COVID-19 and international contracts
Apart from the human tragedy, the outbreak of COVID-19 is impacting the economy, global supply chain and is causing many adverse economic consequences. As a result of COVID-19 some companies can no longer meet the obligations agreed in commercial contracts. The extent of the impact mainly depends on what is agreed in the contract. Whether an invocation of a force majeure clause can be invoked will depend on what exactly has been contractually agreed. Which law has been declared applicable to the agreement and the circumstances that led to the invocation of force majeure are also relevant factors. This article sets out the governing laws of the Netherlands, the People's Republic of China and international contracts in relation to force majeure and COVID-19.
Force majeure under Dutch law
If a valid invocation of force majeure succeeds under Dutch law, the shortcoming will not be attributed to the debtor. This is regulated in Article 6:75 of the Dutch Civil Code. In that case, the shortcoming must not be due to the debtor's fault and neither should it be for the account of the debtor on the basis of the law, legal act or traffic. However, the parties are free to deviate from this in an agreement in order to expand, limit or further specify the possibility to invoke force majeure. Parties often use this freedom by including a specific force majeure provision in a commercial agreement or general terms and conditions. So you have to check your agreement.
Usually the force majeure clause contains a list of events that may cause force majeure. It is not always clear whether a certain event causes a force majeure situation. In light of COVID-19 it is questionable if COVID-19 can be classified as force majeure. In the case that quarantines and illness are included in the force majeure provision, COVID-19 will become a force majeure situation much sooner. Many standard provisions (general terms and conditions) also often state that in the event of force majeure, parties must first consult with each other about the consequences, before, for example, dissolution is initiated. Always keep in mind that the law prescribes that, in a general sense, the parties must also limit their damage as much as possible. So if you or your contracting party can meet additional costs or offering a (more expensive) alternative, this must (also) be investigated and possibly offered.
Force majeure under the People's Republic of China
Article 117 of the Contract Law of the PRC, and Article 180 of General Rules of the Civil Law of the PRC stipulates that a party who is unable to perform a contract due to force majeure is exempted from liability in part or in whole in light of the impact of the event of force majeure, except otherwise provided by law. Where an event of force majeure occurs after the party's delay in performance, it is not exempted from such liability. Article 94 of the Contract Law stipulates the parties may terminate the contract under the circumstance of force majeure.
If a contract does not include a force majeure provision, it will be implied. If a contract includes a force majeure provision, a party can rely on the force majeure provision or resort to the protection offered by the general law if the scope of the contractual remedy is considered to be limited.
So, whether force majeure can be a reason for the exemption of contractual liability should be judged case by case. One can conclude this from the “SARS” cases. General judgment rules are: whether the force majeure is the direct cause that one party cannot perform the contract.
On 30 January 2020 the China Council for the Promotion of International Trade stepped in to help companies announcing to offer force majeure certificates to help companies deal with disputes with foreign trading partners. For more information we refer to our posts: Is the outbreak of the Coronavirus Force Majeure? and Impact of Coronavirus: the Chinese government helps!
In general the consequences of COVID-19 for your international contracts will depend on the law chosen to be applicable and what has been agreed in the contract. Usually the contractual remedies for force majeure typically include an extension of time to perform those obligations or suspension of contractual performance for the duration of the force majeure event. If the force majeure event extends over a longer period, some provisions may entitle the parties to terminate the contract. So you have to carefully review the definition of force majeure, the consequences and notice requirements.