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Coronavirus and Force Majeure in commercial contracts and disputes
The COVID-19 coronavirus has quickly developed into a worldwide pandemic. The question is no longer whether there will be a coronavirus epidemic in Finland but instead what will be the financial, societal and human losses caused by the outbreak.
The losses resulting from the pandemic are causing a significant increase in discussions around the possibility to invoke the force majeure doctrine as a consequence of payment default and other contractual breaches as well as a ground for suspension of contractual performance.
What is ‘force majeure’?
Force majeure refers to impossibility or insurmountable hardship to fulfil the contract because of an unexpected, unforeseen event which has occurred after the conclusion of the contract and which is beyond the control or influence of the parties. The purpose of a force majeure clause in a contract is to limit a contract party’s liability to fulfil the contract if its fulfilment has become impossible or unreasonably difficult due to a force majeure event.
What does the contract say?
Force majeure clauses are customarily included in commercial contracts. These clauses are often standard boilerplate provisions, which on many
occasions have not been subject to much attention or negotiation. Typically, such clauses contain a specific list of events or circumstances, which
constitute force majeure and relieve a party from liability to fulfil the contract for as long as the force majeure event continues. Sometimes, a force
majeure clause allows the other contract party to terminate the contract if the force majeure event continues longer than a certain period of time set out in the contract.
Accordingly, a party seeking to suspend its performance of a contract should first examine whether the contract includes a force majeure clause
and, if yes, assess whether the clause covers the current epidemic. Since force majeure clauses typically contain only examples of situations which may be considered as force majeure events, unique situations like the coronavirus outbreak or other events caused by it may not be explicitly covered by the wording of many force majeure clauses. Whether the coronavirus outbreak constitutes a force majeure event in the context of a particular
contract will be a matter of interpretation. Contractual parties are, however, likely to interpret the force majeure clause differently. They are also likely to differ in their assessments of the effects of the outbreak on their contractual performance. These differing views are accordingly likely to give rise to a significant number of commercial disputes in the future.
This is the opportunity to increase trust between the contract parties, instead of destroying it for good.
– Jussi Lehtinen, Partner, Dispute Powerhouse
What does the law say?
Sale of goods is governed by the Finnish Sale of Goods Act (27.3.1987/355, in Finnish: “kauppalaki”). The Act is non-mandatory and will be applied unless the parties have agreed otherwise. According to the Act, a party to a sales contract is entitled to suspend performance of the contract if it proves that the delay was due to an impediment which (a) the party could not reasonably be expected to have taken into account at the time of the conclusion of the contract and (b) whose consequences it could not reasonably have avoided or overcome. Impediments recognized in Finnish case law and legal literature as force majeure events include acts of war, upheavals of nature (e.g. an earthquake or flood), provisions of law (e.g. import or export restrictions) and general interruption of communications or payment services.
Finland is also a party to the United Nations Convention on Contracts for the International Sale of Goods (“CISG”). CISG is applied where a sale of
goods contract is concluded between parties whose places of business are in different Contracting States or when the choice of law rules lead to the application of the law of a Contracting State. Article 79 of the CISG contains a provision similar to the one included in the Finnish Sale of Goods Act mentioned above according to which a party may be exempted from its contractual obligations in the event of force majeure for as long as such an event continues.
The threshold for invoking force majeure has generally been considered relatively high. Accordingly, we recommend assessing whether suspension or delay of performance is directly caused by the coronavirus outbreak, such as travel restrictions imposed by public authorities, bans to attend large events and conferences, or compulsory quarantines, or whether it results from the indirect consequences of the outbreak, such as disruption of
supply chains or compulsory or voluntary quarantines. Depending on the circumstances, suspension or delay of the contractual performance
could be interpreted as force majeure or as a measure taken for precaution.
What if application of Sale of Goods Act and CISG have been excluded?
In the event that the application of the Sale of Goods Act and the CISG have been specifi cally excluded, it may nevertheless be possible to invoke the force majeure doctrine as a legal principle generally applicable to commercial contracts. In such a circumstance, it may be possible to argue that the
principles concerning force majeure contained in the Sale of Goods Act and the CISG reflect general rules of law, which should apply even if the Sale of Goods Act and the CISG are excluded.
The coronavirus outbreak has become a global phenomenon and the situation is developing rapidly. If both contracting parties are expected to experience difficulties in performing their respective contractual obligations, it may make sense to initiate negotiations for the purpose of reaching a mutual agreement to suspend performance until the outbreak has been contained and the situation is clarified.
Documenting the force majeure event
We recommend carefully documenting all effects of the outbreak on business’ contractual performance. Gathering evidence of the causal link between the outbreak and the hindrance on contractual performance or the losses suffered as a result, will be important in a potential future dispute to establish that the outbreak constitutes a force majeure event that has negatively affected the contractual performance.
Some parties may also regrettably seek to benefit from the outbreak and, thus, attempt to rely on force majeure clauses on less genuine grounds. Therefore, gathering evidence of the causal link between the outbreak and the delay or suspension of contractual performance may also be necessary to guard the business against the other contractual party’s potential claims or even termination of the contract. Depending on the strength of the evidence and the particular circumstances, a business may be able to shield itself against such less genuine or groundless actions, for example, by
applying for interim measures in the Finnish courts.
How to avoid and prepare for future commercial disputes arising in the force majeure and the coronavirus context
Due to the immediate and thorough impact of the coronavirus outbreak to businesses in Finland and the society at large, and the resulting risk of all forms of commercial disputes, we recommend businesses to:
- review the force majeure clauses in their critical contracts and identify which partners and/or supply chains may be subject to interruptions or financial distress due to the outbreak;
- collect and retain documentary evidence as to how the coronavirus will potentially affect or has affected contractual performance, for example, by causing critical delays under a contract and/or necessitating suspension of performance;
- consider what options are available to perform their contractual obligations and mitigate the effects of the outbreak;
- formulate written plans to mitigate the effect of the coronavirus and carefully document all steps taken under such plans;
- if necessary, initiate negotiations to agree on suspension or delay of performance;
- if applicable, notify the other contracting party of a force majeure event;
- if applicable, notify the other contracting party of a breach of contract without undue delay;
- ensure that the contractual notice provisions are complied with when notifying of a force majeure event and/or a breach of contract, whichever if applicable.
Because force majeure requires that the event or occurrence is not foreseeable, businesses negotiating new contracts should not rely on traditional force majeure clauses but should include in their contracts delivery timetables which take into account the challenges brought about by the new
situation. In addition to a usual force majeure clause, it is recommended to include in new contracts specific provisions allowing suspension of
performance due to unexpected future developments of the coronavirus situation.
D&I’s experts are happy to discuss any questions or concerns that you may have concerning the legal implications of the coronavirus outbreak.