FORCE MAJEURE EVENTS AFTER NEARLY 02 YEARS OF COVID-19

By Nguyen Huy Hoang, Partner of BROSS & Partners

Email: hoang@bross.vn

The COVID-19 pandemic has severely affected life and business on a global scale. Since its first days, COVID-19 has been claimed to be a “force majeure event”, one of the grounds for exempting contractual liabilities arising from disrupted business activities. However, as the pandemic has become so familiar and arguably a part of life in the near future, it is no longer rational to claim that COVID-19 itself is a force majeure event. In this article, we present the view that a contract breaching party can now only rely on force majeure event clauses to be exempted from liabilities if it can prove that such breach (i) is caused by a certain after-effect of the pandemic (ii) that is external, unpredictable, and irresistible.

1. Definition of the force majeure event

Under Vietnamese law, the definition of the force majeure event is specified in Article 156.1 of the Civil Code 2015. Accordingly, an event is considered a force majeure event if it has all of the three following elements:

Firstly, such event must be external. The externality of an event can be interpreted as such event happens out of the control and independently of the impact of any parties to the contract (for example: Acts of God, earthquakes, strikes, wars, etc.).

Secondly, such event must be unpredictable. The unpredictability of an event can be manifested via the fact that the parties, to a reasonable extent, and at the time of establishing contractual obligations, are unable to foresee or predict that such event will occur (for example: a storm suddenly changes its direction in contrast to the previous weather forecasts).

Thirdly, such event must be irresistible. Such irresistibility can be inferred from the affected party’s inability to remedy or prevent such event from happening despite all necessary measures and to the extent permissible (for example: the transporter had tried to evade the storm and performed all measures to assure the safety of the ship but the storm still sunk it along with all the goods on the way to the purchaser).

2. Breach of contract “due to” a force majeure event

Besides the mentioned definitional elements, a condition for invoking force majeure events that is often overlooked is that the event much be the cause of or reason for the contractual breach. Indeed, Article 351.2 of the Civil Code 2015 provides that a contract breaching party may be exempted from legal liabilities if it violates the obligations “due to” a force majeure event, unless otherwise agreed or otherwise provided by law. From this provision, it can be interpreted that not all contractual breaches during the occurrence of a force majeure event are exempted from liabilities, but only breaches that happen “due to” the force majeure event.

It seems that Vietnamese law has not precisely specified how to determine if a breach is actually “due to” an event, because a contractual breach, after all and to some extent, is due to the choice of the obligor. This results in different interpretations and may be subject to debate. In our opinion, there are at least two ways of interpretations regarding how to conclude if the breach actually happens “due to” the force majeure event.

The first interpretation is that the breach happens “due to” the force majeure event only if the force majeure event causes the obligation performance to be “impossible”. Take for example a cargo ship that was sunk by a storm along with all the carried goods. According to this method of interpretation, after such force majeure event occurred, the seller is only exempted from liabilities if it is absolutely impossible, for the seller, by all means, to have the goods delivered on time to the purchaser. However, in this line of thought, if the seller still has financial capability to acquire new goods from other suppliers, the seller cannot invoke the force majeure event as liability exemption for non-performance, because the obligation to provide goods, strictly speaking, is not “impossible”.

The second interpretation, which is more lenient for the breacher, is that if the force majeure event causes the obligation performance to be “impractical”, then the breaching party is exempted from liabilities. Using the same example of the cargo ship, if buying goods from other suppliers to provide for the purchaser results in excessive expenses or causes unreasonable disadvantages to the seller, then the seller may be exempted from non-performance liabilities because of the force majeure event.

As Vietnamese law is not certain regarding the above interpretation choices, the outcome of a force majeure dispute will likely depend on the language of the contract and the assessment of the tribunal. In our opinion, this issue should be given due consideration by the legal team in the case of such dispute.

3. What can amount to force majeure events after nearly 02 years of COVID-19

We are of the opinion that, at the time of this article, the COVID-19 pandemic itself no longer a force majeure event, as it has become so familiar with everybody and is mentioned in everyday news. Thus, it is common sense that parties now need to take into account the pandemic before concluding a contract and cannot simply evade liabilities by mentioning COVID-19, unless certain circumstances are in question.                                      

Nevertheless, certain situations or after-effects related to COVID-19 can still be force majeure events. For example, if a company can prove that it has actively and strictly take anti-virus measures, but an unexpected virus infection case passed the protection walls and brought about an outbreak of infection within the company, then it is reasonable to conclude that such company has faced a force majeure event. Or, whether there will be any more dangerous mutations of the virus in the future is a rather unpredictable matter, and once such mutations come into existence, the economy may be seriously affected and many contracts will be unavoidably breached. In such situation, it is arguably a force majeure event also has occurred.

4. What businesses should do

It is a principle that, in contractual relations, lawful agreement between the parties must be respected. Thus, the language in the contract should be carefully picked with force majeure events in mind. The three elements of a force majeure event under the Civil Code 2015 (externality, unpredictability, and irresistibility) cannot be modified; however, the parties may agree in advance in what situations an event shall be considered external, unpredictable, and irresistible, or even attach a specific list of force majeure events to the contract.  

In addition, the contract should also provide for conditions and/or obligations that a party must satisfy before being exempted from liabilities due to force majeure events. For example, the decrease in revenue to a certain amount, the company being forced to be closed due to decisions of competent authorities, the affected party’s prompt notice of the force majeure event, etc. What rights the parties can have after the force majeure events should also be included, for example, the right of extending the obligation performance period, deferring or exempting some obligations for the affected party, or suspending the performance of or terminating the whole contract.

BROSS & Partners, a Vietnam law firm highly recommended by Legal 500 Asia Pacific, Chamber Asia Pacific, AsiaLaw, IFLR1000, Benchmark Litigation, has experience and capacity to advise and resolve legal disputes regarding Investment, Corporate and Commercial, M&A,  Real Estate and Construction, Banking and Finance, Taxation, Securities, Capital Market and Intellectual Property.

Should you need any assistance, please contact: hoang@bross.vn; mobile: 0903 556 119; Zalo: +840903 556 119.