FORCE MAJEURE IN INTERNATIONAL CONTRACTS DURING COVID 19:TRENDS IN EXISTING LAWS AND ARBITRATION
Adv. Manisha Chava and Adv. Parita Goyal
COVID-19 has been declared as a Public Health Emergency of International Concern (PHEIC) by the World Health Organisation (WHO) on 30th January 2020 and issued a strategic preparedness and response plan. It was declared a pandemic on 12th March 2020 by WHO and has matured with significant growth despite the efforts from Governments across the globe by imposing lockdown and social distancing norms, restricting any gathering or public events, advising on self-isolation, curtailing free movement, mandating virtual systems for judicial, arbitral and educational purposes, inculcating work from home policies for corporates and such other emergency measures.
This global commotion has impacted in frustrating various contractual obligations due to its non-performance or delay in its accomplishment. COVID-19 qualifies as an unexpected event, irresistible force and an act of god or natural calamity which cannot be anticipated or controlled, disabling the promisor–promisee and the beneficiary to execute their contract as per the agreed terms. The recourse is available under the force majeure clause which is a French term meaning ‘greater force.’ The ‘test’ for an event to qualify as a force majeure event must meet the following three conditions:
The parties cannot reasonably foresee and control the occurrence of the event.
The event or circumstance occurs after the formation of the contract and obligations under the contract have been prevented, impeded or hindered.
The event was beyond the control of the parties and they have taken all reasonable steps to seek to avoid or mitigate the event or its consequences.
Requirements For Invoking Force Majeure Clause
Whether COVID-19 falls within the legal purview of the force majeure event would depend on the precise text of the contract.
If the contract provides for the inclusion of specific events as force majeure or has expressly provided an exclusion for certain events to be considered as force majeure then the same shall be construed as per the agreed terms of the contract. These provisions can relieve the party from performance of obligation provisionally or permanently. In long term contracts, the suspension of performance is for a specific period and contractual deadlines are extended until the intervening force majeure event ceases.
It is vital to evidence that the non-performance of the event is directly linked to the pandemic and its fulfilment is impossible due to the occurrence of such event. It is essential to establish the association between COVID-19 and failure to perform as arbitral tribunals strictly construe the specific language of force majeure clauses to exclude events which are not specifically intended. This will ensure that parties fulfil their contractual obligation and do not use this as a leeway to evade from payments or performance.
All contractual obligations must be satisfied such as serving notice within a specific period after the occurrence of such event.
Contractual Remedies to Force Majeure Clauses:
If parties enter into a contract for a specific purpose and an event occurs that undercuts that purpose, a party may assert frustration of purpose to defend against a breach of contract claim, as long as the party did not cause the event.
Contracts contain an implied condition that performance shall be excused when performance has been “rendered impossible by the intervention of unforeseen, accidental, and uncontrollable superior” occurrences.
To invoke an impracticability defense, an event must have occurred that makes performance impracticable, and the contract must have been based on the assumption that such an event would not occur.
While litigation may be unavoidable for some contracting parties impacted by the COVID-19 pandemic, in many cases it may be advantageous for businesses to negotiate contract amendments rather than pursuing costly litigation.
Practicability Of Force Majeure Clause from Jurisdictional perspective & Measures Taken By Arbitral Institutions Amidst Crisis:
A. Civil Law Jurisdiction: The Doctrine of force majeure originated in civil law systems and applies to the non‐performance of a contract, irrespective of whether the contract contains a force majeure clause. The force majeure clause allows the parties to avoid possible applicable law limitations, as it is not a mandatory provision. The more detailed the clause is, the less margin of discretion courts or arbitral tribunals will have.
1. The Quebec Civil Code (Article 1470) contains a detailed definition of the force majeure provisions in domestic law.
2. However, in Algerian Civil Code (Article 127), the Egyptian Civil Code (Article 165), the Lebanese Code of Obligations and Contracts (Article 341), and the Emirati Civil Code (Article 273) the force majeure doctrine is expressly mentioned in the legislation but is not defined.
3. The German law concept of “contractual impossibility” is composed of two distinct doctrines.
a. The first doctrine is referred to as “the collapse of the bases of the contract” and is similar to the doctrine of “hardship.”
b. The other is the doctrine of “objective impossibility,” which is codified in the German Civil Code (Article 275) and is similar to the French law concept of force majeure. The circumstances in which “objective impossibility” is recognized are limited.
4. The doctrine of “supervening impossibility” in the Italian Civil Code (Article 1256) and the doctrine of “impossibility of performance” in the Swiss Code of Obligations (Articles 97 and 119) allow a party to a contract to be excused from non‐performance when such performance has become permanently impossible.
B. Common-Law Jurisdiction: The doctrine of force majeure is alien to common law systems. In these systems, courts may refer to related, yet distinct doctrines, such as “frustration” (United Kingdom, Australia, India) or “impracticability” (United States). A contract generally is deemed “frustrated” or “impracticable” when a supervening event renders the performance of the contract so different from what was contemplated at its conclusion that it would not be reasonable to hold the parties bound by it.
C. Measures by Arbitral Institutions: The arbitral proceedings are preferred due to its very nature of it being flexible and therefore arbitral institutions are taking measures for its efficient operation during the pandemic like conducting virtual hearings, making electronic filing its default procedure by ICSID and issuing guidance notes to parties, counsel and arbitral tribunal by ICC, the Seoul Protocol on Video Conferencing in International Arbitration by the Korean Commercial Arbitration Board guiding best practice during the current crisis, while other arbitral institutions are conducting virtual hearings remotely.
The COVID-19 pandemic has disturbed different sectors of the economy including cross-border trade, real estate market, EPC (engineering, procurement & construction), joint-venture agreements and M&A deals worldwide. Party’s ability to meet their contractual obligations are impacted due to prevailing restrictions in various supply chains. The outbreak has further brought significant changes in litigation and arbitration which have resulted in the closure of courts in various jurisdictions and incline in the usage of virtual hearings. This widespread disruption has resulted in force majeure invocations.
The inclusion of force majeure clause in commercial contracts provides for preparedness of the parties to deal with an unexpected future event by allowing additional time for performance of contract or termination of the contract without the parties having to face the consequences of the breach of contract. Not all contracts use force majeure term in their clauses, rather use alternative text such as unforeseen event beyond the control of the parties, the act of god- ‘vis major’, natural calamities, government intervention, regulatory or political events, war, strikes, terrorism, endemic or pandemic. In the absence of such force majeure clause within a contract, the parties may apply the Doctrine of Supervening Impossibility, Doctrine of Frustration or Doctrine of Change of Circumstances which incapacitates the performance of the contract due to it being legally impossible meaning changes in law or physically impossible due to unavailability of materials in unforeseeable circumstances.
In such events, the courts and arbitrators will evaluate and decide each dispute on individual merits, which would be based on the terms of the contract, the intent of the parties and steps are taken to mitigate. However, under most laws of most nations the threshold for invoking force majeure or hardship is high, the analysis required is largely fact-specific, and the outcome will eventually depend on the arbitral tribunal’s discretion while interpreting the related contractual provisions, the facts and applicable legal principles.