The Corona Virus and Sales Contracts
At the outbreak of the Corona virus epidemy, deliveries of goods under contracts are affected in many imaginable or unimaginable ways. The same may even happen with the provision of services but it is better to confine ourselves to the delivery of goods here.
We should simply mention a couple of examples in technology trade to illustrate the problem. Companies producing advanced machines or equipment have reduced the cost of production of various components by scattering it to countries of lower production costs from which the components are being transported mostly to Europe or North America. A common example of a very complex product such is the European Airbus aeroplane, which is said to contain thousands of components produced in dozens of countries. Even if the proportion of components is smaller, significant delays may still occur.
Companies having complex supply chains are suffering from the shortage of components produced especially in China, which was first hit by the virus, and where measures were taken to isolate it by travel restrictions and layoffs. The shortage of individual components inevitably affects the finalization of the end product unless replacing products or stores exist. However, modern logistics is geared to just-in-time deliveries in order to save costs by avoiding excessive storage. In turnkey contracts, the supplier is required to install the plant or equipment but may be prevented from doing so because of travel restrictions to the country of the buyer. These are the most commonly mentioned logistical problems the Corona virus creates, but others may be just around the corner.
A supplier usually undertakes to deliver the goods under contractual provisions which presuppose the payment of damages, liquidated and/or actual ones, in case the delivery time is exceeded. The structure and effect of these clauses very much depends on the legal regime applicable to the contract. The supplier may, however, be relieved from paying damages, if there exists a force majeure event. Force majeure is a French law concept having found its way into many legal systems. In Anglo-American law, the related concept of frustration of contracts is well known but it is not exactly the same thing. As force majeure is part (Article 79) of the Vienna Convention of the International Sale of Goods (CISG) and many standard forms of contract, it is widely used to overcome the difficulties that we are envisaging with the outbreak of the virus.
The International Chamber of Commerce has recently adopted its third ICC Model International Force Majeure Clause which will again be published together with the ICC Model Hardship Clause. The previous versions of these Clauses were published jointly in 2003. As national laws may treat these matters very differently, it is important to have an international benchmark in place. The writer of this article was a member of the Drafting Group of the ICC Clauses.
In fact, there are now two ICC Model Force Majeure Clauses, a Short Form and a Long Form. Essentially, both versions work similarly, but it was though that the Shoert Form would be more attractive to smaller companies.
According to the definition of these Clauses, “Force Majeure” means the occurrence of an event or circumstance (“Force Majeure Event”) that prevents or impedes a party from performing one or more of its contractual obligations under the contract, if and to the extent that the party affected by the impediment (“the Affected Party”) proves:
- that such impediment is beyond its reasonable control; and
- that it could not reasonably have been foreseen at the time of the conclusion of the contract; and
- that the effects of the impediment could not reasonably have been avoided or overcome by the Affected Party.
As we can see, the Affected Party has a cumulative burden of proof of showing circumstances which impede the delivery, the foreseeability of the impediment and the non-existence of any means to overcome it.
However, the rigorous burden of proof is practically reversed when one or more of the Presumed Force Majeure Events apply. According to Clause 3.e) “plague, epidemic, natural disaster or extreme natural event” (as highlighted by the author) qualify for Presumed Force Majeure Events. In such a case, the Affected Party need not prove that the impediment is beyond its reasonable control, or that it could not reasonably have foreseen the impediment at the time of the conclusion of the contract. The Affected Party only needs to prove that the effects of the impediment could not reasonably have been avoided or overcome by it.
A party successfully invoking the ICC Force Majeure Clauses is relieved from its duty to perform its obligations under the Contract and from any liability in damages or from any other contractual remedy for breach of contract, from the time at which the impediment causes inability to perform, provided that the notice thereof is given without delay. If this is not the case, the relief is effective from the time at which notice thereof reaches the other party.
A novelty in the ICC Clauses is that it now regulates the position of the contracting partner of the Affected Party, who usually is the one paying for the goods. The other party may suspend the performance of its obligations, if applicable, from the date of the notice. The obligations need be capable of being suspended. Typically, at least part of buyer´s payment obligations are tied to the delivery. Companies need to pay attention to this provision which may prove to be very significant for them.
If the impediment is of a long duration, the default provision in the ICC Clauses being 120 days, either party may terminate the contract. In accordance with above, there are normally no damages to be paid.
The Corona virus creates impediments, which normally are not economic of their nature in the first place. One of borderline issues is namely economic force majeure where the impediment can be overcome by paying substantially more. With time and money, the effects of the virus can be overcome. However, many complex situations may need to be resolved. For example, what happens, if there is simply a corporate policy – and not an prerogative by officials – not to travel to countries or territories being affected by the virus? Are you exempted due to your own caution?
Helsinki, 9 March 2020
Dr. Lauri Railas
Attorney-at-Law