Coronavirus as a Condition of Force Majeure in Contract Default

Triniti

Businesses and citizens around the world follow the rapid spreading of the new Covid-19 virus with great concern. The measures to contain this virus already cause suspension of manufacturing as well as difficulties in the supply of products and services. In the near term we may expect reduction of economic activity which will cause not only financial, but also legal consequences among  companies.

The impossibility to perform obligations as a result of Covid-19 impact – to produce goods, to deliver those services that are already paid for, should be qualified as obstacles beyond our control named as Forced Majeure conditions. It has been widely used in contracts and viewed as formality, but it is the right time now to examine the importance of this provision in practice.

Isolation Means Change of Business Routines

Everyone must be prepared for the reality of default in obligations that are caused by the negative influence of Covid-19. Forced by restrictions to eradicate the new virus companies will not perform their agreed obligations both as a result of shortage of labor and disruption in transportation networks, but also obeying by the legal and statutory regulations which prohibit certain activities. Payment delays are expected, eventually not linked to the creditworthiness of individual countries or their banks, but primarily caused by the sudden need of companies to pay for the essential costs of staff rotation, disinfection of premises, procuring for special tools and protective gear to continue operations as well as additional expenses for finding alternative supply routes. The recent cancellation of the Geneva Motor Show was based precisely on the application of Force Majeure conditions of Covid-19.

Currently, lawyers across the world are debating the concept of application of Force Majeure to Covid-19 disruptions, and whether it may validly serve as the reason of withdrawing by the businesses and consumers from the contract obligations without compensation of damages. The general understanding of Force Majeure definition is that it is an impediment that is outside someone’s control, it could not have been reasonably foreseen at the moment of entering into agreement, and by reasonable means its negative consequences cannot be eliminated. Clause 7.1.7 of the UNIDROIT Principles of International Commercial Contracts contains definition of Force Majeure, and the Vienna Convention mentions Force Majeure concept as well, but uniform application of Force Majeure rules among countries is not yet reached. The main issues for discussion are whether the appearance of global viruses should have been predicted, whether the dissemination of virus in a particular  country means automatic cancellation of obligations or their suspension, and are there any reasonable means how to preserve the contracts and fulfill their purpose even if damages are sustained and deadlines not met. For example, currently the Japanese Government is sill debating if the Olympic Games in 2020 may be postponed without breaching the agreement with the International Olympic Committee.

Force Majeure Conditions in Latvia

The Civil Law of Latvia is not a great remedy to address the Force Majeure conditions because it imposes rather strict liability for performance of agreements – the contract binds a party to perform its undertaken obligations, and any later difficulties in performance may not be invoked as a cause of withdrawal unilaterally, even if such party compensated the losses caused. Accordingly, only a specific statutory exemption or a pre-agreed Force Majeure clause could serve as the reason for unilateral termination of contract. The legal scholars have expressed views that the Civil Law in general in its various sections contains all of the elements for successful definition of Force Majeure obstacles. The Supreme Court has also ruled that difficulties in performance of an agreement when a sudden event misbalances the consideration of the parties but does not render the performance impossible should be distinguished from the obstacles of Force Majeure which grant the party the right to discontinue the contract altogether. Each contract entered into pursuant to Latvian law would be analyzed individually, including those conditions that are caused by the particular disruptions of Covid-19 virus.

Proof of Force Majeure Conditions

There is no universal Force Majeure application formula in the world. For instance, the China Council for the Promotion of International Trade (CCPIT) has started as of January 30, 2020, to issue Force Majeure certificates to exempt businesses based on laws on commerce in the People’s Republic of China from liability for Covid-19  defaults under their respective agreements. However, for contracts that are not subject to this jurisdiction, receipt  of such Force Majeure certificate may not be considered sufficient, and even Chinese businesses may be liable for compensation of damages in contract default cases.

The Latvian Chamber of Trade and Industry (LTRK) offers Force Majeure certificates for a fee. Up until now the receipt of such certificate has not been publicly mentioned as proof for not performing contracts, such as cancellation of travel services. Companies and LTRK members are encouraged to explore this option to safeguard their interests in the unfortunate event of disputes over non-performance of agreements.

Another alternative which was deployed by the Lithuanian Government, would be to announce an emergency situation in the country or in particular regions as a result of Covid-19. Such instruction would define the eradication measures for Covid-19 as a matter of objective set of facts which directly relate to the existing contracts and conditions of their performance. This would not relieve every company from liability under any agreed contracts, but the affected businesses would not have to argue each individual case and its attribution to Covid-19. Uniform information on the imposed restrictions could be made available in public for both local and foreign counterparties.

Difficulties Must be Notified

Every businessperson in Latvia should examine the contracts it has entered into in the past for the existence of Force Majeure clauses. If there is suspicion that the undertaken obligation cannot be reasonably fulfilled, this must be at the earliest convenience communicated to the other party in due process, and the reason, potential result and term of remedy should be stated in the notice. Depending on the nature of contract there may be an option to suspend its performance, or to notify the other party on termination. If the notice is not sent in advance, the courts may consider this inexcusable, and any later reference to Force Majeure conditions could be invalidated if it is retrofitted already after the contract avoidance started.  Default which already has taken place before the Force Majeure obstacles have materialized would not be protected and excused. Upon receipt of the Force Majeure notice it must be checked if the opposite party has indeed encountered objective difficulties in performing its obligations, and if there is damage compensation option, provided that the obstacles against contract performance were related to other causes, most likely indirectly related, such as failure by the other entities to perform their respective obligations.

Insurers and Banks Should Act

In addition to collection of evidence on the Force Majeure conditions one must also review those values and processes that had been insured. Even in this traditional area of protection there is no single approach across the global insurance companies when it comes to Covid-19 coverage and whether it was an insurable risk, and what are the conditions for insurance compensation being payable.

Should the rapid spread of Covid-19 continue in Latvia, the Finance and Capital Markets Commission and the Consumer Rights Protection Board could within its competence consider measures similar to those enacted by the Chinese authorities stating that payment delays caused by the corona virus in a range of branches of economy, defaults of contracts and missed deadlines must not be used as a pretense for termination of contracts. Instead, the regulated companies must allow due postponement of payments and other obligations.

Damages alike Infection Must be Contained

Everyone should in the new Covid-19 circumstances be aware that in Latvia similarly to many European countries the law requires that the suffering contract party must limit its damages even if the opposite party has breached the agreement. It will not be possible to recover just any amounts of losses and costs simply by referring to the failure of the other party to call for Force Majeure conditions as a result of Covid-19. The amount and effect of damages should reasonably be contained, and even a worldwide pandemic may not substantiate coverage of all and every possible loss of income or opportunity across the world. Our duty is not only to secure ourselves with the vault of products for consumption, but also to be aware of the legal rights and responsibilities in the Force Majeure circumstances.

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