Corona Virus Pandemic (Covid-19): application of “force majeure” clause to international sale of goods contracts.

On 30 January 2020 the World Health Organization (“WHO”) declared the emergency of Coronavirus Covid-19 in China to be a public health emergency of international concern. Then on March 11th, the WHO defined the Coronavirus Covid-19 as a Pandemic spread all over the planet (the “Pandemic”).

BACK-GROUND

The present article aims at providing some guidelines, based on the United Nations Convention on international sale of goods (Vienna, 1980, later called the “Convention”) for a first approach to legal analysis and applicable remedies in situations of delay or impediment in the execution of sale of goods contracts, caused by the Pandemic as a possible “force majeure” cause.

Given that in an international sale of goods contract a certain lenght of time may elapse between the conclusion of a contract and its performance (as an example, consider the cases of sale of equipment with installation, or sale with deliveries by instalments, or supply & purchase  contracts), it may happen that the seller’s production, after the declaration of the Pandemic, has been delayed, for example for the necessity of disinfecting systems and for letting the employees work in security. It may also happen that the seller cannot not deliver the goods, purchased in China, to a German client, because of the lack of raw materials’ supply in China.

In these and similar cases, the seller could probably rely on the “force majeure” cause related to the Pandemic – in so far as he can prove the alleged facts – as an exemption from liability for delay or non-delivery of goods. He can do so by attaching that the performance has become impossible or excessively burdensome, to an extent to be beyond his control, so that he cannot be liable for the failure to perform its obligations and for the compensation of the damage caused to the client.

Specifically, the question is what are the legal grounds on which in an international sale of goods it is possible to claim a liability exemption for a “force majeure” cause, and if and to what extent, in this specific case, the Pandemic can constitute for real a “force majeure” cause in this sense.

LEGAL FRAMEWORK FOR THE APPLICATION OF THE “FORCE MAJEURE” CLAUSE

In order to analyse the issue, it is necessary to rely on the Convention, which is in force in a great number of Countries and which covers a wide range of sale of goods contracts (from traditional sales, to contracts for the supply of goods, but also contracts of sale with deliveries by instalments and circumstances including also contracts for the supply of goods to be manufactured as stated in art. 3 of the Convention), which are the most common contracts in international trade.

The Convention is a legal instrument of great success – considering also art. 7 which promotes the uniformity of its application and which contributed to the issuing of a great amount of judgments, on both litigation and arbitration, spread all over the world – signed by 93 States, including:

i) In the European Union almost all the Member States (except for the UK, Ireland, Portugal and Malta); and

ii) outside the Union, almost all the Countries which have the most intensive trade relations with Italy, as for example United States, Australia, Canada, China, Russia, Japan and Brasil, with the relant exclusion of India and a lot of States in the Middle-East.

In particular, the Convention – unless otherwise agreed from the parties – concerning a different applicable law to the sale of goods, is applying:

– following an agreement inside the contract between the seller and the buyer (who decide to choose the Convention as the applicable law regulating the contract)

or

-in the case that there is no specific agreement inside the contract, art. 1 provides that the Convention applies to contracts of sale of goods between parties whose places of business are in different States:

a) when the States are Contracting States;
or
b) when the rules of private international law lead to the application of the law of a Contracting State.

As an example, in the EU context, art. 4 (a) of EU Regulation no. 593/2008 states that “a contract for the sale of goods shall be governed by the law of the country where the seller has his habitual residence”. The consequence is that in the case of a sale of goods between an Italian seller and a Portuguese buyer (remember that Portugal didn’t sign the Convention), the Convention will apply in any case and also the Portuguese judge, eventually designated as the competent judge in the dispute, must apply it even if it is not the national Portuguese law.

Therefore, in the mentioned situations, it is necessary to refer to the Convention and to the related potentially uniform enforced jurisprudence of both judges and arbitrators, in order to establish which are the constituent elements of the “force majeure” cause.

HOW THE CONVENTION IS APPLIED TO “FORCE MAJEURE” CASES

In particular, art. 79 of the Convention, named “Exemptions”, provides at paragraph 1 that a party is not liable for a failure to perform any of his (contractual) obligations if he proves that:

i. the failure was due to an impediment beyond his control;
ii. he 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.

Art. 79 paragraph 2 states the application of the exemption also in the case that the party’s failure is due to the failure by a third person whom he has engaged to perform the whole or a part of the contract (for example, by the sub-supplier or by a carrier; cfr. Handelsgericht des Kantons Zürich 1999, Clout case 331), but only if are met the conditions stated above.

Essentially, in the words of art. 79, to state that there is an exemption from the contractual liability due to a “force majeure” cause (and always unless otherwise agreed in the parties’ contract), it is necessary that the interested party proves that:

1. the impediment arose after the conclusion of the contract
For example, a new law, not present at the time of the contract’s conclusion, stopped the service’s performance (also known as “factum principis”);
2. the impediment was not reasonably be expected to happen at the moment of the sale of goods execution: i.e. the impediment is beyond party’s control and it cannot be included in reasonably predictable events.
For example, it is not an unpredictable event the existence of ban on import of goods when the ban was already in force at the time of the contract’s conclusion (ICC judg. no. 2130/1980).

In a decision of March the 5th, 2005 the Chinese Arbitration Court (Cietac) dismissed the application from a Chinese seller which invoked the SARS epidemic as a “force majeure” cause to justify the failure to perform his obligation to deliver the goods, because in the Court’s opinion, inter alia, the SARS epidemic was already spread two months before the contract’s conclusion and, for this reason, for the seller it was a predictable event.

Therefore, in the case of the current Pandemic, it will be necessary to verify if it had been already declared by Public Authorities (with a particular reference to the WHO’s official declarations) when the contract was concluded or if it has been verified at a later stage. If the Pandemic had occurred later than the signing of the contract, then the unpredictability of the situation will be probably satisfied, as the event was unpredictable for the affected party.

3. the party could not reasonably have “overcome” the impediment or “its consequences”. For example, it is not a case of impossibility the case of a failure in issuing visas to Israeli staff which had to carry out maintenance, because this staff was replaceable with a different nationality staff (ICC judg. no. 1782/1973).

This condition, in the case of the Pandemic, may justify new law’s conditions which prevent the contract’s execution.

FORCE MAJEURE OR HARDSHIP?

It is important to bear in mind that if the performance can be done, but only at a major cost, this will not be considered as a condition of impossibility. In this case, the original economic balance proposed at the time of the contract’s signing is altered, with the consequence of a particularly heavy cost for the affected party’s performance. These particular situations are not covered by art. 79 of the Convention, but they fell into a specific clause also known as “hardship clause”, provided in the sale of goods’ contract and which imposes the renegotiation of the entire contract. However, with a 2009’s decision (Belgian Court of Cassation 19/6/2009 Scafom International/Lorraine Tubes), to which the Convention applied, the Belgian Cassation Court obliged the buyer to renegotiate sales’ terms with the seller, taking into account the Unidroit Principles as general principles of international trade law (steel price had gone up 70% between the contract stipulation and the time of delivery).

NOTIFICATION OF “FORCE MAJEURE” CAUSE

Art. 79, paragraph 4, states that the party who fails to perform the contract must give notice to the other party of the impediment and its effect on his ability to perform the obligations in a reasonable amount of time (in which the party who fails to perform knew or ought to have known of the impediment). If the notice is not received by the other party, the affected one is liable for damages resulting from such non-receipt.

For this reason, to claim a “force majeure” clause which satisfies all the conditions stated, the seller or the buyer (depending on who is uncapable of performing the contract) must give notice to the other party with a modality foreseen in the contract or a modality which assures a proof of this notice and which is demonstrable (for example with a registered letter with acknowledgment of receipt, urgent courier with proof of delivery, etc.).

EFFECTS OF THE APPLICATION OF FORCE MAJEURE CAUSE

The effect of the application of art. 79 is to allow the party claiming the “force majeure” for the Pandemic situation (seller or buyer) to have an exemption from the liability for the entire period of the impediment, during which the performance of the party affected by the “force majeure” cause will be suspended, until reaching the contract’s termination if the impediment persists.

Various legal news blogs report that China, signing Country of the Convention, with the China Council for the Promotion of International Tradeallows Chinese companies to ask for a “Force Majeure Certificate”, in which it is stated that any failure to perform or delay in performing are directly caused by the spread of the Pandemic (as already done with SARS in 2003). However, there are several doubts on the validity of such certificates when submitted to (not Chinese) judge or arbitrator during an international dispute, because, in our opinion, it is necessary to always analyse the existence of the elements stated in the above mentioned art. 79, not being enough a declaration from public authority to integrate the conditions seen above.

TYPICAL CONTRACTUAL SITUATIONS IN LIGHT OF A FORCE MAJEURE CAUSE

In principle, it is possible to face the following macro-situations:

1. the contract is very concise (for example it is a proforma summary on sales terms accepted from the buyer) and it does not provide any clauses on the applicable law, nor a “force majeure” clause.

In this case, when the Convention applies, it is necessary to refer to art. 79 and it is not possible to rely on a national law (i.e on a specific rule of national law regulating force majeure).

When the Convention does not apply instead, it is necessary to refer to the national law which will be the one of the Country where the seller has his habitual residence given that the specific Country considered has not signed the Convention (consider UK, India, Portugal, etc.). In this case we will need to check what is the content of the national law on the “force majeure” cause.

2. the contract provides specific clauses both on “force majeure” and on applicable law.

In this case it is necessary to consider the “force majeure” clause and to respect it, and, where this clause misses something, it will be necessary to refer to the applicable law. In our experience there are always different clauses, and sometimes they are misconceived: in this situation, the parties’will must be modified and integrated with prevision from the applicable law. More in detail, the clause must provide the event which constitutes a “force majeure” case with the mention of “epidemic”. It could be also present inside the clause a reference to a list of “force majeure” causes as examples of this events, without any reference to “epidemic”, but this clause might be covered by the general definition of “force majeure” provided by the clause considered.

On the other side, it could be present a rigid formulation of exemptions in which the clause here discussed is not included, and in this case likely it is not possible for the affected party to claim that clause because the parties’ will was to limit the “force majeure” cases. Generally speaking, is better to provide a specific “epidemic” clause or a general clause which guarantees the formulation of the “force majeure” cases in which it is then possible, in our opinion rightly, to include the current Pandemic.

Anyway, the clause must be interpreted and applied considering both dispositions in the contract (so by verifying that there are no other conflicting clauses) and parties’ chosen law for regulating the agreement.

3. the contract does not provide a “force majeure” clause, but it provides a specific clause on applicable law.

In this case, it is needed to make reference to the only law indicated by the parties in the contract and also to the related applicable national jurisprudence.

It is necessary to analyse the contract’s text and to verify if there are clauses on the applicable law and on “force majeure” cases, with the aim of establishing if the Pandemic is a specifically ruled event or not. Then, if necessary, the parties’ will can be integrated with the Convention’s provisions (where applicable) or with the national applicable law.

When the contract does not provide any information on the case considered, it is necessary to verify which is the applicable law (the Convention or national law).

When the Convention applies, the concrete circumstances at the basis of the claim for a “force majeure” cause have to satisfy the requirements of art. 79, and then there is the need to promptly give notice of the impediment to the other party.

SCENARIOS AND OPERATIONAL SOLUTIONS

After the notification to the other party of the “force majeure” cause due to the Pandemic (or hardship cause if applicable), there will be different potential scenarios:

1. suspension of the contract: during the suspension’s period, unless otherwise agreed, each party has to bear its own costs, once confirmed that the provisions of art. 79 are satisfied. This is the most likely to happen scenario in the current Pandemic situation.

2. renegotiation of the contract: this solution can be linked to the suspension and it is the less onerous solution because it opens to good faith negotiations. The most convenient solution is to agree on a rescheduling of deliveries, up to a potential termination of the contract if, for example, the impediment does not change in a reasonable period of time.

3. termination of the contract: it is possible to ask for a termination of the contract when the obligation is impossible to perform and the other party opposes to the suspension of the contract or to its renegotiation, with the possibility of an international dispute arising with the other party.

Marcello Mantelli
Avvocato in Milan and Turin


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