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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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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