A force majeure event is an unexpected episode out of one’s control, which prevents the normal performance of business and contractual obligations. COVID-19 spread disorderedly on a global scale and raised legal issues that forced us to analyze and debate the contractual force majeure clause conundrum through multiple lenses. We needed stronger focus to realize that legal issues relating to non-compliance with contracts during a crisis would have to undergo newfound scrutiny. This article explains the pandemic’s multiple challenges with the force majeure clause that appears on many contracts we use every day. Much has changed since the pandemic first struck and is changing still. Do we have the right focus yet?
Remember the pandemic’s disruptions up ticking the force majeure debate on civil liability and its exclusions? Countries worldwide have since taken countless measures to prevent the spread of the virus such as mandating quarantine for all who have been in contact with infected persons or who have been in a geographic area deeply affected by the virus. The rollout of quarantine measures has significantly reduced the available workforce. Extended lockdown periods have paralyzed almost all industries, brutally impacting contractual relations. What lies behind still leaves us shaken because its results are not done yet!
Although at first the outbreak impacted only trade relations with certain parts of the world, today the crisis, considered by some to be behind us, continues threatening the stability of the global economy and the timely fulfillment of contracts across all sectors.
What new guidance is available?
The Portuguese Supreme Court of Justice has said that the case of force majeure always has an underlying idea of inevitability: it will be an all-natural event or human actions that are predictable or even preventable. Force majeure by contrast is open to interpretation and can only be defined in the light of concrete circumstances.
Nevertheless, most contracts set limits on the concepts of force majeure or unforeseen circumstances (“fortuitous”) to give a concrete expression to the scenarios whereby the defaulting party is released from its obligations or its timeline for compliance. For example, the definition of force majeure is often limited to acts of war, fire, lightning, earthquakes, cyclones, volcanic eruptions, explosions, and epidemics.
The COVID-19 pandemic has recently led many of these models to be revised or reformulated, as with the new guidance issued by the International Chamber of Commerce (ICC) model made available by International Chamber of Commerce.1
Did COVID-19 trigger force majeure?
The question of whether you can modify contractual obligations resulting from COVID-19 has been the subject of discussion by several legal professionals. Most agree that in theory the answer is yes. However, determining whether an event qualifies as a trigger of force majeure requires the use of indeterminate concepts that can only be evaluated in the face of concrete circumstances. That is, before the contract is in question and before the assessment of whether the impossibility of performance is a consequence of the cause of force majeure, an extraordinary situation must exist that inhibits the fulfillment of an obligation. Therefore, in abstract terms, as an epidemic and pandemic, COVID-19 can be considered a cause of force majeure.
How does pandemic relate to hardship and force majeure?
Hardship is a legal concept that excuses performance when the underlying circumstances of the contract change in a way the parties did not foresee at the time of executing the contract, and, although in principle the contractual obligations are still fulfillable, fulfilling the contract does not make sense from an economic viewpoint.
It’s important to understand that force majeure and hardship are two different principles, even if they sometimes are treated as the same. They are different in their preconditions and in their legal consequences. To apply force majeure, the legal obligations of a party must become universally impossible to fulfill due to an unexpected event, unable to be controlled, which occurs without any foresight. That is, as the English translation clarifies, force majeure is an “act of God.”
Hardship, on the other hand, comes into play when the underlying circumstances of a contract unforeseeably change so that the economic implications of fulfilling the contract obligations become excessively burdensome on one of the parties.
The legal consequences of both concepts are very different.
- The consequence of force majeure is that because one party cannot fulfill its contractual obligations due to impossibility, that party is relieved from such obligations during the time of the force majeure event.
- In the case of hardship, the party for which the underlying circumstances changed can basically still fulfil its contractual obligations and perform the contract, but the performance has become economically worthless. Depending on the contractual agreement between the parties and the laws of the jurisdiction, the contract will either be adjusted to the circumstances automatically or the parties will have to renegotiate the contractual details that were affected by the changed circumstances -- namely, the purchase price and delivery date.
In Portugal, this concept is Alteração de Circunstâncias, or material change in economic circumstances, and is a function of civil law provided for in Article 437 of the Portuguese Civil Code2 and applies across all contracts, not just commercial.
To help illustrate, imagine the situation of someone who had to cancel a wedding during an epidemic, because a disease outbreak occurred at the venue. And let’s say the host had already hired the catering service at the time of the outbreak. In theory, nothing would prevent serving the catering or paying the price of the catering, but the basis for this contract has disappeared: there is no longer a wedding or guests to whom to serve the catering. In such a situation, the regime of hardship or Alteração de Circunstâncias, subject to other legal assumptions, could work to allow the contract to be terminated or the price adjusted.
Another issue -- the seller of a specific object loses the object in the ocean. In principle, he must try to recover it from the bottom of the ocean, which may be theoretically possible but obviously does not make economic sense.
Neither of these examples of excusing contract performance on the grounds of hardship could excuse performance under the principle of force majeure.
Interpretations of force majeure events vary in different jurisdictions
The doctrine of force majeure is one of the most basic principles of law and is generally accepted across jurisdictions. However, the extent to which this doctrine is read into contracts as a function of law varies by jurisdiction. For this reason and to effectively excuse performance and limit liability, the best practice is always to include clear language defining the contours of force majeure and specifying the consequences of noncompliance.
Are international contracts governed by the English law or by the laws of Hong Kong?
Consider in detail the precise wording of the force majeure clause, the contract, and the circumstances that have arisen. Determining whether performance is excused by a force majeure clause can be a difficult and a highly fact-sensitive exercise. Serve any notices required under the contract as soon as possible and in accordance with the notice provisions.
Consider carefully what events or circumstances you allege constitute the force majeure event, considering the wording of the clause and the timescales required for service of notice (e.g., the date of the outbreak of COVID-19 itself or government restrictions subsequently put in place).
Document and record why performance was impossible, hindered, or delayed; note the steps taken to find alternatives and mitigate loss; and record any notices served.
Make sure the contract between the parties expressly provides for the suspension or termination of service on the grounds of force majeure. In the context of COVID-19, to what extent the viral outbreak prevented, hampered, or delayed the performance of the contract.
The contracts governed by German and French law have similar considerations.
German law does not expressly regulate the consequences of a force majeure event and therefore contracts generally include force majeure clauses.
Contracts governed by French law without a force majeure clause is governed by the French Civil Code and is triggered when the performance of a party is prevented by an event outside its control, which could not reasonably have been foreseen at the time the contract was agreed, and the effects of which could not be avoided by appropriate measures.
What if the contract lacks a force majeure clause? Can the alternative doctrine of frustration3 be a solution?
Since force majeure is, in almost all jurisdictions, a creature of contract rather than a rule imposed by general law; and if there is no force majeure clause, an affected party will have to look to other provisions of the contract for potential routes to manage their difficulties. If the contract does not provide any solutions, it may, in certain circumstances, be possible to rely on the doctrine of frustration of contract.
In common law, a contract may be discharged or set aside on the grounds of frustration where an unforeseen event renders the contract physically or commercially impossible to fulfill. Unlike force majeure, which must be included in a contract to be invoked, frustration need not be referred to or included in a contract to be invoked by any party. However, if a force majeure clause exists, it would displace the doctrine of frustration for any event that falls within the scope of the force majeure clause. Nonetheless, one may still argue frustration for any event that falls outside of the scope of the force majeure clause. Thus, even if a contract includes a force majeure clause, a court may still find frustration to be applicable, although never simultaneously applicable to the same event.
Frustration requires that an unforeseen subsequent event outside the control of the parties has made the contract impossible to perform or has transformed performance of the obligations under the contract into something so radically different from that which the parties intended that it would be unfair to hold the parties to their obligations. This is a high burden, and it is very difficult to show that a contract has been frustrated.
Regarding COVID-19, for individuals and businesses that wish to rely on frustration doctrine, the main hurdle to overcome would be the ability to demonstrate that the changes to the nature of contractual obligations are permanent, and not just temporary. COVID-19 consequences such as illness, quarantine, travel restrictions, shuttering of businesses and schools, or working from home, seem temporary. Nevertheless, in a contract where time is of the essence to perform a material term, and such performance is utterly prevented by the pandemic, frustration may can be argued.
The most obvious example of frustration of a contract might be when a party has died from COVID-19, and the main purpose of the contract relates to personal rights and obligations of the deceased party.
A final word – it’s complicated!
The situation in which we find ourselves has no recent precedent and is extremely complex, as described above. The law provides some solutions under specific circumstances with the doctrines of force majeure, hardship, and even frustration. However, renewed negotiations between the parties involved, guided by good sense and good faith, will of course always be a better solution than breaching a contract, even on legally excusable grounds. To this end, timely and effective communication is an important aspect of objective good faith vis-à-vis the other party when re-evaluating contract obligations considering unforeseen circumstances.
The COVID-19 pandemic has brought new attention to the importance of force majeure provisions and other legal doctrines that may provide relief in these unprecedented times. As described herein, the limits of the application of these doctrines can be fact-specific, and special considerations should be taken to provide adequate protections in all agreements.
END NOTES
- International Chamber of Commerce (ICC) Force Majeure and Hardship Clause – (long form)
- CMS law.tax.future article titled, Law and Regulation of Force Majeure in Portugal. See also related article titled Portugal
- Ref article COVID-19: Doctrine of frustration Torkin|Manes
ABOUT THE AUTHOR
Mauro Ribeiro is the lead commercial counsel for Huawei . He has strong business acumen and more than ten years of in-house experience in telecommunications, EPC renewable energy and advertising sectors, with the insight to evaluate and negotiate profitable contracts with international partners.
ABOUT Huawei Technologies
Huawei Technologies Co., Ltd. is a Chinese multinational technology corporation headquartered in Shenzhen, Guangdong, China. With approximately 195,000 employees, they operate in over 170 countries and regions, serving more than three billion people around the world who design, develop, and sell telecommunications equipment, consumer electronics and various smart devices. Huawei's mission is to bring digital to every person, home, and organization for a fully connected, intelligent world. To this end, “we will drive ubiquitous connectivity and promote equal access to networks to lay the foundation for the intelligent world; provide diversified computing power to deliver ubiquitous cloud and intelligence; build powerful digital platforms to help all industries and organizations become more agile, efficient, and dynamic; redefine user experience with AI, offering consumers a more personalized and intelligent experience across all scenarios, including home, travel, office, entertainment, and fitness & health.”