31 Mar 2020

COVID-19 and Force Majeure

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“Act of God” – NOT the same thing to all men

The COVID-19 virus has been declared a global pandemic, and businesses have been rushing to invoke “Force Majeure” to excuse their inability to perform their obligations. However, “Force Majeure” is not a globally similar legal concept – it has key differences under civil and common law systems. Its invocation must therefore be treated with care.

Background

As the world becomes increasingly interconnected, more contracts are inked between parties coming from different legal systems. This may result in parties choosing the law of a neutral jurisdiction to govern their contract or one party accommodating the choice of law of its counterparty. While certain plain words setting out the obligations of the parties can be universally understood, “Force Majeure” means different things in different jurisdictions. Extra caution should be taken when you concede to a choice of a law that you are not familiar with.

“Force Majeure” under English law

Under English law, the term “Force Majeure” is meaningless on its own. To use an extreme example, if the clause in an English law contract simply says, “This contract may be terminated in the event of Force Majeure” without expressly defining what “Force Majeure” means, the clause is unlikely to have any meaningful effect. This is because “Force Majeure” is a creature of contract and the concept does not exist in common law or statute. Conversely, if the English law contract has express wording allocating the risk of loss if performance becomes impossible / impracticable as a result of a specified event or events that the parties could not have controlled, the contract does not even need to use the term “Force Majeure”.

The clause may be expanded to include caveats, for example, the party relying on the clause may be required to explore alternative ways to perform its obligations, and/or give notice in compliance with the requirements of the clause.

“Force Majeure” under French law, People’s Republic of China (“PRC”) law

France and China are both civil law jurisdictions, which is a system of law based on fixed codes and statutes.

The phrase “Force Majeure” is French for “superior force” and is a legal concept that is enshrined in Article 1218 of the French Civil Code. Article 1218 provides that there is “Force Majeure” if there is an event beyond a party’s control that could not be reasonably foreseen at the time of the contract’s conclusion, which effects could not have been avoided such that it prevents the performance of the contract. In other words, going back to the example above, it would not be meaningless for a contract governed by French law to simply state “This contract may be terminated in the event of Force Majeure”. Under French law, even in the absence of an express contractual provision, “Force Majeure" may apply if the conditions of Article 1218 of the French Civil Code are met (though for the sake of caution, it is best to still insert a clause providing for the application, effect and scope of “Force Majeure”.

Similarly, in China, the legal concept of “Force Majeure” is enshrined in both the General Rules of the Civil Law and the Contract Law as events which are unforeseeable, unavoidable and insurmountable which may excuse performance of a contract in whole or in part. “Force Majeure” under PRC law may be implied into a contract so there is no need to even mention it in the contract. Certificates have been issued by the China Council for the Promotion of International Trade (“CCPIT”) purportedly to certify that certain Chinese companies were prevented by the COVID-19 outbreak from fulfilling their contractual commitments. It is likely that, under PRC law, the CCPIT certificates would serve as useful evidence to show that “Force Majeure” has been triggered under the General Rules of the Civil Law and the Contract Law.

A few blind spots

If you are from a civil law jurisdiction looking at an English law contract, take note that:

  • Strict compliance with the contractual requirements for invoking “Force Majeure” is required. Special attention should be paid to notice provisions. A CCPIT certificate or any other certification alone, official as they may not be, may not suffice to release a company from its contractual obligations if the contractual requirements are not met;
  • The burden of proof lies on the party relying on the clause, and if there is any ambiguity in the clause, the clause will be interpreted against the party relying on it;
  • Do not be afraid to challenge a “Force Majeure” notice for contractual discrepancies!

If you are from a common law jurisdiction looking at a French or PRC law contract, take note that:
 

  • Even if the event being relied upon is not specifically listed in the contractual clause, there may be a fall back available in the applicable code (provided that the parties have not specifically contracted out of the applicable code);
  • That said, even if the relevant code or statute applies, the burden of proof still lies with the party relying on the “Force Majeure” defence, i.e. the causation between the “Force Majeure” event and the failure to perform must be established;
  • The wording of the contract alone may not give you the full picture – seek legal advice on the applicable code or statute.
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