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Force Majeure in International Transactions during COVID-19

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As we are globally going through harsh times caused by the pandemic of Covid-19; disruptions in supply chains along with many other factors are leading to rapid and drastic changes in the economies. Therefore, providing a protection in case of non-performance for the international commercial contracts has become more and more important.

Besides international conventions such as CISG and the UNIDROIT Principles, states under their national law try to regulate this kind of unanticipated events and its effects to the contracts by different doctrines regarding excuses for non-performance of contractual obligations, which are mainly known in practice as “force majeure” and “frustration” in common law.

What is Force Majeure?

Even though there are still slightly different interpretations regarding its meaning, force majeure is a civil law doctrine, also known as ‘Act of God’; describing supervening events beyond the parties’ control which render the fulfillment of the contract impossible, either temporarily or permanently. As a result, it exempts, in most cases, the parties from their obligations in the contract.[1]

We must note that force majeure concept of civil law as a defense is not a traditional approach in English law but is a matter of contract amongst parties that there will be no excuse unless it is included into the contract. In English law, accepted excuse concept is frustration which goes beyond the meaning of hardship, force majeure, changed circumstances or any other terms used in civil law,[2] whereas in American Law, the doctrine of impracticability, unlike English law, developed not only by legal doctrine and case law, but also statutorily accepted in the Uniform Commercial Code section2.

Characteristics of Force Majeure

The defense of force majeure will exempt a debtor from liability of non-performance if he can demonstrate that the event of force majeure has been irresistible, unforeseeable, external, and have has made performance impossible to fulfill the obligation in question and not only more onerous or difficult.[3]

What is a force majeure clause?

In practice, parties to a contract explicitly allocate their risks in contract provisions, so that they can be exempted from liability or obligation when an event beyond the control of the parties prevents one or both parties from fulfilling their obligations under the contract; meanwhile they define what constitutes a force majeure event that may delay or excuse performance.[4] Clauses of such kind, either by the draftsman or by the courts, called as “force majeure” clauses.

While it can simply be a clause; providing for cancellation of the contract in case performance is prevented by circumstances within the term of force majeure, a well drafted force majeure clause may provide a masterful response by including provisions of possible time extensions being granted to the promisor, postponement or alteration of the contract in certain events, return of money paid, and probable cancellation if the impossibility keeps continuing after a certain time.[5]

Force majeure in civil law countries

It must be kept in mind that in French law and some civil law countries, which have the mirror approach as France such as Belgian, Dutch, and Luxembourgian law,[6] force majeure doctrine works apart from party agreement; meaning that even though a force majeure clause is not included in the contract, a party might be protected for non-performance by law provided that event has been irresistible, unforeseeable, external, and has made performance impossible. On the other side, force majeure clause is not triggered by law in nature but must be invoked by non-performing party as the drafted grounds under force majeure clauses, which provide relief, might be wider than those under the doctrine of force majeure as stated in civil codes and as interpreted by courts.[7]

How to invoke a force majeure clause?

Because of COVID-19, many companies are experiencing difficulties in fulfilling their contractual agreements. For example, they cannot deliver the goods on time. In those cases, there is the possibility to invoke force majeure clauses in your contract or defence depending on the applicable law.

To invoke a force majeure clause, a party affected must notify the counterparty and demonstrate that the force majeure event has prevented him from performing his obligations and it was not reasonably within the control of him. The term "reasonable control" consists of two different features:

  • Firstly, an affected party should not contribute to causation of the event that prevents his performance.
  • Second, he must have taken "reasonable steps" to mitigate the consequences of excusing event.[8]

It is important to note that the invocation of a force majeure clause is dependent on the individual case and the applicable law. Your contract may already provide some protection against unperformed obligations. However, assuming that your company is a victim of COVID-19 does not exempt you from your liabilities. Each causation that prohibits performance should be thoroughly assess.

Impossibility and Exemptions under the Vienna Convention (CISG)

The United Nations Convention on Contracts for the International Sale of Goods (CISG), ratified by 93 countries, is one of the international instruments which also strives to reflect force majeure concept of civil law[9] by providing relief for supervening events for exceptional situations in international sales.

Our concern in question is regulated article 79(1) of CISG;

A party is not liable for a failure to perform any of his obligations if he proves that the failure was due to an “impediment” beyond his control and that he could not reasonably be expected to have taken the impediment into account at the time of the conclusion of the contract or to have avoided or overcome it or its consequences”.

Thus, in order to be excused according to article 79, the non-performing party must prove that performance was prevented by an impediment that beyond the party’s control, and that could not reasonably have been taken into account, avoided or overcome. The effect is to grant the non-performing party with a defense against an action for damages, not to terminate the contract.[10] As a result, if the party is excused, the non-performing party is not liable for damages; however, the other party remains with the right to "avoid" the contract in case of a "fundamental breach" pursuant to other provisions under the title of ‘remedies’ in the CISG.[11]

Article 79(3) says‚ “The exemption provided by this article has effect for the period during which the impediment exists”. Thus, it is indicated by ‘during…impediment exists‛ that it provides an excuse for temporary interruption. In other words, if an impediment is temporary, article 79 does not provide a permanent excuse. Subsequently, if the other party has not avoided the contract, the nonperforming party's obligation to perform may remain when the impediment passes.[12]

According to article 79(4), “The party who fails to perform must give notice to the other party of the impediment and its effect on his ability to perform”. If the notice is not received by the other party within a reasonable time after the party who fails to perform knew or ought to have known of the impediment, he is liable for damages resulting from such non-receipt. Thus, the non-performing party must also notify the innocent party regarding the impediment and its effect on his ability to perform" within a reasonable time.

Tips for companies when dealing with force majeure during COVID-19

As demonstrated in this article, excuse doctrines in commercial law exist in legal systems as well as in international instruments; however, reflected in different ways in the terms of its coverage and effects to the contracts. That brings the following questions to mind:

  • Which law will be applicable to your contractual relation? Is it CISG?
  • Do you have a written contract in which you have a force majeure clause to invoke?
  • In case there is no written contract, are you protected by the applicable law?
  • Does Covid–19 outbreak situation in your country constitute grounds for force majeure?

These are the questions first come to mind and must be answered. However, parties under contractual obligations but not able to perform due to Covid-19 are first advised to closely monitor the situation in specific of their contractual relation, and keep clear records, check their contracts and notify counter-party as soon as the obligation to perform affected by the situation. Bear in mind that in case of dispute the party invoking a force majeure clause must demonstrate the non-performance is due to force majeure.

More information

Are you confronted with a force majeure situation because of COVID-19 and do you want to know what your possibilities are? Feel free to contact us. We will be happy to provide you with more information on this topic.

Author: Omer Faruk Celik, LL.M.

Bierens Law

  

Table of Legislation

  • French Civil Code (1804)
  • Uniform Commercial Code (1952)
  • United Nations Convention On Contracts For The International Sale Of Goods (1980)

Literature

  • Treitel G. H., Frustration and Force Majeure (1st, Sweet & Maxwell, London 1994) 1-599.

Chapter in Edited Book

  • Diamond A., ‘Force Majeure and Frustration under International Sales Contracts’, in Ewan McKendrick (eds), Force Majeure and Frustration of Contract (2nd, LLP, 1995) 257-265.
  • Nicholas B., ‘Force Majeure in French Law’ in Ewan McKendrick (eds), Force Majeure and Frustration of Contract (2nd, LLP, 1995) 21-29.
  • Swadling W., ‘The Judicial Construction of Force Majeure’, in Ewan McKendrick (eds), Force Majeure and Frustration of Contract (2nd, LLP, 1995) 3-18.

Journal Article

  • Augenblick M. & Rousseau A. B., 'Force Majeure in Tumultuous Times: Impracticability as the New Impossibility' [2012] 13 the Journal of World Investment & Trade 59-75.
  • Bund J. M., 'Force Majeure Clauses: Drafting Advice For The CISG Practitioner' [1998] Vol. 17, University of Pittsburgh The Journal of Law and Commerce 381-427.
  • Mazzacano P. J., 'Force Majeure, Impossibility, Frustration & the Like: Excuses for Non-Performance; the Historical Origins and Development of an Autonomous Commercial Norm in the CISG' [2011] Issue II 1-54.
  • Nicholas B., 'The Vienna Convention on International Sales Law' [1989] 105 L.Q.R. 201- 243.

Thesis

  • Uribe R. A. M., The Effect of a Change of Circumstances on the Binding Force of Contracts Comparative perspectives [2011] 1-325.

[1] R.A. Momberg Uribe, The Effect of a Change of Circumstances on the Binding Force of Contracts Comparative perspectives (1st, 2011) 14.

[2] R.A. Momberg Uribe, The Effect of a Change of Circumstances on the Binding Force of Contracts Comparative perspectives (1st, 2011) 139.

[3] Articles 1147 and 1148 of the French Civil Code. See also for detailed discussion Barry Nicholas, ‘Force Majeure in French Law’ in Ewan  McKendrick (eds), Force Majeure and Frustration of Contract (2nd, LLP, 1995) 24-25.

[4] Mark Augenblick, Alison B. Rousseau, 'Force Majeure in Tumultuous Times: Impracticability as the New Impossibility' [2012] No.13, the Journal of World Investment & Trade 59, 60.

[5] William Swadling, ‘The Judicial Construction of Force Majeure’, in Ewan McKendrick (eds), Force Majeure and Frustration of Contract (2nd, LLP, 1995) 9.

[6] P. J. Mazzacano, 'Force Majeure, Impossibility, Frustration & the Like: Excuses for Non-Performance; the Historical Origins and Development of an Autonomous Commercial Norm in the CISG' [2011] Issue II, 41.

[7] G. H. Treitel, Frustration and Force Majeure (1st, Sweet&Maxwell, London 1994) 434.

[8] Jennifer M. Bund, 'Force Majeure Clauses: Drafting Advice For The CISG Practitioner' [1998] Vol. 17, University of Pittsburgh The Journal of Law and Commerce 382, 401.

[9] Aubrey Diamond, ‘Force Majeure and Frustration under International Sales Contracts’, in Ewan McKendrick (eds), Force Majeure and Frustration of Contract (2nd, LLP, 1995) 265.

[10] Barry Nicholas, 'The Vienna Convention on International Sales Law' [1989] 105 L.Q.R., 233-235.

[11] Jennifer M. Bund, 'Force Majeure Clauses: Drafting Advice For The CISG Practitioner' [1998] Vol. 17, University of Pittsburgh The Journal of Law and Commerce 382.

[12] Jennifer M. Bund, 'Force Majeure Clauses: Drafting Advice For The CISG Practitioner' [1998] Vol. 17, University of Pittsburgh The Journal of Law and Commerce 387.

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