The recent COVID-19 Pandemic has brought the global supply chains to a great turmoil. The empty shelves in the supermarkets and the shortage of essential supplies are only the visible aspects of the disruption caused by the outbreak. The unseen aspects include shortage of raw material, stoppage of production across the globe and unfulfillment of contractual obligations.

There is a business have begun to witness legal trouble in relation to their existing contracts and agreements. The counter parties may seek to delay, avoid or terminate their contractual obligations based on the fact that COVID-19 either legitimately prevents them from performing their obligations or they seek it as a mere opportunity to extricate themselves from a bad deal.

There are many countries that are facing severe challenges in coping with their contractual obligations. These contractual obligations can be suspended or terminated by taking the defence of a “Force Majeure” event.

What is a Force Majeure Clause?

Force Majeure is a French word that implies a ‘superior force’. The courts have defined the term, as an event that can neither be anticipated nor controlled. ‘Force Majeure’ not only takes into consideration the act of nature, such as floods, earthquakes, etc, but also includes the act of people such as wars and riots. The terms “act of nature” or “act of god” can be often used interchangeably under a contract.

Depending upon the drafting of a contract, this clause may deal with a list of events, based on which parties can excuse themselves from performing certain contractual obligations either in whole or in part. This clause may provide an extension of time to the suppliers in order to fulfil their obligations or provide them a right to terminate the contract altogether. This clause acts as an exception to what would otherwise be treated as a breach of contract.

Chinese Law and its Reliance on Force Majeure [1]

Due to the implementation of the city-wide lockdowns and the large-scale quarantines, China’s small and medium enterprises have been hit hard and these enterprises constitute 80% exports, generates 90% employment and accounts for 70% GDP. It has become nearly impossible to perform the commercial contracts in China.

Legislative Recourse :

As per the People’s Republic of China (PRC) both the contract and civil law define ‘Force Majeure’ as the situations that are unforeseeable, unconquerable and unavoidable. These unforeseeable circumstances prevent the counterparties from fulfilling their contractual obligations, thereby absolving them from penalties.

As per a government linked entity, China Council for the Promotion of International Trade, China has issued 4,811 force majeure certificates as of 3rd March. They covered contracts worth 373.7 billion Chinese yuan ($53.79 billion), state media Xinhua reported. Such certificates are issued by the government to companies that apply for them.

Cross-Border Contract:

Chinese businesses may encounter a problem when trying to claim “Force Majeure” in their cross-border contracts. This is so because majority of the contracts between Chinese and other Foreign Parties are governed by the English Law. As per English Law, parties are allowed to claim Force Majeure if the contracts and documents include the specific clauses for the same. This would then require the contracts to be re-examined and reviewed in order to either find methods to absolve themselves from liability or to re-negotiate the terms.

Italian Law and General Notion to Force Majeure

Italy has been seriously affected due to the pandemic, since February 2020. Most countries have banned the entry of individuals from Italy into their territory, the foreign investors have put their investments of Italian targets on hold until the emergency situation is dealt with and airlines have suspended their flights to and from Italy. There has been a drop in the demand for Italian goods from other countries and this is impacting the Italian economy and most local businesses.

Talking about the ongoing businesses, the existing contracts and business relationship are facing legal troubles. Article 1337 of the Italian Civil Code, requires the parties to “act in good faith during the negotiations and in the finalization of an agreement.”

If the party to an ongoing negotiation decides to terminate the same on the basis of an unexpected material adverse effect situation later stage of the negotiation and thereby, provides a justified reasoning, such withdrawal from a negotiation will be allowed. In case the other party wants to claim compensation for the violation of Article 1337, then the party is requires to prove that the impact of the situation, let’s COVID-19, was not the one to materially impair the economies of transaction that were being negotiated upon.

There is no expressed general notion of Force Majeure that has been contemplated under the Italian Law. However, it is not unusual to find Force Majeure clauses in the commercial agreements that are to be performed in Italy. Whether the COVID-19 spread will fall within the scope of Force Majeure clause would depend majorly on the description of the relevant events contained in the clause.

There are the clauses such as Material Adverse Change/ Material Adverse Effect that can be invoked in cases of mergers and acquisitions or other financial agreements. There are other remedies or recourses that parties can resort to, for instance, Article 1218 of the Italian Civil Code, releases parties from any liability for the non-performance of their obligations, in case it proves that such non-performance is due to an event not imputable to the same.

Article 1256 of the Italian Civil Code provides for extinguishment from obligations if it becomes impossible for an event not imputable for obligator. Article 1463 deals with the termination of a contract and section 1464 deals with partial impossibility.

English Common law and Force Majeure [3]

Both the US and UK have been affected by COVID-19 in an unprecedented manner. New York has turned out to be one of the most effected states in the US. The sales of UK businesses have been greatly affected. In a survey conducted in March, 81%of the businesses reported that this outbreak was one of the top three sources of uncertainty for their business. From these businesses, 51% companies stated that the disease was a top source of uncertainty, and for 30% it was the second or third largest source of uncertainty.

English Common law does not deal with a general concept of Force Majeure, therefore, a party to be able to claim a relief for a force majeure event has to expressly state the instances that it wants the relief for in the contract itself. In the absence of expressed provisions, there is a limited scope for law to come to the aid of a party who was not able to fulfil its contractual obligations due to some unforeseeable circumstances.

Many contracts state a list of events that are deemed to be events of force majeure and are beyond the control of the parties. A specific reference to the word “pandemic” will make it a loteasierto bring a Force Majeure claim. In case such words are not specifically stated in the contract, it must be proved through arguments that an the non-fulfilment of obligation is due to the unforeseeable situation that cannot be prevented, and the parties have tried to fulfil the contract through alternate measures. Mostly, contracts include the clause for Force Majeure, but in case there is not a specific clause for the same, parties can seek the aid of the Doctrine of Frustration.

Korea’s Perspective on Force Majeure [4]

Typically, a domestic sales arrangement within Korea, may include the current situation of the novel coronavirus pandemic under the heading of ‘Force Majeure’. For a Force Majeure clause to be applied when considering the Korean perspective, the event of Force Majeure shall be beyond any reasonable control of the parties and by no means shall it be possible to predict or prevent the event from occurring. The parties must have resorted to assess the alternatives in order to be assured that the fulfilment of the contractual obligations is impossible even if it adopted other measures to do the same. The disruption in the supply or in the performance of the contract shall not merely be considered as a reason to be recognized as an event under the context of Force Majeure.

Certain contracts may state that, if a Force Majeure clause is applied, the contract may automatically be terminated. On the other hand, some contracts may even state that the duty to fulfil the contractual obligation may be suspended for a certain period of time and if the Force Majeure event is not curbed or treated even after such time, then eventually the contract may terminate. Even in the absence of a Force Majeure clause, if the party seeking to reply on Force Majeure proves the fact that the party is not responsible for the nonfulfillment of the contractual obligation and the same was due an unforeseeable event, then the liability may be exempted.

In cases of international sales transactions which involves Korean parties, the potential issues under the Force Majeure situation can turn out to be complicated. This is because the governing law on which the contract depends may vary, based on the nature of the contract.

A certain jurisdiction’s law will directly apply to a contract only in cases where its ‘choice-of-law’ clause unambiguously indicates that the application of such private international law should be excluded, for example, “This agreement and any disputes arising there from shall be governed by the law of South Korea without regard to its conflict of laws rules.”

Singapore’s Approach on the Force Majeure Clause [5]

As per 1st February 2020, Singapore imposed various travel restrictions, thereby prohibiting new visitors of any nationality, who travelled to mainland China and also the visitors with Chinese passports, with the exception of Singapore permanent residents and long-term pass holders, from entering Singapore.

On 7th February 2020, government of Singapore raised the DORSCON (Disease Outbreak Response System Condition, which is a colour-coded framework that shows the current disease situation) alert level, and it turned from DORSCON Yellow to DORSCON Orange. This indicated the nature of the disease that spreads easily from person to person.

Talking about the contractual obligations being dealt with in Singapore, the relevant transaction documents include the Force Majeure clause. However, this clause, does not include the events that cause inconvenience or price increase and include only the events that cause “disruption” “obstruction” or “prevention”. Whether or not COVID-19 will be treated as a Force Majeure event will depend upon the wordings of the clause. If the clause expressly states the words such as “epidemic”, “global health emergency” or an event that “poses a risk to the health or safety of participants”, then current COVID-19 outbreak could very likely fall within the scope of this clause. In case a Force Majeure clause is not included in the contract or if COVID-19 is not covered under the Clause, the approach usually lies on the Doctrine of Frustration, but since frustration of a contract is hard to prove, this approach is usually avoided.

Vietnam and Force Majeure Clause [6]

As per Vietnamese law, an event of force majeure is defined as an event which cannot be objectively foreseen and cannot be remedied although all permissible and necessary measures have been applied. An event would only be considered as force majeure if the event is objective and unforeseeable.

Further, under the Commercial Law, upon the occurrence of an event of force majeure, the party seeking the defense of Force Majeure, must immediately notify the other party in writing, regarding the event of force majeure and regarding the possible consequences of such event. In order to determine whether the coronavirus outbreak is an event of force majeure, as per the Vietnamese law, the above requirements must be fulfilled.

When considering the cross-border mergers and acquisitions, Clauses such as Material Adverse Effect must be considered. Though Vietnamese law does not provide any explicit regulations on “material adverse changes” but some similar regulations on the “performance of contract in the event of a basic change of circumstances” was introduced in the 2015 and is provided under Article 420 of the Civil Code. As per this Article, an affected party is allowed to re-negotiate contract terms with the other party within a specified timeline if there exists any change in the circumstances after the execution of the contract. If the parties cannot re-negotiate the contract terms, any party can request the court to either terminate the contract at a specific time; or to amend the contract to balance out the lawful rights/interests of the parties under the contract, in response to the basic change of circumstances.

Canadian Contracts and Force Majeure [7]

The concept of Force Majeure has been recognized as per the Canadian jurisprudence and majorly all the contracts includes a provision for Force Majeure events. A party can seek the benefit of this clause in cases where unforeseeable circumstances might occur that make it impossible for the party to fulfil the obligations arising out of a contract. The procedure required is similar to that required by English Common Law.

India and the applicability of Force Majeure in COVID-19 [8]

There has been a grave impact of nationwide lockdown in India. The affect is such that apart from essential services like electricity, water supply, gas, financial services (banking),public administration and defence, all other sectors have been completely shut. The aviation sector and real-estate sector have suffered a greater loss during this Pandemic.

Since the novel coronavirus has made it difficult for the parties to a contract to perform their obligations and has thereby disrupted the supply chain, the question to be interpreted is, whether the Covid-19 can be treated as a force majeure event in India. Setting out a broad criterion may help you treating this pandemic as a force majeure event:

In cases where your contractual definition of force majeure, specifically states the word “pandemic” or wherein the list of events of force majeure, words such as “pandemic”, “epidemic” or “quarantine” are mentioned, then such a clause may provide clarity to the fact that it renders the parties unable to perform their contractual obligations in such situations.

If the force majeure clause talks about such circumstances that are beyond the reasonable control of the parties, the same can be arguable to determine that the factual circumstances caused by the outbreak were beyond the reasonable control of the affected party.

Clauses like, price adjustment clauses, limitation or exclusion clauses or material adverse change clauses can be invoked by the counterparties, these clauses may limit or exclude the liability for the non-performance of contract. Companies may also consider ramification of non-performance clause/ liquidated damages clauses, according to which the amount of compensation for non-performance can be predetermined and agreed upon by the parties.

Also Read: Covid-19: A Force Majeure in India?

This being an analysis for the international perspective on Force Majeure in the light of Covid-19, has covered up the highly affected states by this pandemic and how their contractual obligations can be controlled with the help of a Force Majeure clause. However, it becomes difficult to solely lie on this clause when international supplies and mergers and acquisitions are dealt with. The major concern becomes the governing law, when dealing with such arrangement.

[1]https://www.ifpri.org/blog/covid-19s-impact-chinas-small-and-medium-sized-businesses

[2]https://www.cnbc.com/2020/03/06/

coronavirus-impact-china-invokes-force-

majeure-to-protect-businesses.html

[3]https://www.mwe.com/insights/covid-19-legal-current-or-future-implications-on-doing-business-in-italy/

[4]https://voxeu.org/article/economic-impact-coronavirus-uk-businesses

[5]https://www.theworldlawgroup.com/

news/covid-19-and-force-majeure

-in-sales-transactions

[6]https://www.mondaq.com/Food-Drugs-Healthcare-Life-Sciences/898254/Contractual-Terms-Does-The-Novel-Coronavirus-COVID-19-Outbreak-Constitute-A-Force-Majeure-Event-In-Singapore

[7]Chapter X, Article 156.1 of the Civil Code

[8]https://www.businesstoday.in/opinion/

columns/coronavirus-in-india-covid-19

-india-lockdown-economy-cost-gdp-gva-

nationwide-shutdown/story/399477.html