The recent outbreak of the novel coronavirus disease COVID-19, which was declared an epidemic in Vietnam by the prime minister on February 1, has had a considerable impact on public life and business operations in many regions over the world, including in this country.
|Nguyen Trung Nam, founder and senior partner of legal consultancy firm EPLegal |
Many enterprises, especially those dealing with cross-border trade of goods and services, now face the question whether they or their trade partners are contractually liable for any failure to perform their obligations due to the adverse impact of the current outbreak, and how to get out of trouble. This article serves as an analysis of the situation as a potential force majeure (FM) event in the context of international transactions, and provides useful tips for affected enterprises.
The exposure of COVID-19 may have an impact on many commercial transactions and trader performance of their obligations. Manufacturing of goods may be delayed if the factory operates in the areas quarantined; shipments may be cancelled or delayed due to import/export restrictions imposed by governments; and service contracts are affected by the fact that the personnel involved are restricted from travelling for work, or more seriously, they are caught by the virus and get quarantined.
One of the latest cases identified in Singapore involved a person who had served on board a cargo vessel. The vessel was thereafter isolated at anchorage and went through the process of disinfection. This may affect the delivery duration of the goods on that ship.
Under Vietnamese law, the term “FM event” is defined in Article 156.1 of the Civil Code 2015 as an event which (1) objectively occurs, (2) is unforeseeable, and (3) cannot be remedied although all permissible and necessary measures have been taken.
A party’s failure to perform one or more of its obligations due to a FM event may escape liability to the breached party and in certain case where the FM event prolongs and the obligation is a fundamental one, it may even void the contract on the grounds of the FM, without being liable for any loss and damages of the party in harm. The burden of proof for the FM event is on the party who wishes to rely on the FM to avoid its liability.
Given the nature of the epidemic, it may well satisfy the two conditions that it objectively occurred, and it is unforeseeable. However, the third condition above (efforts have been made to remedy the situation but failed) is not always easily proved, and must be considered in the context of each circumstance.
There are common mistakes when businesses rely on the FM events to avoid liability. Firstly, everyone is aware about the outbreak, and competent authorities have been implementing measures to limit, control, and eliminate the disease. Therefore, the parties entering into contracts after the outbreak of this epidemic have foreseen its potential impact on their capability to perform their obligations, and need preventive measures to overcome it.
Secondly, the impediment must not stem from a violation of the law of that party. Many contracts also mention this condition in the definition of FM. One party cannot violate the law and then take its consequences as a reason for FM.
Thirdly, the affected party must comply with the provisions of the agreed contract, if any. For example, notice must be given within a reasonable time, or the time limit specified by the parties, to inform the other party that the FM event related to COVID-19 has occurred and obstructed the first party to perform the contract.
Vietnam is also a member of the Vienna Convention on the Contracts for the International Sales of Goods (CISG), which shall apply in the sale of goods contracts between businesses from member countries, or if the parties choose Vietnamese law as the applicable law. The CISG has never used the term “FM” – instead it describes in Article 79.1 that “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”.
In practice this is a very high threshold, meaning only those impediments making the performance of obligations impossible will satisfy the test, other circumstances which only make the performance difficult or impractical would not set the affected party free from liability.
In the context of COVID-19, a party would not be able to claim an FM event to avoid performance if, say, a port is closed due to the quarantine, but the goods could still be delivered through other ports though with additional costs.
In the face of the contract performance obstacles caused by the COVID-19 outbreak, enterprises should immediately take measures.
First, assess the impact on contract performance, and determine whether the provisions in terms of FM are applicable and whether it is proper to propose suspension, termination, or amendment to the contract.
Next, they should inform the other party of the event and request acknowledgement of the same. Third, enterprises should take immediate and effective measures to mitigate losses. They must also be aware of the other party’s rights if FM is invoked, which may include the right to terminate the contract after a certain period of time, then sell goods to other buyers, or in the case of the buyer, source goods from alternate suppliers.
Finally, enterprises should take into account the continuation of the present outbreak and its impact on any committed obligations, and make express provisions to avoid liability in relation to the same.