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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Vietnam

How is Force Majeure regulated in Vietnam?

Vietnam is considered a Civil Law jurisdiction, where the local Civil Code draws its origins from the Code Napoléon.

Under Vietnamese laws and the practice of Force Majeure clauses in contracts governed by Vietnamese law, Force Majeure is defined as “An event which occurs in an objective manner which is not able to be foreseen and which is not able to be remedied by all possible necessary and capable measures being taken” (Vietnamese Civil Code, Article 156.1).

In other words, a Force Majeure event could only be invoked if it meets all the following conditions:

  • impossibility to foresee the event;
  • possibility for the party/parties affected to remedy the consequences of the Force Majeure event, after all necessary measures make been taken to prevent and curb it;

These conditions are still quite vague and tricky, in practical terms.

For instance, if it is true that the company cannot either produce or provide services, they must explain why it is not possible to overcome the situation, such as hiring third parties to ensure the fulfilment of its obligations.

And yet, there is another question, regarding expenses. If one party is affected by Force Majeure but has overcame the situation by paying expenses for hiring more labour or substituting material supplies, is it possible to request the other party to share these expenses?

The consequence of a Force Majeure event is the discharge of obligations from both parties and the legislator intends to make each party bear its own losses. In some advanced legal systems, one can apply the doctrine of good faith and fair dealing or unjust enrichment to help recover a part of the cost. However, unfortunately the Vietnamese legal system, considering it has only relatively recently embraced a market economy system (still “Socialist-oriented” as per constitutional definition), is not as detailed as Western ones when it comes to this particular institution, thus meaning that it all boils down to contractual clauses and intent of parties.

Vietnamese courts an doctrine tend to apply a wide interpretation of what an event of Force Majeure is, as long as it meets all the above requirements, hence Covid-19 can be identified as a Force Majeure event, if it is proven to be objective and unforeseeable and impossible to remedy after all necessary measures have been taken.

If all the above requirements are met and an event is determined as one of Force Majeure under Vietnamese laws, the consequences of invoking a Force Majeure clause will depend on the terms of the contract, which normally are suspension of contractual obligations, termination, extension of deadlines, renegotiation of the contractual clauses.

If the contract does not include a Force Majeure clause, according to the Commercial Law 2005, consequences of a Force Majeure event will be as follows:

  • “the party suffering the force majeure event shall be exempted from liabilities and obligations owed to the other party” (Article 294.1.b), and
  • “the parties may agree to extend the time limit for performing their respective contractual obligations. If they do not or cannot agree, that time limit shall be extended for the duration of the Force Majeure event plus a reasonable time not exceeding five months for a contract with a performance period of less than twelve months from the date of execution, or eight months if the performance period is more than twelve months. After those time limits, parties are free to refuse performing the contract without any consequence” (Article 296).

This is in line with the commercial law principle of trying to make commercial transactions survive, rather than render them void and null.

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 (Vietnamese?), especially in light of the so-called “foreign element” (e.g. one party not being Vietnamese), which allows for contracts where no governing law is explicitly indicated by the parties to be governed by a law which may be in this instance more precise (such as Singapore’s);
  • the foreseeability of the event of Force Majeure (e.g. could the parties make contingency plans before or after the outbreak?);
  • the presence of a properly drafted clause or at least of a specific agreement or intention between the parties, addressing ideally all possible scenarios;
  • 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 Vietnamese 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); this may be a risky exercise, as some clauses could contain wording that are somehow detrimental to the party wishing to invoke Force Majeure. Furthermore, the clause may or may not include certain formalities or consequences required (or not) by the law, such as notices, extension of deadlines, obligation to notify authorities, etc.;
  5. If no proper clause is present, examine the interpretation of the Civil Code and of the Commercial Law, in particular Article 420 of the Civil Code, to renegotiate or terminate the contract;
  6. Evaluate the consequences of a legal action in Vietnam or the enforceability of a foreign decision in Vietnam.
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