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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Netherlands

How are Force Majeure and Hardship defined in the Dutch Civil Code (DCC)?

 “Force Majeure” essentially means nonattributable nonperformance. Parties are virtually free to contractually limit or expand legal effects and can agree on the circumstances that will be deemed Force Majeure. Failing a specific arrangement, by default, a breach of agreement may as per Dutch law not be attributed to the debtor if: (1) reasonably not the debtor’s fault, (2) not attributable by either law, legal act or generally accepted principles (common opinion).

“Hardship” is most similar to the Dutch tenet of “unforeseen circumstances”. The term refers to circumstances not considered at the time of conclusion of an agreement, having such an impact that it’s unacceptable to require a party to perform it on agreed terms (please also see below for Dutch law key elements of “reasonableness and fairness” as they may also affect the interpretation of agreements).

While the Netherlands is a Contracting State Vienna Convention on Contracts for the International Sale of Goods (CISG), the treaty may be (and often is) excluded in trade agreements.  The CISG’s provision on force majeure and hardship is very similar to the DCC’s provisions hereon. The practical importance of the distinction between Dutch law and the CISG on this subject is therefore negligible.

Can the Coronavirus be considered as a Force Majeure in the Netherlads?

Whether or not a Force Majeure can be invoked primarily depends on the wording of the Force Majeure clause or, by default, the law. Parties can extend liability up to an abstract guarantee of performance or its limit is as long as it does not exclude performing the key obligations in advance.

We illustrate it with two examples of contractual force majeure clauses often seen in Dutch Agreements:

Example 1: Force Majeure shall mean: prevention of fulfillment of the Agreement as a result of fire, explosion, embargo, uprising, riot, war (whether or not declared), natural disasters (excluding disease) and flood, all other occurrences shall not constitute a force majeure.

Example 2: Force Majeure shall mean: any circumstance which is independent of the will of the parties, as a result of which performance of the contract cannot reasonably be required of Party A, whether temporarily or permanently and shall in any event include: (civil) war and the threat of (civil) war, natural disasters, an epidemic, strikes, excessive absenteeism of Party A’s employees, transport problems, fire, lack of raw materials, government measures by any government whether in the Netherlands or elsewhere, in any event including import and export prohibitions, quota schemes, and breakdowns at Party A or at suppliers of Party A, as well as nonperformance or force majeure on the part of suppliers as a result of which Party A is not or no longer able to meet its obligations to the Customer.

The Corona Virus would probably not be regarded as force majeure in example 1. Whilst example 2 explicitly mentions an epidemic so it’s safe to say – given substantial impact – it’s an example of force majeure. If the parties have not included a force majeure clause, the default article 6:75 of the DCC will apply.

What does it actually mean that a debtor cannot be blamed if he could not have reasonably foreseen and prevented the event that led to nonperformance and hereby avoided its consequences?

We illustrate it with the important generally accepted principles in Dutch law likely to be relevant in relation to the Coronavirus outbreak:

The cause of the hindrance was foreseeable at the time the contract was entered into

If at the time the obligation was entered, the impediment was such that a normal, prudent debtor with the same knowledge and experience as contracting party would have taken this into account, Force Majeure cannot be invoked.

Insolvency

Insolvency does not justify invoking Force Majeure, even if entirely beyond the control of the debtor and even if this would have been unforeseeable at the time.

Illness

Unless the debtor is the only one that is able to perform (e.g. a vocal artist), illness does not have to – generally – constitute Force Majeure as it only hinders one of the possible ways of performance.  In general, the debtor of a – personal – service does not guarantee that the service will also be performed in the event of illness on his part. The creditor who stipulates such a performance must in turn consider the possibility of personal impediments which may affect everyone equally.

It will be different in case of an epidemic and the shortfall of labor forces a party to choose which creditor to serve first. Here it will also be key in which industry a case plays out.  It’s for example highly likely that e.g. a B2B food supplier has to very carefully consider which customers to serve when. Typically, large retailers have very strict rules, that are penalized when not kept, on timely supply and detailed arrangements on rolling forecasts (more often than not unilaterally binding on for the supplier) and mandatory contingency plans. In such case it’s urgent to check whether or not the contingency plan is effectively in place, because the supplier will in that case probably not be able to immediately fall back on the Force Majeure clause in the agreement, or even not on the default regulation of Dutch law, as parties have considered a sudden supply shock (for whatever reason) that should have been covered.

Risk to life, health, freedom, etc.

In accordance with the same principles, the question whether Force Majeure is invoked is to be answered if the debtor, in fulfilling the obligation, would expose himself or his family to danger to life, health, honor, freedom or subsistence. Provided, again, that the conditions discussed (nonperformance, nonattributable, unforeseeable) are met, a claim to Force Majeure will generally be possible. For example, a seller may invoke Force Majeure vis-à-vis his buyer if, by concluding the sale, he would run the risk of being placed on a ‘black list’, which would actually put him out of business. Provided that the debtor’s fear in this example was objectively well-founded. In case of an epidemic with sudden lockdowns, one of the risks is also a limitation in the freedom of movement. Given what is possible in most jurisdictions when a state of emergency is declared, invoking Force Majeure because it is likely that a party will not be able to enter or leave an area, is very plausible and should be considered with urgence. Of course, this is typically also closely linked to the legal obligations and general duty of care an employer has towards his employees. In many cases the, employment, health and safety laws that have a mandatory character will have an overriding influence. In theory a sole entrepreneur could e.g. still be lawfully allowed to perform an obligation under an agreement. If however the same entrepreneur acts via his employees, the assessment will likely have a different outcome.

The debtor’s inexperience

The debtor will be held liable for mistakes which are the result of a lack of experience, even if he cannot be blamed for the fact that he carried out the conduct in which the error was contained, and even if the error was unforeseeable for him. The newly graduated doctor will be liable for the consequences of a malpractice that an experienced colleague would not have made.

Unforeseen circumstances – Hardship under Dutch law

The term ‘unforeseen’ does not refer to what parties had foreseen or not, but only to whether the possible occurrence of circumstances have been considered (explicit or implicit) in the agreement. For example: parties may agree that an export restriction for strategic purposes of surgical masks is the risk of one of the parties. Even though the occurrence is an unfortunate surprise it would not be considered Hardship.

What risks parties have accepted, must be determined by interpretation of the agreement. The law states that the court may modify the effects of a contract (even set it aside), in whole or in part when according to standards of “reasonableness and fairness” a party cannot be expected to perform the agreement in unmodified form.

The reason for such action could be that performance has become extremely difficult or an event completely disrupts the balance of a reciprocal agreement. The event may even render the agreement meaningless or its purpose unattainable. Finally, an event could make a claim for actual performance of an obligation under an agreement unacceptable (again reasonableness and fairness come into play as well, also it’s an objective review and not merely that the debtor is of the opinion it’s unacceptable) and the creditor should e.g. have to settle for damages.

Any dispute about silence on Hardship in the agreement will result in a review based on content and goal of the agreement, how, when and by whom it was entered into as well as the principles and reasonableness and fairness. The court has discretionary power (it may modify the effects of a contract or may set it aside, in whole or in part) but the hurdle to do so in practice is high, in particular when professional parties are involved.

Reasonableness and fairness in the first place require loyalty to the written word of an agreement and allow deviation from it by the court only in exceptional cases. Finally, please note not only circumstances of a special nature affecting only the parties are considered, but also to unforeseen circumstances of a general nature. Dutch courts have decided that e.g. natural disasters, armed conflicts, are to be considered unforeseen circumstances. It is entirely likely that based on developments of the Coronavirus outbreak, it will qualify as unforeseen circumstances as well in specific cases.

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

It is key to sort out whether the relevant contract contains provisions on Force Majeure or Hardship, since the DCC does not expressly prescribe what constitutes either of the two and because parties may limit or expand certain legal effects contractually. The creditor does not have to prove that there was no Force Majeure, he only has to claim non-performance and prove damage. It is up to the debtor to prove that his non-performance was the result of a cause that cannot be attributed to him by agreement, law, or generally accepted principles (common opinion).

What is the best course of action in case of notice of Force Majeure in the Netherlands?
  • Inform in good time about delays, are there replacement products or can other logistic modalities or routes be used?
  • If you are the debtor check where effective Force Majeure arrangements are in place and consider this when utilizing scarce resources or deciding who to supply.
  • Consider alternatives and take the necessary measures to limit damages.
  • When entering into new agreements, check whether occurrences such as the Coronavirus are adequately covered in the agreement from your perspective.
  • Check whether the damage is insured, either with the debtor or the creditor.
  • Check your key agreements and critical customers or suppliers pro-actively and plan accordingly.
  • At all times consider the role and position of employees when deciding on a course of action, not just from the practical perspective of their needs but also from the perspective that their protected position will affect assessments regarding Force Majeure or Hardship
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