COVID-19 LOCKDOWN, A FORCE MAJEURE EVENT IN COMMERCIAL CONTRACTS

This is part of series of Article appearing in an online daily where the issues pertaining to the insertion of “COVID-19” as a force majeure clause event in commercial contract is discussed. Recently a judgement of the High Court of Delhi had recognized COVID-19 instituted lock down as a form of “Force Majeure”

by: Gizem Alper is a licensed attorney in New York and Turkey (Istanbul). She is on the staff at the Institute of International Commercial Law at Elisabeth Haub School of Law at Pace University. 

COVID-19 has affected the world tremendously. Countries have closed borders and halted international travel, cross- border trade is strained. COVID-19 has disrupted supply chains; many goods are no longer in demand, while others are in high demand. The future of our global society is unclear, which also triggers unclarity in international trade. The shattering caused by COVID-19 will unavoidably affect performance under international sales contracts.

The force majeure provisions in contracts or the relevant laws will become “handy” as the crisis created by COVID-19 unfolds. As such, the parties that are unable to perform under the contract will first turn to the contract to see if there are any force majeure provisions. If that is the case, the matter will be resolved based on contract provisions. However, if there is no contract provision addressing force majeure, the parties will turn to applicable laws. In such a case, if the contract is concerning the international sales of goods, the United Nations Convention on Contracts for the International Sale of Goods (CISG) may be applicable. The CISG provides for a uniform set of rules and it is applicable when the parties to a contract are from different, yet signatory countries or when the private international law rules lead to a contracting country (CISG Article 1).

The CISG has a provision addressing force majeure (CISG Article 79): An impediment beyond a party’s control is considered a ground for force majeure. The concept of impediment under the CISG is particularly different from both civil and common law jurisdictions. In civil law, generally speaking, force majeure is codified, and force majeure provisions generally foresee that a non-performing party may nonetheless be liable for damages if a fault is established. On the other hand, in common law jurisdictions, if there is no force majeure clause in a given contract, the doctrines of impossibility or impracticability are a means for excuse from the performance of a given contract.

As per Article 79(1) of the CISG, there are four elements for force majeure or impediment: a) there is an impediment that is “beyond the party’s control”, meaning that it is outside the personal sphere of its control; b) the impediment is unforeseeable, meaning that it was not foreseen at the time the contract was concluded; c) the impediment and its consequences could not have been reasonably overcome or avoided and d) the non-performing party has to show that the non- performance is due to the impediment. If these elements are met, the non- performing party is not liable for damages, provided that it took measure to mitigate damages as per Article 77 of the CISG.

There is case law from numerous jurisdictions concerning the application of Article 79 of the CISG. Although there are different views, generally speaking, economic hardship alone is not considered a ground for force majeure. However, when performance becomes unequivocally burdensome for one of the parties, this has been considered a ground for force majeure. For example, in a case from 2009, the supplier of steel tubes claimed that steel prices had abruptly risen; the Belgian court ruled that

Changed circumstances that were not reasonably foreseeable at the time of the conclusion of the contract and that are unequivocally of a nature to increase the burden of performance of the contract in a disproportionate manner, can, under circumstances, form an impediment in the sense of this provision of the treaty.”

As for precedent case law concerning a pandemic, there is precedent CISG case law from CIETAC concerning the SARS outbreak. In the said arbitral award dated 2005, SARS was not considered a force majeure event, the non-performing party was not excused from performance under Article 79 of the CISG, because SARS had happened a few months before the contract was signed.

In light of previous case law and Article 79(1) of the CISG, COVID-19 in itself may be considered a force majeure event – however, it should be considered on a case-by-case basis. There is no doubt that the impediment caused by COVID-19 is beyond the control of both parties. It should also be relatively easy to prove the causal link between non- performance and COVID-19; that non- performance is due an impediment as a result of COVID-19.

As for the element of “foreseeability”, in principle, it is met for contracts executed before COVID-19 appeared upon the face of the globe; parties could not have foreseen that such disruption on the global economy could have been caused by a tiny, invisible “virus” in the era of technology and science. The “trickier” case is proving that the impediment was not foreseeable for contracts executed after COVID- 19. It will be difficult for a non- performing party that has executed a contract after the “virus” went “viral” to avoid paying damages for non- performanceHowever, it would not be accurate to say that, it is not possible, as the situation should be determined on a case-by-case basis. For example, an export restriction on a given vegetable, because scientists discover that it is  “the cure” for COVID-19 would not be foreseeable, however, the fluctuation of prices in the supply chain would be a foreseeable outcome.

Whether the consequences of COVID-19 could have been overcome or avoided should also be considered on a case-by-case basis and does not have a straightforward answer. On the other hand, it should be noted that U.S. courts will most likely look into the concept of substitute performance, i.e. whether substitute performance was available or not.

As a final note, in my opinion, as the shattering created by COVID-19 lingers on, one of the main grounds for non-performance will be due to economic hardship. However, as stated, economic hardship in itself is not a ground for force majeure. For example, a devaluation of a certain currency due to COVID-19 will most likely not in itself invoke Article 79 of the CISG. However, laws have been enacted to ensure justice and at times, protect the vulnerable. Therefore, economic hardships that create imbalance, that harm the vulnerable or, in other words, the party that has highly been impacted to the detriment should be given due relief; if the hardship has been triggered by COVID-19, this should be a ground for force majeure.