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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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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