FORCE MAJEURE: IMPACT ON INTERNATIONAL CONTRACTS (II)
FORCE MAJEURE: IMPACT ON INTERNATIONAL CONTRACTS (II)
A&Z and Studio Tosato Attorneys are working together to provide companies solutions with special reference to force majeure on international contracts when an international instrument, such as CISG, or a domestic law such as PRC, Italian and Spanish Law are applicable. In the previous article, we examine if coronavirus constitutes force majeure and what measures might be taken (See article FORCE MAJEURE AND CORONAVIRUS (I)).
Companies are advised to review the provisions of their contracts to determine whether the impact of the coronavirus may constitute a force majeure event. How does force majeure impact on international contracts? What solutions under the PRC, Italian and Spanish Law? Our attorneys look at this situation and offer some recommendations in this and coming articles.
Force majeure in International Trade
Article 79 United Nations Convention on Contracts for the International Sale of Goods, 1980 (“CISG”), provides that a party is exempted from liability for damages only if the failure to perform is due, first, to an impediment beyond its control and, second, that it 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.
CISG will automatically apply where both of the contracting parties are based in countries that have adopted the CISG (Unless CISG is expressly excluded by both parties) - or where they choose, as their governing law, the laws of a jurisdiction that has adopted the CISG.Since the outbreak occurred in China, the article of force majeure in Chinese law is likely to be applied. Because the international trade contract is also the applicable object of Chinese Contract law, if the parties to the international trade contract choose Chinese law, they will then treat the provisions according to the Chinese Contract law.
Other articles to bear in mind that are practically identical to Article 79 CISG:
- Article 7.1.7 of the UNIDROIT Principles of International Commercial Contracts (UPICC)
- Article 8:808 of the Principles of European Contract Law (PECL)
- The“ICC Force Majeure Clause 2003”
Force majeure and Hardship
Force majeure and Hardship are exceptions to the basic rule pacta sunt servanda. Hardship, however, is based on events not foreseeable at the time of the conclusion of the contract that make the performance unduly burdensome or devaluate the contract performance for the affected party. Besides, the performance of the contract is not impossible but merely hindered.
Many legal systems accept the theory of Hardship, for example, Germany, Netherlands, Italy, Greece, Portugal, Austria as well as the Scandinavian countries. English law seems to reject any notion of relief for changed circumstances that do not amount to impossibility. However, in case of frustration of contract - that means where the contract is rendered useless by the change of circumstances - an exception is granted to this general rule.
The UPICC and the PECL expressly provide for rules in case of a change of circumstances. The CISG does not contain a special provision dealing with questions of Hardship. Yet, currently, it is more or less unanimously accepted in court and arbitral decisions, as well as in scholarly writing, that Article 79 does indeed cover issues relating to hardship.
Despite the fact that there is no such concept as hardship in Chinese Contract law, there is a similar clause of situation change (Article 26) of the Interpretation of the Supreme People's Court on Several Issues Concerning Application of the “Contract Law of the People's Republic of China”.
This clause stipulates as follow: where any significant situation change in an objective environment has taken place after the formation of a contract which could not have been foreseen by the relevant parties at the time of entering into the contract and does not belong to any commercial risk occasioned by any force majeure cause, rendering the continual performance of the contract manifestly unfair to the relevant party or impossible to achieve the purpose of it.
Then, the People's Court shall confirm whether the contract is varied or dissolved in accordance with the principle of justice taking into account the actual circumstances. However, it should be noted that in practice, the People's Court will be very careful to apply the situation change, and it is not common to terminate the contract on the basis of the situation change.
Some solutions in reference to force majeure in the PRC Law
According to Article 117 and 118 of the Contract Law of the PRC, force majeure refers to unforeseeable, unavoidable and insurmountable objective circumstances. Where it is not possible to perform a contract due to force majeure, then, depending on the extent of the force majeure, the performing party shall be partially or wholly excused from liability. Where>unable to perform the contract due to force majeure, the said party must immediately notify the other party in order to reduce the potential losses sustained by the other party, and the said party shall also provide evidence of the force majeure within a reasonable time.Zang Tiewei, a spokesman for the legislative affairs committee of the Standing Committee of the National People's Congress (NPC), expressed on February 10, 2020, that the government has taken measures to prevent and control the outbreak of the Coronavirus to protect public health. For the parties unable to perform the contract, it is hence understood as an unforeseeable, unavoidable and insurmountable force majeure. Mr. Zang’s words reveal the Chinese authorities’ understanding of whether the outbreak constitutes a force majeure event.
Nevertheless, whether the Coronavirus outbreak event constitutes a force majeure event under the specific contract still needs to be confirmed in combination with relevant facts. For example, if the prevention and control measures taken by the Chinese government to contain the epidemic result in no personnel in the factory to carry out production, it can be considered as force majeure. Having said so, to claim force majeure just because of the outbreak itself it is not sufficient reason to apply as force majeure.
Therefore, even if the scope of force majeure has been expanded due to this present epidemic, it still needs to make a comprehensive judgment about the impact of the epidemic on the time and degree of performance of the contract.
Some solutions in reference to force majeure in Italian and Spanish Law
Although the role of applicable law is greatly reduced when the terms of the contract are clear and complete, the applicable law still may play an important role in interpreting the force majeure clause in the contract or the force majeure doctrine more generally.
The doctrine of force majeure originated in civil law systems. It applies to the non-performance of a contract, irrespective of whether the contract contains a force majeure clause. Nevertheless, there are substantial differences among national laws as to the nature of events that qualify, whether or not extreme impracticability is sufficient, and the nature of relief.
According to both Italian and Spanish Law, the outbreak of coronavirus could constitute “force majeure”.
Italian Law
Article 1218 of the Civil Code provides that “the debtor who does not exactly render due performance is liable for damages unless he proves that the non-performance or delay was due to impossibility of performance for a cause not imputable to him”. Force majeure is not specifically mentioned and the central concepts are “impossibility” and “cause non imputable”.
It is standard doctrine among Italian legal scholars that “impossibility” must be absolute and not relative and the “cause not imputable” must be an event external and beyond the affected party’s control, unforeseeable and unavoidable.
Italian law also distinguishes between performance which has become impossible and performance which is possible but burdensome. Where extraordinary and unforeseeable events render one party's performance under a continuous or periodic contract excessively onerous, that party may dissolve the contract unless the other party offers to modify the contract in an equitable manner (Article 1467, Civil Code).
Spanish Law
Spanish Civil Code contains a specific provision regarding force majeure events. Article 1105 states that: “outside the cases expressly mentioned in the law, and those in which the obligation should require it, no one shall be liable for events which cannot be foreseen or which, being foreseen, should be inevitable”.
