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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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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