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.

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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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