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

Malta

How is force majeure defined and regulated in Malta?

Malta is generally defined as a Civil Law jurisdiction with significant contaminations deriving from Common Law, by virtue of its being a former British colony and still today a member of the British Commonwealth.

Perhaps the most significant example of such hybridisation is the institution of the Maltese trust, the eponymous creation of Equity, eventually inserted as an fiduciary obligation under the Maltese Civil Code (Chapter 16 of the laws of Malta), as well as its more relevant regulations under the Trusts and Trustees Act (Chapter 331).

The Maltese Civil Code is the main source of law for contracts, provides under article 1134 that “The debtor shall not be liable for damages if he  was prevented from giving or doing the thing he undertook to give or to do, or if he did the thing he was forbidden to do, in consequence of an irresistible force or a fortuitous event”.

The mentioned article, however, fails to provide statutory definitions of “irresistible force” and “fortuitous event, thus resulting in the party wishing to rely on the plea of force majeure to prove such circumstances and thus to base its plea on case law. Bases on notable cases Mizzi noe. vs. Attard noe. case (Court of Appeal 08/02/1969) and George Farrugia et. vs. Pacifika Masini noe. case (First Hall, Civil Court, 07/01/2008), scholars come to the conclusions that:

  • the impossibility of non-performance has to be absolute

and

  • the event must be unpredictable;
  • the event must be external/comes from a third person; and
  • the debtor cannot have any fault in what happens, in the sense that the event could not have been prevented and was absolutely beyond the debtor’s

In the absence of legal precedents, the definition of force majeure falls back to the will of the parties and boils down eventually to how accurately and clearly the relevant contractual provision has been drafted.

How to prove that the Coronavirus can be considered an event of Force Majeure?

There is no single way to determine whether Covid-19 per se constitutes a circumstance of Force Majeure.

Various elements must be taken into account, preferably through the aid of a legal expert, such as:

  • governing law (Maltese?);
  • the foreseeability of the event of Force Majeure (e.g. where the parties working domestically only? could they make contingency plans before or after the outbreak in Malta? are their businesses present in other (high risk) areas? where they fulfiilling their duty of being informed? etc.);
  • the presence of a properly drafted clause;
  • the exact wording of such clause (e.g. “epidemic” is different than “pandemic” – at the time of writing, Malta, paradoxically, is being spared the epidemic, but is indeed coping with the effects of the pandemic);
  • if no proper clause is present, examine analogous court cases and, even if no relevant precedent is found, apply the mentioned principles drawn by scholars, particularly the absoluteness of impossibility of non-performance;
  • the industry in which the parties operate (e.g. tour operators will, at a first glance, have a better chance at invoking Force Majeure);
  • exceptional measures introduced by the government (e.g. mandatory quarantine affecting people vested with the powers to execute certain contractual obligations) and their relevance (e.g. working from home per se does not prevent the fulfilment of certain obligations), including on third factors which influence the performance of obligations (e.g. if suppliers are themselves affected and, in such case, if alternative suppliers could be used).
What is the best course of action is recommended in case either party issues a notice of Force Majeure?

Since there is no general automation that makes Force Majeure trigger simply by the happening of Covid-19, either party should, ideally, follow this course of action:

  1. Consider all the relevant facts;
  2. Determine whether the case is governed by Maltese laws;
  3. Evaluate if the emergency procedures, such as mandatory quarantine, work from home, shutdowns etc. apply to the case and to what degree;
  4. Examine the exact wording of the Force Majeure clause, if present, in the relevant contract(s);
  5. If no proper clause is present, examine relevant judicial precedent and the interpretation of article 1134 of the Civil Code;
  6. Evaluate the consequences of a legal action, such as clawback provisions, should the other party face bankruptcy proceedings.
Do you have another question on Covid-19 in Malta?

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