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Coronavirus as a Condition of Force Majeure in Contract Default

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

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

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.

Read more in Latvian