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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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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