: the causal link between the epidemic and the breach of the obligation.

As is obvious, there is no generalization and an individualized study of the contract in question and of the unfulfilled obligation is required, within the framework of the epidemic scenario that we are analyzing.

Returning to the previous example, that of the supply of non-essential items affected by the restrictive provisions on mobility, there would be no doubt that article 1,105 would be applicable and that the obligor to provide the supply obligation would not be required to comply with it.

Now, the casuistry is vast and exceeds the intention of this article; consider leases for business premises that could be closed for weeks or months. How does the scenario affect the obligation to pay the rent? The tenant is occupying the premises but is not being able to exploit it. It does not seem debatable that while he remains in possession of the property, exploiting it or not, he must pay the rent; But, will it be possible to understand modifiable clauses of the contract so that the lessee, prevented from exploiting, can resolve in advance? Or those of length of notice? Who should suffer the consequences, lessee or landlord? Or a contract for the supply of perishable products between a manufacturer and a distributor that will be irretrievably lost by the order to close establishments open to the public. Who of the two should be released from his obligation and suffer the damage? Or equally and equally distributed?

It is all these questions that will require a meticulous and detailed study of the contract and the concurrent circumstances and that we fear very much will flood the Spanish courts in the coming months.

In any case, the conclusion is that COVID 19 undoubtedly supposes an event of Force Majeure (both if the contract expressly regulates Force Majeure or not) that in many contractual relationships will result in the release of the contractor’s compliance obligations. forced to comply and prevented or hindered by the pandemic. Provided, of course, that there is a causal link between the pandemic and non-compliance.

The effects of COVID-19 on Lease Agreements of Premises and Offices

What are the effects on leases of offices or premises that have been forced to close? Go to this link for an in-depth analysis of the situation

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Switzerland

How are Force Majeure and Hardship defined under Swiss law?

 “Force Majeure” is not explicitly defined in Swiss contract law, more specifically the Swiss Code of Obligations (“CO”). According to the Swiss Supreme Court, Force Majeure relates to unforeseeable and extraordinary “external” events that are inevitable. In case an agreement contains a Force Majeure clause, contracting parties often include examples of Force Majeure events in their agreements. Acts of God such as earthquakes or floods, but also wars and riots are typical examples.

“Hardship” is similar to the concept of “clausula rebus sic stantibus” which allows courts to deviate from the fundamental principle “pacta sunt servanda” (agreements must be kept) by amending contracts without the consent of one of the contracting parties. In order for a court to modify the terms of a contractual relationship, several requirements must be met:

First, the circumstances relating to an agreement must have changed in a fundamental manner.

Second, the changes of the circumstances must be unforeseeable, extraordinary and inevitable.

Third, the changes of the circumstances must lead to a severe disturbance of the contractual equilibrium, so that it would amount to an extortionate exploitation and abuse of law (i.e., a violation of the duty to act in good faith as set forth in Article 2 of the Swiss Civil Code) if the creditor would insist on the fulfillment of its contractual claims. In other words, the performance of the contractual obligations must become excessively onerous.

While Switzerland is a contracting state of the Vienna Convention on Contracts for the International Sale of Goods (“CISG”), the CISG may be (and often is) excluded in trade agreements. Article 79 CISG, which states that a party is not liable for a failure to perform any of its obligations if it proves that the failure was due to an impediment beyond its control, that could have not reasonably been expected at the time of the conclusion of the contract, is substantially similar to the concept of Force Majeure and the “clausula rebus sic stantibus” under Swiss contract law.

Can the Coronavirus be considered as Force Majeure and what are the consequences?

Whether or not a Force Majeure can be invoked primarily depends on the wording of the Force Majeure clause or, in the absence thereof, on the Swiss Code of Obligations respectively its interpretation by the Swiss Supreme Court and further Swiss courts. The statutory rules governing Force Majeure, in particular Article 103 or 119 CO, are of a non-mandatory nature. Therefore, the parties to an agreement may deviate from the statutory principles by, e.g., allocating risks arising out of Force Majeure events to a specific party.

In principle, contracting parties may also freely decide what kind of events shall qualify as Force Majeure. As mentioned above, earthquakes, floods, wars and riots are typical examples of Force Majeure events that are often explicitly listed in Force Majeure clauses. Unless there are indications in a Force Majeure clause that a list of specific Force Majeure events shall be considered as exhaustive, it seems fair to assume that lists of Force Majeure events shall not be exhaustive, meaning that events not explicitly mentioned in the clause may qualify as Force Majeure as well. This holds true, e.g., for epidemics such as the one caused by the coronavirus. It seems rather unlikely that the parties to an agreement intend to exclude global epidemics from the scope of application of Force Majeure clauses.

In the absence of a Force Majeure clause, it seems quite likely that the circumstances caused by the coronavirus qualify as Force Majeure events for the purpose of, e.g., Article 103 CO (concerning delays caused by Force Majeure events), Article 119 CO (concerning situations where the fulfillment of contractual obligations becomes impossible due to Force Majeure events) or Article 163 CO (concerning the unenforceability of contractual penalties in connection with Force Majeure events).

Having said that, it is important to clarify that the Coronavirus itself does usually not qualify as Force Majeure. In the context of trade agreements, rather the circumstances caused by the Coronavirus may qualify as Force Majeure. By way of example, such circumstances may be:

  • an involuntary temporary closure of manufacturing facilities (e.g., due to the sickness of numerous employees, numerous employees being put in quarantine and thereby prevented from working, a company being forced to temporarily exclude numerous employees from work in order to eliminate a potential risk to the safety and health of other employees, an order by authorities to close down the manufacturing facility etc.);
  • temporary export restrictions (as, e.g., for medical protective equipment, medical devices or pharmaceutical products) or the seizure of goods by authorities; or
  • transport interruptions (as, e.g., in case of closing of borders, a suspension of cargo movements or a breakdown of public transportation).

In principle, Force Majeure events may not only relate to a contracting party itself, but also to third party suppliers on whom a contracting party must rely in order to be able to perform its own obligations. If, e.g., a third party supplier has to supply raw materials or components that are a necessary input for the manufacturing of certain goods by the contracting party, the contracting party may be exonerated from its contractual obligations towards the counterparty on the basis of a Force Majeure events relating to the third party supplier. This threshold is quite high though.

There are cases where it might be possible for the contracting party to replace the third party supplier subject to a Force Majeure event with another supplier who is still able to supply. In such a case, the Force Majeure event relating to the third party supplier who was supposed to supply to the contracting party will normally not exonerate the contracting party, since the contracting party could still perform its obligations by relying on other suppliers not subject to any Force Majeure events. This is normally the case, e.g., if the third party supplier has to supply generic goods such as raw materials (e.g., steel or copper); the less alternative suppliers, the more likely that the contracting party will be exonerated on the basis of Force Majeure, and vice versa.

The availability of alternative suppliers depends on numerous factors as, e.g., contractual product requirements set forth in the contract between the contracting parties (e.g., origin requirements) or regulatory requirements or the existence of intellectual property rights. If, for example, a third party supplier supplies components to the contracting party which are (at least partly) protected by intellectual property rights, alternative suppliers are likely missing. For instance, a wholesaler of goods of a specific brand will not be able to fulfill its supply obligations towards retailers if the manufacturer of the branded goods is prevented from manufacturing due to a Force Majeure event. Therefore, the wholesaler will likely be exonerated from its supply obligations towards retailers.

In case a Force Majeure event does not make it impossible for a contracting party to perform its contractual obligations, but performance becomes “just” (much) more costly, the contracting party will usually not be exonerated because of Force Majeure. Such cases must be assessed under the title “hardship” respectively the clausula rebus sic stantibus.

In the event that a contracting party is temporarily prevented from performing its contractual obligations due to a Force Majeure event, the following principles apply:

  • First, the debtor is discharged from liability (damages) for late performance to the extent the delay is caused by the Force Majeure event. Indeed, the debtor will not be considered to be in default as long as performance of its obligations is impossible due to Force Majeure (Article 103 para. 2 CO).
  • Second, contractual penalties for late performance (including, e.g., a reduction of the purchase price by 1% for each day of delay) will not be enforceable (Article 163 para. 2 CO).
  • Third, the debtor will also not assume any liability for random events, as it is the case for culpable delays (cf. Article 103 para. 1 CO).

If performance of an obligation becomes permanently impossible due to a Force Majeure event, the obligation is deemed extinguished and the debtor is exonerated. The debtor must return any consideration already received from the creditor on the basis of the statutory provisions on unjust enrichment and loses its counterclaim against the creditor to the extent it has not yet been satisfied (Article 119 para. 1 and 2 CO).

Having said that, it is important to keep in mind that parties can deviate from these statutory principles, e.g., by allocating the risks arising out of Force Majeure events to one of the parties. Such allocation may not only take place in the Force Majeure clause itself, but also in other provisions of an agreement (e.g., relating to contingency plans). Moreover, a contracting party will usually not be exonerated on the basis of Force Majeure in case there was a prior culpable delay in the performance of its contractual obligations, unless such party can prove that Force Majeure would have occurred anyway, i.e., even if the contracting party had not been in a culpable delay (Article 103 para. 2 CO).

Can the Coronavirus be considered as Hardship and what are the consequences?

Parties are free to include Hardship clauses in their contracts. Such clauses may describe specific cases of Hardship and their consequences in detail. “Hardship-like” clauses are, e.g., common in supply agreements where parties may provide for an adaptation of prices in case of major changes in price indexes (such as the Swiss consumer price index), exchange rates or prices of raw materials. In contrast, Hardship-like clauses can also explicitly exclude any adaptation of a contract in case certain events occur.

In the absence of contractual Hardship clauses, Hardship must be analyzed under Swiss statutory law. As mentioned above, Hardship respectively the clausula rebus sic stantibus is based on Article 2 of the Swiss Civil Code, i.e., the obligation to act in good faith.

Some provisions specific to certain kinds of contracts contain additional Hardship-like rules. By way of example, Article 373 para. 2 CO, which relates to practically important contracts for works and services, states that where performance of the work was prevented or seriously impeded by extraordinary circumstances that were unforeseeable or excluded according to the conditions assumed by both parties, the court may at its discretion authorize an increase in the price or the termination of the contract. In contrast, the statutory rules applicable to mandate agreements do not contain a similar clause. However, Article 404 CO, which is mandatory law, states that either party may terminate mandates at any time, subject to the compensation of damages (negative interest, i.e., to bring the other party in the position as if the mandate had never been concluded) in case the mandate is terminated at an inopportune moment.

The first requirement for the application of the clausula rebus sic stantibus, a fundamental change of the circumstances, implies that the concept may, in principle, apply to continuing obligations only. One-off transactions are usually not within the scope of application of the clausula rebus sic stantibus. Whether the coronavirus amounts to a fundamental change depends on the specific circumstances. Some companies (e.g., manufacturing companies) may be concerned massively by the coronavirus (up to a complete temporary shutdown of the business), whereas other companies (e.g., certain service providers) may be able to continue performing their obligations, e.g., by “simply” letting employees work from home.

The second requirement, unforeseeability, should not be a major concern. Indeed, it is hard to see how someone could successfully argue that the COVID-19 epidemic should have been foreseeable, unless the relevant agreement has been concluded after the first COVID-19 cases popped up in December 2019 in China.

The third requirement, a severe disturbance of the contractual equilibrium, again depends on the specific circumstances and must be analyzed on a case-by-case basis. For example, a manufacturer who has agreed on fixed supply prices that are valid for a certain period of time and whose manufacturing costs rocket, e.g., due to limited availability of raw materials, might suffer under a severe disturbance, whereas other companies might face limited costs increases only. In any event, the disturbance of the contractual equilibrium does not have to lead to the economic ruin of the party suffering under changed circumstances. The starting point is the contract as concluded; an agreement which was unbalanced already at the time of its conclusion cannot be “remedied” through the application of the clausula rebus sic stantibus. Overall, courts dispose of a considerable discretion when deciding whether a severe disturbance of the contractual equilibrium exists.

In case all requirements of the clausula rebus sic stantibus are met, the consequences for the agreement must be primarily assessed in light of the agreement, in particular if the contract contains Hardship-like clauses. In the absence thereof, the courts have to assess the hypothetical will of the parties, i.e., what reasonable parties would have agreed on in case they had known about the change of the circumstances. In principle, the courts dispose of a considerable discretion, as they have several options to choose from:

  • The court can decide that a contract shall be terminated, usually ex nunc, i.e., with effect as from the termination.
  • The court can prolong or shorten the term of an agreement.
  • The obligations of the parties to the contract may be altered, e.g., by adapting prices, deadlines for the performance of obligations etc.
What is the respective burden of proof on the parties to prove the coronavirus outbreak can be/cannot be deemed as an event of Force Majeure?

In the absence of a Force Majeure or Hardship clause that allocates the burden of proof to one of the parties, the burden of proof lies with the party who wish to exculpate itself, i.e., which is affected by Force Majeure or Hardship.

Article 97 para. 1 CO states that a debtor who fails to perform an obligation shall be liable for damages, unless the debtor can prove that it was not at fault. Hence, the creditor does not have to prove that there was no Force Majeure or Hardship, but only the non-performance of the obligation, the damages caused by such non-performance and the causal link between the non-performance and the damages.

What is recommended in case of notice of Force Majeure in Switzerland?

Companies should screen their agreements and assess whether they are able to perform in accordance with the agreement despite of the Coronavirus. In that regard, special attention should be paid to unsubstitutable third party suppliers, on which contracting parties depend for the performance of their own obligations. Such third party suppliers should be contacted proactively in writing and requested to provide written information as to whether and to what extent they are able to supply despite the COVID-19 epidemic. Commercially important contracts (e.g., agreements with a high turnover or which could give rise to high damage claims) should be prioritized.

If it is foreseeable (or at least likely) that a company will be prevented from fully performing its obligations in a timely manner due to the coronavirus epidemic, the company should do whatever is feasible to mitigate the consequences of the epidemic on the performance of its own obligations (e.g., by trying to find new third party suppliers). Such efforts should be documented in an appropriate manner, since such documentation might be necessary as evidence if disputes should arise later on.

In addition, the company should notify affected counterparties as soon as possible in writing about the circumstances which prevent the company from fully performing in accordance with the contract, including a description of measures taken to mitigate the effects of the epidemic and, if possible, a forecast regarding the length of the delay caused by the epidemic. Further notification requirements might be stipulated in agreements, general terms and conditions etc.; if such requirements exist, they should be fully complied with.

Notifications to counterparties should be updated whenever circumstances change, e.g., as soon as it is foreseeable that information in earlier notifications might be outdated.

Companies should check whether there is any insurance in place, which might cover damages caused by the COVID-19 epidemic (e.g., an epidemics insurance, business interruption insurance etc.). If so, the company should notify the claim as soon as possible to the insurance company in accordance with the rules set forth in the insurance policy and the general terms and conditions of insurance. Uncertainties regarding the insurance coverage may be discussed directly with the insurance company.

If a company receives a notification of Force Majeure or Hardship from the other party, but does not agree with the qualification as Force Majeure or Hardship, such company should inform the counterparty without delay in writing that reliance on Force Majeure or Hardship is unjustified and insist on performance in accordance with the contractual obligations.

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Turkey

How is Force Majeure regulated under Turkish law?

“Force Majeure” means non-performance that is not attributable to the party obliged to perform.  A clear-cut definition of Force Majeure is not made in Turkish Codes.

Turkish Court of Cassation’s General Assembly of Civil Court Chambers defined Force Majeure as follows, “Force Majeure is an extraordinary event that takes place outside of the business and operation of the liable party or debtor, which was impossible to be foreseen and prevented, and leads to an absolute and inevitable violation of a general norm of behaviour or obligation. Natural disasters such as earthquake, flood, fire and epidemic or pandemic are considered as Force Majeure.”

Every case has its own merits and the Force Majeure must be assessed for each case individually.

“Hardship” is a situation in which the circumstances make it excessively difficult for one of the parties to perform its obligations in a contract.  According to Article 138 of the Turkish Code of Obligations (“TCO”), when an unexpected event that is not foreseen and not expected to be foreseen by the parties at the moment of conclusion of the contract arises and causes an excessive difficulty in performing the obligation, the debtor shall be released from its obligation and there will be no breach of contract in case such event does not derive from negligence of the obliged party.

If demanding performance from the obliged party under the changed circumstances would violate the principle of good faith, the obliged party shall be entitled to demand the court to modify / adapt the contract to the new circumstances, or to terminate the contract where such adaptation is not possible.

Is the Coronavirus a Force Majeure event in Turkey?

The wording of the Force Majeure clause in the contract plays an important role to decide if it is possible to invoke Force Majeure.

A Force Majeure clause which would work in COVID-19 pandemic, for instance, would read as follows: “A circumstance which is independent of the will and control of the parties, as a result of which performance of the contract cannot reasonably be required from the parties at a certain time period or permanently be classified as Force Majeure. Such circumstance shall be including but not limited to; unrest, war, civil war, terrorism, natural disaster, epidemic, strikes, extreme weather conditions, fire, lack of raw materials, any government measures that disables the performance, import and export prohibitions”.

Rather than using standard (so-called “boiler plate”) clauses, it is advisable that the Force Majeure clause should be drafted in a way to cover the possible events which may affect the contract at hand and render impossible performance of a certain obligation.

Parties should first review the Force Majeure clauses in their contracts and evaluate whether epidemic or pandemic diseases are within the scope of the clause. Generally, the possible events that may be deemed as Force Majeure are listed in the contracts with an indicative (open) or exhaustive (closed) list.

As a matter of fact, in the sample Force Majeure clause published by the International Chamber of Commerce (ICC) in 2003, it is recommended to add epidemic diseases to the contracts in the list of events indicated as Force Majeure.

The fundamental elements of a Force Majeure event are listed below:

  • The event that triggers Force Majeure must take place out of control of the parties due to an external event,
  • It must be impossible for the parties to foresee this event at the date of execution of the contract, or to predict the effects of the event,
  • it is impossible to perform the obligation affected by the event and
  • the event is indicated in the Force Majeure clause of in the contract.

Accordingly, pursuant to Turkish Law, epidemic or pandemic diseases which could not be foreseen, occurred outside of the control of the parties and caused the impossibility to perform are deemed as a Force Majeure as long as it is stipulated in the contract and relevancy is proven. The party that cannot perform its obligations due to Force Majeure is not be liable for these unperformed obligations.

In the event that epidemic or pandemic diseases are not included in Force Majeure Clause in the contract, a judge will decide whether the unexpected event can be deemed as a Force Majeure or not, in case of dispute. The Judge will ascertain this matter by analysing  the specific circumstances such as the obligations of parties, features and effects of the unexpected event, supply chain of the debtor etc. In the case that COVID-19 is not evaluated as Force Majeure, then Debtor has another option of adaptation of the contract due to Hardship.

How to prove a Force Majeure event in Turkey?

Pursuant to the Turkish Code of Obligations, if the performance of a bilateral contract becomes impossible due to reasons that cannot be ascribed to the debtor, the debtor is released from his obligations and cannot be held liable for compensation. Yet, in a bilateral contract, the debtor must return the consideration received from the creditor pursuant to the provisions on unjust enrichment and loses his right to counterclaim to the extent it has not yet been satisfied.

The creditor is not obliged to prove that non-performance was not resulted from Force Majeure, he has the burden of proof that there is non-performance and the damages suffered as a consequence. On the other hand, the debtor has the burden of proof that his non-performance was the result of a cause that cannot be attributed to him by agreement or law.

It is important to mention that the debtor has an obligation to notify immediately the creditor of the impossibility of performance and to take all necessary precautions to mitigate the resulting damages. If he does not fulfil this obligation, he is liable to pay compensation for damages. In this case the debtor has also the burden of proof that he did immediately notify the creditor regarding the event of Force Majeure.

What is recommended in case of a COVID-19 Force Majeure notice in Turkey?
  • Results of Force Majeure in different legal structures and agreements may differ. In this regard, it is very important to review the agreement carefully to determine if there is a Force Majeure clause and which is the governing law.
  • The affected party must timely inform the other party about the non-performance and must seek possible alternatives to perform the contract.
  • Take all necessary precautions to minimize the possible damages and inform the counterparty.
  • Check which damages are insured, either with the debtor or the creditor.
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United Arab Emirates

How is Force Majeure regulated in the UAE?

Force Majeure is regulated in Article 273 of UAE Federal Law No. 5 of 1985 (known as the UAE Civil Code).

Article 273 reads as follows:

  1. In bilateral contracts, if a Force Majeure arises that makes the performance of the obligation impossible, the corresponding obligation shall, be extinguished and the contract ipso facto rescinded.
  2. If the impossibility is partial, the consideration for the impossible part shall be extinguished. This shall also apply on the provisional impossibility in continuous contracts. In both instances the creditor may rescind the contract provided the debtor has knowledge thereof.

UAE Courts’ jurisprudence requires the events leading to the application of Force Majeure to be unforeseeable, extraneous and must render the obligation impossible to perform rather than more onerous.

Dubai Court of Cassation, 188/2009: It is well established in the precedents of this court in the case of Force Majeure negating liability for compensation for damage for breach of an obligation, it is a prerequisite for being allowed to rely on Force Majeure that it should be the result of an unforeseen event that could not have been averted, namely that the results thereof could not have been guarded against or prevented, in such a way as to make performance of the obligation impossible. The assessment of whether the facts alleged amount to Force Majeure is a matter of fact for the trial court.

Dubai Court of Cassation, 730/2015 It is well established in the precedents of this court that the Force Majeure requires lack of connection between that parties and the accident, and that the accident to be unpredictable and impossible to be averted, and that what should be impossible to anticipate or stop is what the accident causes, such as wars, earthquake, fire, drowning or theft or floods, droughts, storms, and so on. If the Force Majeure is the only reason for the damage, then the causal relationship does not materialize and the responsibility does not materialize.

Pursuant to Article 273 of the UAE Civil Code and UAE jurisprudence, Force Majeure is a mandatory safeguard offered by the UAE legislation. Contractual parties could claim Force Majeure even if not reflected under the underlying contracts. Conversely parties cannot define as Force Majeure anything they wish as an attempt to safeguard delays. Force Majeure has the characteristics  defined by the UAE Courts, currently requiring that the events are unforeseeable, extraneous and that render the obligation impossible.

This differs from common law jurisdictions where the application of Force Majeure will depend on the wording used by the Parties in the contract.

In case the Force Majeure events lead to termination of the contract, the parties will need to be resorted to the pre-contract position or damages will be awarded in furtherance of Article 274 of the UAE Civil Code:

“When a contract is or shall be rescinded, the two contracting parties shall be reinstated to their former position, prior to contracting, and in case this is impossible, the Court may award damages.”

However, when an obligation is not impossible but rather burdensome in such a manner as to threatening him with heavy loss, Article 273 of the UAE Civil Code will not apply and parties will need to seek recourse to Article 249 of the UAE Civil Code, which reads as follows:

If public exceptional unpredictable circumstances shall arise, and their happening has resulted in making the execution of the contracted obligation, if not impossible, has become burdensome to the debtor in such a manner as to threatening him with heavy loss, the judge may, according to circumstances and by comparing the interests of both parties, reduce the burdensome obligation to reasonable limits, if justice so requires. Any agreement to the contrary is void

Will Covid-19 qualify as Force Majeure? Or Hardship?

There’s uncertainty as to whether the Covid-19 will be treated under Article 273 or Article 249 of the UAE Civil Code.

The key aspect will be whether the outspread of Coronavirus could be (a) foreseen at the time of signing the underlying contract or (b) merely uneconomic rather than impossible.

In the event of (b), Article 249 would allow for a reasonable adjustment in the parties’ obligations.

Although we may all expect the impact and spread of Coronavirus to have been unforeseeable, Courts may view the World Health Organization’s declaration that the outbreak constituted a public health emergency of international concern of 30 January 2020 as a heads up that would render the subsequent world developments foreseeable.

Contracts entered into before this date will need to look into whether the execution of the obligations is impossible or merely more burdensome.

What is the best course of action in the face of obstacles out of Covid-19?
  1. Undertake a revision of the underlying contract particularly Force Majeure clauses, governing law and jurisdiction;
  2. Even if Article 273 and 249 do not require the submission of notices raising the application of Force Majeure contentions we would recommend that a notice is sent in order to comply with good faith requirements under Article 246 of the UAE Civil Code.
  3. Negotiate, negotiate, negotiate. Any mid-term solution may be better than a positive judgment or award that may come too late.
  4. Evidently negotiations should be documented in writing to ensure transparency and back up in the event of future breaches of the agreements reached.
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United Kingdom

How is Force Majeure incorporated into contracts in England and Wales?

First and foremost, Force Majeure has no recognised meaning in English law. Its inclusion into English contracts is to excuse one or both parties from the performance of the contract in some way following the occurrence of certain events which are usually beyond either of the parties’ control. However, to be effective, those events need to be properly defined in order to add certainty to the agreement. It is not sufficient to simply say that a party will be excused from complying with its obligations if a Force Majeure event takes place. For example, in British Electrical and Associated Industries (Cardiff) Ltd v Patley Pressings Ltd [1953] 1 WLR 280 a clause stating that the “usual Force Majeure clauses shall apply’ was considered void and was therefore unenforceable.

Given the importance that such clauses can have on a contract, the drafting of a list of events that might be considered Force Majeure can be both cumbersome and lengthy. What might be considered outside of the parties’ control to one party might not be considered as such by the other party.

That is why it is important to have express inclusion or exclusion of certain events when a contract is being drafted. The party most likely to seek to rely on a Force Majeure clause (generally the supplier of goods or services) will want to ensure that any eventuality is covered so that they do not end up bound by the terms of a contract that they may find difficult complying with if compliance is even possible.

Whereas, the party least likely to enforce the clause will want to omit as many events as possible so that it can either enforce the terms of a contract if a specific event is not covered or alternatively sue for any loss suffered if the contract cannot be performed.

Where a party seeks to rely on a Force Majeure clause, the burden of proof falls on them to prove that the event falls within any defined clause in the contract and that specific event is the reason for non-compliance. It is not sufficient to rely on a defined event for failure to comply when the reason that the contract has not been honoured is for completely unrelated reasons.

Even further, the Force Majeure event must be the sole reason why the contract has not been honoured. This proposition was established in Intertradex v Lesieur [1978] 2 Lloyd’s Reports 509 and was upheld in Seadrill Ghana v Tullow Ghana  where Teare J found that the defendant’s failure to provide drilling instructions to the claimant, a contractual obligation, was caused by two matters; one a Force Majeure event, the other not. As the Force Majeure event was not the sole reason for failing to comply with the terms of the contract then the contract remained binding and enforceable.

Further, it is not sufficient to simply rely on a Force Majeure event as reason for not complying with your contractual obligations if it cannot be shown that the party seeking to rely on the clause has used reasonable endeavours to prevent, or at least mitigate the effects of the Force Majeure. This means, for example, a party should consider whether there are any other ways that the contract can be complied with even if it falls outside of the scope of what is contractually obligated to do.

Once a Force Majeure clause has been relied upon by one party and it is accepted that they are contractually entitled to rely upon that clause, what does it mean for the performance of the contract?  For the most part, clauses are suspensory so that the obligations do not fall away, they are simply put on hold until such time as the contract can be performed.

If compliance of the contract makes no commercial sense after the Force Majeure event has passed then either party may serve notice terminating the agreement after a specified period of time if the contract allows for such a notice to be served. Once a Force Majeure clause has come into effect and the contract has either been suspended or terminated, the non-performing party will not be liable for any non-performance or delay unless they were already in breach at the time of the Force Majeure event.

Does the Coronavirus fall within an event of Force Majeure?

As in all cases, the party seeking to rely on the Coronavirus as being a Force Majeure event will have the burden of proof of asserting that it falls within any Force Majeure clause that exists in the contract. A party seeking to rely on Force Majeure will want to check whether the contract specifically lists ‘pandemics’ or ‘epidemics’ as Force Majeure events. If the contracts contain such wording then the Coronavirus will almost definitely be considered a Force Majeure event. It must be remembered that even if the Coronavirus is considered a Force Majeure event, the clause can only be relied upon if performance of the contract is rendered impossible as a specific result of the Coronavirus and not for any other reason.

If pandemics are not covered by the contract then it might be arguable that the Coronavirus is covered under an ‘Act of God’ which was defined by Lord Hobhouse in Transco PLC v Stockport Metropolitan Borough Council [2003] UKHL 61 as an act which (i) involves no human agency; (ii) is not realistically possible to guard against; (iii) is due exclusively and directly to natural causes; and (iv) could not have been prevented against with any amount of foresight, plans and care. It seems almost certain that Coronavirus will fall within each of these definitions although it has not yet been tested in Court.

Finally, it might be possible that Coronavirus falls within a clause relating to Government action. Given the Government’s decision to close all non-essential shops and to limit the reasons for people to leave their homes for four very specific reasons it may be that contracts cannot be performed as a result.

Can the doctrine of Frustration apply to Coronavirus?

In the absence of an express clause which would allow a party to rely on the Coronavirus as a Force Majeure event, the doctrine of frustration may still apply. Frustration applies when something occurs after the formation of the contract which renders it physically or commercially impossible to fulfil the contract, or transforms the obligation to perform into a radically different obligation from that undertaken at the moment of entry into the contract.

If a contract becomes frustrated then the obligations under the terms of the contract become discharged. It is a very high bar to claim that a contract has become frustrated as it is at direct odds with the idea of contractual certainty. The Court will always seek to enforce the terms of a contract if at all possible, which is why a party should seek to rely on a Force Majeure event if at all possible before relying on the doctrine of frustration.

What is the best course of action recommended in case either party issues a notice of Force Majeure?

For the party issuing a notice of Force Majeure it is imperative that they are certain that they are entitled to rely on the Force Majeure clause in the contract. If the contract does not specifically refer to the event that they seek to rely on, then they could be sued for specific performance or for losses relating to their non-compliance.

Even if a party is entitled to rely on the Force Majeure event it would not be sufficient to either suspend or terminate their contractual obligations if they are able to comply with their obligations through other means that may not have been considered at the time of entering the contract. Further, if there are any other reasons why their obligations cannot be complied with then they are unlikely to be able to rely on the Force Majeure event.

Any notice should also be issued as soon as it becomes clear that the contract cannot be completed and without delay to avoid any argument that the non-compliance was for any reason other than the Force Majeure event.

For a party that is served with a notice of Force Majeure they should consider whether the event relied upon is covered by the wording of the contract and whether there is any other means by which the contract can be performed or any other reasons as to why the contract cannot be performed. If the answer to either question is yes, then they are likely to be able to enforce the terms of the contract despite the Force Majeure event.

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USA

How are Force Majeure and Hardship defined in USA laws?

In many civil law jurisdictions, Force Majeure is an implied term defined in local law and read into the contractual relationship.  In the United States (and in common law jurisdictions generally), a Force Majeure clause must be an express clause in the contract.

In most states (including New York and Delaware), a court typically will find a Force Majeure to exist if the clause specifically references the event that transpired.  Force Majeure clauses can vary greatly in their drafting.  They typically refer to events such as war, family, floods, earthquakes, strikes, fire, terrorist attacks, “acts of God”, and government action.  Some clauses refer to epidemics, illness, disease and similar; many do not.  And some clauses include catch-all language, defining a Force Majeure event also to include events like those listed in the clause and which are outside the parties’ control.

Hardship is not generally recognized under US law.  Rather, most states in the U.S. recognize common law doctrines of impossibility (or impracticability) and frustration of purposeImpossibility typically requires the party invoking the defense prove the following elements: (1) an unexpected intervening event occurred; (2) the parties’ agreement assumed the event would not occur; and (3) the event made contractual performance impossible or impracticable.  Nonperformance will not be excused if the risk was foreseeable when the contract was entered into or if nonoccurrence of the event was not a basic assumption on which the contract was made.

Frustration of purpose focuses on whether the event at issue has obviated the purpose of the contract.  The doctrine requires many of the same elements as impossibility or impracticability but does not require a supervening event that impedes performance.  The inquiry is more based on whether the party invoking the defense can show that performance of the contract in light of the unforeseen event would no longer fulfill any aspect of its original purpose.

What are the criteria to consider when evaluating the CV as a Force Majeure or as a Frustration or Hardship?

Regarding Force Majeure, a first question to consider, as stated above, is whether a court under applicable state law would narrowly interpret the Force Majeure clause, and if so, whether the Force Majeure clause in question has language specific to the intervening event.

A second question to consider is the effect of the existence of a Force Majeure event.  Some Force Majeure clauses require that the event render performance impossible or illegal.  Others use a lower standard, satisfied by the event rendering performance impractical or commercially unreasonable.  This analysis is very dependent on the facts and circumstances.  One key inquiry is whether performance has been rendered truly impossible (such as due to government restriction on travel, quarantine or shutdown of commerce) or just impractical or excessively expensive.  As a general principle relevant to this inquiry, a party to a contract assumes the risk of its own subjective incapacity to perform.  Of course, consideration of the foregoing and alternative methods of performance is central to invocation of the impossibility or impracticability doctrines as well.

A third question to consider is whether the Force Majeure clause contains a notice requirement to invoke the clause.  These requirements may be based on a specified number of days from the trigger event, or a temporal standard (e.g., “as soon as practicable” or “promptly”) set out in the contract.  Parties will need to consider how these notice periods are to be measured.

And as a general principle, whether the event in question was expected or was a foreseeable risk at the time of contract execution is a central question to any of these potential defenses to non-performance.

How to prove that the Coronavirus can be considered as an event of Force Majeure?

The non-performing party will have the burden of proof in asserting any of the above defenses.  As Force Majeure is defined by contract and not by local law, the elements that the non-performing party will need to prove will directly be determined by the language of the contract.  Most likely, the non-performing party will need to make a showing in respect of the above concepts – occurrence of an event covered by relevant text in the clause, the standard of non-performance (impossibility, impracticality, or otherwise) has been met, mitigation efforts made, lack of foreseeability of the event.  The non-performing party will similarly have the burden of proof in asserting the doctrines of impossibility and frustration of purpose, and will need to prove the elements listed above.  As to frustration, the doctrine requires rather total frustration of purpose.

What is the best course of actions recommended in case either party issues a notice of Force Majeure?

Companies intending not to perform contractual obligations owing to the Coronavirus outbreak should consider:

  • carefully reviewing with counsel applicable state law and the text of the Force Majeure clause, as well as the availability of other common law doctrines;
  • evaluating alternative methods of performance to mitigate damages;
  • creating a record to support a potential Force Majeure claim (nature of impact and mitigation efforts);
  • considering contingency plan and timely notice and other communications with counterparty; and
  • review whether business interruption insurance coverage may apply.

Companies expecting performance from suppliers concerned about non-performance owing to the Coronavirus outbreak  should also consider steps 1, 2 (in seeking alternative supply), 4 (in communicating with supplier to assess situation) and 5 above.

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Vietnam

How is Force Majeure regulated in Vietnam?

Vietnam is considered a Civil Law jurisdiction, where the local Civil Code draws its origins from the Code Napoléon.

Under Vietnamese laws and the practice of Force Majeure clauses in contracts governed by Vietnamese law, Force Majeure is defined as “An event which occurs in an objective manner which is not able to be foreseen and which is not able to be remedied by all possible necessary and capable measures being taken” (Vietnamese Civil Code, Article 156.1).

In other words, a Force Majeure event could only be invoked if it meets all the following conditions:

  • impossibility to foresee the event;
  • possibility for the party/parties affected to remedy the consequences of the Force Majeure event, after all necessary measures make been taken to prevent and curb it;

These conditions are still quite vague and tricky, in practical terms.

For instance, if it is true that the company cannot either produce or provide services, they must explain why it is not possible to overcome the situation, such as hiring third parties to ensure the fulfilment of its obligations.

And yet, there is another question, regarding expenses. If one party is affected by Force Majeure but has overcame the situation by paying expenses for hiring more labour or substituting material supplies, is it possible to request the other party to share these expenses?

The consequence of a Force Majeure event is the discharge of obligations from both parties and the legislator intends to make each party bear its own losses. In some advanced legal systems, one can apply the doctrine of good faith and fair dealing or unjust enrichment to help recover a part of the cost. However, unfortunately the Vietnamese legal system, considering it has only relatively recently embraced a market economy system (still “Socialist-oriented” as per constitutional definition), is not as detailed as Western ones when it comes to this particular institution, thus meaning that it all boils down to contractual clauses and intent of parties.

Vietnamese courts an doctrine tend to apply a wide interpretation of what an event of Force Majeure is, as long as it meets all the above requirements, hence Covid-19 can be identified as a Force Majeure event, if it is proven to be objective and unforeseeable and impossible to remedy after all necessary measures have been taken.

If all the above requirements are met and an event is determined as one of Force Majeure under Vietnamese laws, the consequences of invoking a Force Majeure clause will depend on the terms of the contract, which normally are suspension of contractual obligations, termination, extension of deadlines, renegotiation of the contractual clauses.

If the contract does not include a Force Majeure clause, according to the Commercial Law 2005, consequences of a Force Majeure event will be as follows:

  • “the party suffering the force majeure event shall be exempted from liabilities and obligations owed to the other party” (Article 294.1.b), and
  • “the parties may agree to extend the time limit for performing their respective contractual obligations. If they do not or cannot agree, that time limit shall be extended for the duration of the Force Majeure event plus a reasonable time not exceeding five months for a contract with a performance period of less than twelve months from the date of execution, or eight months if the performance period is more than twelve months. After those time limits, parties are free to refuse performing the contract without any consequence” (Article 296).

This is in line with the commercial law principle of trying to make commercial transactions survive, rather than render them void and null.

How to prove that the Coronavirus can be considered an event of Force Majeure?

There is no single way to determine whether Covid-19 per se constitutes a circumstance of Force Majeure.

Various elements must be taken into account, preferably through the aid of a legal expert, such as:

  • governing law (Vietnamese?), especially in light of the so-called “foreign element” (e.g. one party not being Vietnamese), which allows for contracts where no governing law is explicitly indicated by the parties to be governed by a law which may be in this instance more precise (such as Singapore’s);
  • the foreseeability of the event of Force Majeure (e.g. could the parties make contingency plans before or after the outbreak?);
  • the presence of a properly drafted clause or at least of a specific agreement or intention between the parties, addressing ideally all possible scenarios;
  • exceptional measures introduced by the government (e.g. mandatory quarantine affecting people vested with the powers to execute certain contractual obligations) and their relevance (e.g. working from home per se does not prevent the fulfilment of certain obligations), including on third factors which influence the performance of obligations (e.g. if suppliers are themselves affected and, in such case, if alternative suppliers could be used).
What is the best course of action is recommended in case either party issues a notice of Force Majeure?

Since there is no general automation that makes Force Majeure trigger simply by the happening of Covid-19, either party should, ideally, follow this course of action:

  1. Consider all the relevant facts;
  2. Determine whether the case is governed by Vietnamese laws;
  3. Evaluate if the emergency procedures, such as mandatory quarantine, work from home, shutdowns etc. apply to the case and to what degree;
  4. Examine the exact wording of the Force Majeure clause, if present, in the relevant contract(s); this may be a risky exercise, as some clauses could contain wording that are somehow detrimental to the party wishing to invoke Force Majeure. Furthermore, the clause may or may not include certain formalities or consequences required (or not) by the law, such as notices, extension of deadlines, obligation to notify authorities, etc.;
  5. If no proper clause is present, examine the interpretation of the Civil Code and of the Commercial Law, in particular Article 420 of the Civil Code, to renegotiate or terminate the contract;
  6. Evaluate the consequences of a legal action in Vietnam or the enforceability of a foreign decision in Vietnam.
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