Force majeure requiring more protective national policies

Tran Hong Cuong, partner at Southeast Asia Law firm

Vietnam’s investment and business climate is now being hurt by COVID-19, and many investors have failed to implement their projects due to force majeure events.

According to the General Statistics Office, the total foreign investment capital into Vietnam as of March 3, including newly-registered, newly added, and stake acquisition-based capital, hit $8.55 billion, down 20.9 per cent on-year.

Despite a lack of specific assessment on the causes behind such an investment capital reduction, it is understandable that the pandemic has to some extent affected investment activities. Travelling bans have forced investors to cancel their visits to Vietnam, leading to postponement of investment decisions.

Projects that are under implementation have also been affected, resulting in economic and investment flow consequences, and troubles in capital recoupment ability, employment, and tax collection.

Meanwhile, under-prepared projects have been unable to be implemented, affecting opportunities for investors, and in many cases this has led to force majeure events in deploying investment projects.

The Vietnamese law has stipulated a number of force majeure cases. Specifically, Clause 1 of Article 156 under the Civil Code 2015 stated that an event of force majeure is an event which occurs in an objective manner which cannot be foreseen and not be remedied by all possible necessary and admissible measures being taken.

An objective hindrance is a hindrance which in an objective context results in a person with civil rights or obligations not knowing that his or her lawful rights and interests have been infringed or not being able to exercise his or her rights or fulfill his or her civil obligations. Thus, an event to be defined as a force majeure must meet the following conditions.

Firstly, it must occur in an objective manner which cannot be foreseen. The Civil Code does not stipulate specific criteria for specifying an event as occurring in an objective manner. However, it is also needed to properly interpret that an event occurring objectively means an event occurring not in line with the will of all relevant stakeholders.

Secondly, such an event must not be able to be foreseen. The Civil Code also fails to stipulate criteria on defining an event as occurring in an unforeseen manner. However, it is also understood that an unforeseen event means it occurs not in line with the will or forecast of all relevant stakeholders. The point is that the stakeholders must forecast the proper point of time that such an unforeseen event can occur. Can it be understood that a force majeure event must be a one that all relevant stakeholders cannot foresee at a point of signing contracts?

Thirdly, the affected relevant stakeholders have applied all possible measures within their capacities but they cannot remedy the force majeure event. In addition to such conditions for a force majeure event, the Civil Code also stipulated that such an event must be a one that cannot be remedied although relevant stakeholders have made all efforts to use all possible measures within their capacities to remedy all negative impacts of the event on the implementation of the contract. Accordingly, the obligor shall have to apply all measures within his or her capacity in order to implement all commitments and obligations prescribed in the contract. This will create a foundation for him or her to be exempted from the responsibility for carrying out the contract.

In Vietnam on February 1, the prime minister promulgated Decision No.173/QD-TTg officially announcing the outbreak of the coronavirus in Vietnam, following various nations that detected cases of infection. The decision categorises the virus as a Group A infectious disease at a global emergency level.

Therefore, COVID-19 is an objective event not in line with the will of the parties to the contract, and the parties cannot foresee all consequences caused by the pandemic. However, for COVID-19 to be a force majeure event, it must meet some other conditions. First, has the obligor made all efforts to apply all necessary measures within his or her capacity so as to remedy the impact of COVID-19 on the implementation of the contract? Second, is COVID-19 the direct cause that has forced the affected party not to fulfill the obligations in the contract?

Clause 2 of Article 351 under the Civil Code 2015 stipulates, “Where an obligor is not able to perform a civil obligation due to an event of force majeure, it shall not have civil liability, unless otherwise agreed or otherwise provided by law.”

Regarding the payment obligation in loan contracts, Clause 1 of Article 466 under the Civil Code read, “Where the property lent is a sum of money, the borrower must repay the lender the loan in full when due. If the property is an object, the borrower must deliver to the lender an object of the same type, quantity and quality, unless otherwise agreed.”

It is understood that a payment obligation cannot be exempted because firstly, this event can be remedied as the enterprises has yet to be bogged down in insolvency or can seek loans from the third party.

Secondly, it is quite difficult to prove that a person that has lost money has “applied all necessary measures within his or her capacity”.

And thirdly, almost all transactions in the society are related to a payment obligation. If an exception is applied as a force majeure event, it will lead to a collapse in all transactions/contracts which are the capital to build up assets and confidence in society. Thus it is difficult in reality to use a force majeure event as an exemption for the implementation of an obligation.

Currently COVID-19 is raging in Vietnam, affecting many investment projects here. The government needs to take measures in order to spur on the performance of investors and enterprises. The measures can be in the forms of debt payment delay, lending rate reduction, and flexible rescheduling of payment obligations for the state budget, and reductions in assorted fees. This will help lessen burdens of enterprises and investors.

The government and localities, and ministries, especially the Ministry of Foreign Affairs and the Ministry of Industry and Trade are advised to provide more information for enterprises about markets and sources of materials. Currently enterprises are depending on some foreign material sources. Vietnam has joined some new-generation free trade agreements and has to revise its legal frameworks in line with the practices of the world and its partners. Therefore, the country also needs to further better its institution, boost administrative reform, and create a more business-friendly climate in favour of enterprises and investors.