Contract Law
Coronavirus and international contracts: general indications and operative recommendations – Force Majeure
What are the legal implications of force majeure for the obligation to perform the contracts? What must be taken into account for the assertion of force majeure? Differences between termination, suspension and renegotiation of the contract.
Content: 1. Coronavirus and force majeure: preliminary remark. – 2. Definition of “force majeure” and coronavirus: attention to the contractual terms. – 3. Communication of the cause of the force majeure. – 4. Effects of the force majeure and execution of the contracts. Dissolution of the contract. Suspension. Renegotiation.
- Coronavirus and force majeure: preliminary remark
Having established that the economic constraints affect the execution of contracts and make impossible to perform one’s own contractual obligations, it is first and foremost advisable to analyze the contract looking for clauses regulated by force majeure. In any case, the following explanations also apply.
The internationally recognized legal principle ”pacta sunt servanda” usually applies: according to such assumption, contractual obligations must be fulfilled by all parties. The occurrence of force majeure is not a normal occurrence. Therefore, it allows one party to be totally or partially released from a contractual performance without committing a breach of a contract and without being liable to indemnify the other party.
However, the definition of force majeure does not apply in the same way in all legal system. Italian law interprets it in the meaning of any cause that makes impossible to perform a contractual performance, which is not attributable to the debtor (art. 1256, para. 1, Civil Code). Chinese law, on the other hand, refers to an objective situation which is unforeseeable, unavoidable and irreconcilable (Art. 117, PRC Contract Law).
For the Vienna Convention on the International Sale of Goods, which has been ratified by nearly 100 states, force majeure according to Art. 79 consists of an obstacle a) which is beyond the control of one of the contracting parties, b) it could not reasonably be expected at the time of the conclusion of the contract, and c) it is unavoidable and cannot be bridged.
Please note: if a contractual relationship is exclusively subject to the US or the English law, where Vienna Convention is explicitly excluded, force majeure can only be invoked if this is expressly provided and regulated. In addition, it does not refer to force majeure but to ”frustration” and “impracticability“, which ts interpreted more narrowly compared to ”force majeure“.
- Definition of “force majeure” and coronavirus: pay close attention to contractual terms
In practice, international treaties define the following occurrences as “force majeure”: epidemics, natural disasters, wars, insurrections and sovereign acts of administration (e.g. embargo). Incidents such as strikes, supply bottlenecks, raw material crises or transport problems are usually excluded.
For the exclusion of contractual responsibility in such events (meaning, in order not to be liable for damages), international contractual clauses usually require that the performance of a duty is rendered wholly or partially impossible by the event. Some clauses also regulate situations that place an excessive burden on one of the contractual performances (hardship clauses). In principle, however, events which only make performance more difficult do not constitute force majeure.
In order to exclude compensation for damages, it is therefore necessary in times of coronavirus that the restrictive measures of the state authorities specifically affect the contractual performance and thus exclude the contractual responsibility for nonperformance. For this purpose, it is essential to examine in depth all contractual clauses.
- Notification of the cause of the force majeure
In order to correctly assert a force majeure event, international treaties and various state laws require that the affected party shall promptly notify the other party of the impossibility of performance due to force majeure. The notification shall also include concrete evidence of the force majeure.
If the notification is delayed through the fault of the party concerned, the force majeure cannot be invoked. In this case, however, the damage must be compensated up to the time the late notification.
An immediate, transparent and truthful notification of the contractual partner is essential in all cases in order to avoid a claim for damages
- Effects of the force majeure and execution of the contracts. Dissolution of the contract. Suspension. Renegotiation.
In international contracts, the dissolution of the contract is not automatic, but becomes inevitable if the own performance becomes impossible or unfeasible due to force majeure. Some international contracts also provide that the contract is automatically dissolved after the reason for the force majeure has been notified. After termination, the other party may not claim damages for the impossibility or excessive difficulty of performance of the contract due to force majeure. This does not, of course, apply to compensation for other reasons or for late notification of the force majeure obstacle.
However, after the termination of the contract, the other party is no longer required to perform its obligation and may demand the return of the goods already delivered. If the above-mentioned impossibility relates only to a part of the contractual performance, the contractual partner is entitled to a proportional reduction of the extent of its own performance. These return criteria are often reflected in international contracts.
If, in the case of certain contracts, the observance and compliance of the contractual obligations is in the foreground interest, the suspension of contractual obligations makes more sense and is also often provided for in the contract. In the event of force majeure, the expenses incurred for this are usually borne by each contracting party itself. Many contracts and legal systems also define that the contract must be tenninated or renegotiated after a certain period of time has passed.
In any case of uncertainties, a renegotiation of the contractual conditions may be the best solution for all patties. New delivery dates can be set, the duration of the contract can be extended or, in more complicated cases, the mutual services can be reconciled.
In conclusion, it can thus be said that legal systems and common contractual practice take force majeure into account and thus exclude unjustified claims for damages. In any case, special care must be taken in dealing with a contractual crisis. Loyal and transparent cooperation between contractual partners is also essential to avoid unnecessary further damage to the contractual partner.
For any further questions or clarification on these issues please do not hesitate to contacting me.
Avv. RA Dr. Massimo Fontana Ros
Balzano – Milan – Dubai – Frankfi.ut am Main
M +39 331 7116211