Can COVID-19 serve as force majeure?

Tony Nguyen, senior partner, and Son Nguyen, associate of legal consultancy firm EPLegal

Due to the ongoing pandemic, import-export enterprises are facing damages and order cancellations due to failure to perform their obligations. Most of them have been seeking a good reason – for example, the impact of COVID-19 as a force majeure (FM) event – to excuse themselves from their liability.

The pandemic impacts on foreign trade activities may vary: agricultural products may not be harvested and processed on time; factories playing a vital role in the supply chain are shut down because workers are not allowed to go to work. Specifically, in this summer’s outbreak, the coronavirus penetrated large industrial zones and the frequent shortage of workers moving back to their hometowns is one of the biggest problems causing critical delays in carrying out agreed orders.

In a good number of international sales contracts, the parties agree to apply Vietnamese law. Additionally, Vietnam is also a member of the UN Convention on Contracts for the International Sale of Goods. Thus, this convention would apply if the parties are members or they choose Vietnamese law as applicable law.

The convention does not define “force majeure”, but it has an article with similar legal consequences: “A party is not liable for a failure to perform any of his obligations if he proves that the failure was due to an impediment beyond his control and that he could not reasonably be expected to have taken the impediment into account at the time of the conclusion of the contract or to have avoided or overcome it, or its consequences.”

When determining whether or not an event amounts to FM, the party in breach must give a notice indicating FM and detailing its effect within a reasonable time to the other party. The burden of proof falls on the party citing FM and such a party shall adduce the existence of FM in its notice. Accordingly, it shall establish whether such an event satisfies the conditions.

Common mistakes

There are several missteps made in trying to rely on FM. A party may cite FM as a reason for non-performance of an obligation, but such obligation is unaffected by FM. For example, Company A could allege that it was unable to make a deposit as scheduled, and request Company B to suspend delivery of goods. But Company A’s payment obligation was not influenced by FM as banks still operated and payment could be made via internet banking.

A party applying FM might be misconceived when suspending the whole of its obligations, as only impeded obligations by FM are suspended and exempt from liabilities and its other obligations shall be performed as agreed. For instance, Company A obliged to deliver goods to Company B’s two locations (Place X and Y) but place X is locked down, which constitutes an FM event. In this case, Company A is only relieved from remedies for delivering to Place X only, not Place Y.

A party may cause an impediment through its own conduct and therefore does not satisfy an objectivity test. If a party fails to implement measures for prevention and control of COVID-19, which results in an outbreak and halt of company operations, such a party could not apply this impediment as FM.

A party seeking waiver of liability may cite an indirect event constituting FM. For instance, the prime minister issued Directives 15, 16, and 19 in order to restrict several activities and request local authorities to provide their appropriate directives. Authority X issues a decision to halt Company A’s operations due to infected cases. As a result, there are four objective hindrances: COVID-19, the prime minister’s directions, local directions, and the local decision. The party in breach should mention which impediment directly influences its obligations.

Improving protection

As a general principle, parties should actively implement measures and prevent COVID-19 as per the guidelines, while continuing to perform their unaffected obligation in good faith. They are also expected to mitigate the losses caused by the pandemic-related event – for example selling goods to, or purchasing goods from, another company regardless of whether or not it constitutes an FM event.

If an impediment causes the victim to not achieve commercial purposes, an export enterprise should try to rely on the hardship principle to renegotiate the contract, because FM most likely fails here. It should carefully assess the impediment to its obligations and effects, and inform the other parties of the alleged FM event as soon as practical, even without the full details. In addition, these export enterprises need to make their best efforts to overcome the impediment, and also record all evidence of such efforts.

Last but not least, exporters should take into account the COVID-19 situation cautiously when negotiating new contracts. There should be specific terms in the contract dealing with these types of scenarios, while not simply relying on situations stemming from the current pandemic.