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.

Check out the FAQ of the country of your interest below and get in touch with our Coronavirus Helpdesk and to set up a free call if you need assistance.

Tell us how we can help

Japan

How is Force Majeure defined in the laws of Japan?

Force Majeure and its elements are not expressly defined in Japanese law. Therefore, if an agreement contains a provision regarding Force Majeure, the relationship and the rights of the parties on that issue will depend on the specific language of the provision. However, if an agreement does not contain a Force Majeure provision, the issue will be governed by the Civil Code.

Under the Civil Code, a party may be liable for non-performance of its obligations, such as delay in performance, incomplete performance, or impossibility of performance, if the party acted willfully or negligently. The applicability of Force Majeure is narrower than the absence of negligence (i.e., no fault), so if a Force Majeure event occurs, a non-performing party would not be liable for a contractual default because there would be no fault. Force Majeure is generally understood to be a basis for an exemption from legal liability, as reflected in judicial court precedents.

Academic theories differ as to the elements of Force Majeure, but a common thread is whether the Force Majeure incident is caused by external factors that cannot be avoided even by taking reasonable preventative measures. Force Majeure has also been defined by reference to the following elements in international rules, such as the United Nations Convention on Contracts for the International Sale of Goods (CISG):

  • There is an obstacle that is not within the control of the obligor;
  • The obstacle could not have been taken into account when the contract was executed; and
  • The obstacle is difficult to avoid or overcome.
How is Hardship defined in the laws of Japan?

While not specifically defined in Japanese law, the concept of hardship is understood to mean the situation in which the performance by a party to an agreement has become extremely burdensome or complicated due to the occurrence of unforeseen events.

The Civil Code, however, contains a legal principle that applies to a change of circumstances based on the occurrence of unexpected events after the execution of an agreement (the Changed Circumstances Principle). Under this Changed Circumstances Principle, a party is permitted to cancel or change the terms of an agreement upon the occurrence of a change in circumstances that the parties could not have foreseen at the time of execution of the agreement and that is not attributable to any party, if requiring performance in accordance with the terms of the agreement would be contrary to the principles of good faith. However, very few judicial precedents have permitted cancellation or change to the terms of an agreement based on the Changed Circumstances Principle.

In practice, and depending on the specific changed circumstances, if an agreement contains clauses relating to amendment of the agreement or requiring parties to operate in good faith, then those clauses would control the parties’ relationship, and the parties must conduct good faith discussions to try to reach a reasonable resolution relating to changed circumstances.

Can the COVID-19 emergency be considered to be a Force Majeure event?

Whether a party’s default caused by COVID-19 constitutes a Force Majeure event will depend on a case-by-case analysis. In some cases, the impact of COVID-19 may result in a party’s failure to perform an obligation, in which case the default may qualify as a Force Majeure event, and the non-performing party may not be liable for the default. If a party seeks to invoke a Force Majeure clause to avoid liability for a default, a key issue will be whether the default was caused by the Force Majeure.

What is the recommended course of action for invoking a Force Majeure clause?

In Japan, a party seeking to avoid liability for default based on the occurrence of a Force Majeure event will commonly argue the absence of the party’s willful or negligent conduct, rather than claim that the event actually constitutes a Force Majeure. Thus, pursuant to Paragraph 1, Article 415 of the Civil Code, the party claiming the existence of a Force Majeure event must prove that the party’s default was caused by events that were not attributable to that party. Given the difficulty of proving the negative fact that a default was caused by events not attributable to the party, in practice, a party will attempt to prove that a default was caused by outside events other than that party. Thus, a party invoking a Force Majeure clause based on COVID-19 must prove that it could not have performed its contractual obligations due to the effects of COVID-19. A key legal point will be whether there is a causal relationship between COVID-19 and the party’s default.

However, if a party seeks to cancel an agreement based on the other party’s non-performance of its obligation, the Civil Code of Japan does not require proof of a party’s willful or negligent conduct. Therefore, if a default is attributable to a Force Majeure event, an agreement may be cancelled regardless of whether the party’s liability based on the default is established.

Do you have another question on Covid-19 in Japan?

Tell us your need, one of our experts will be in touch shortly.