Introduction
This newsletter highlights that the COVID- 19 pandemic has been widely recognized as a force majeure event across various jurisdictions. As a result, parties in these regions are generally relieved from liability for non-performance or delayed performance of contractual obligations that were hindered or rendered impossible due to the pandemic.
Force majeure clauses, along with hardship clauses, 1 have become critical tools in international contracts, especially in the face of unforeseen global events like COVID-19. These provisions help businesses manage risks by providing a legal framework to address circumstances beyond their control. While force majeure clauses typically allow parties to suspend or terminate obligations when performance becomes impossible, hardship clauses provide relief when fulfilling the contract remains possible but has become excessively burdensome due to unforeseen events.
As businesses navigate the ongoing effects of the pandemic and other global disruptions, it is essential to carefully draft and negotiate these clauses to ensure clarity and protection against future uncertainties.
II. Force Majeure and COVID-19 in Various Jurisdictions
COVID-19 meets the key criteria traditionally required to invoke force majeure:
- Unforeseeability: The outbreak of COVID-19 in early 2020 was unprecedented and unforeseeable at the time most contracts were executed. Even though pandemics have occurred in the past, the scale, impact, and global response to COVID-19 were beyond what could have been anticipated by parties entering into contracts before the pandemic.
- Inevitability and Externality: The pandemic and the resultant government-imposed measures, such as lockdowns, travel restrictions, and mandatory quarantines, were entirely beyond the control of contracting parties. These measures significantly hindered or even made impossible the performance of many contractual obligations, such as the supply of goods, provision of services, and payment of rents.
China: Under Chinese law, force majeure is explicitly defined in Article 117 of the Contract Law as events that are unforeseeable, unavoidable, and insurmountable. The COVID-19 pandemic, recognized as such by the Chinese government, has been officially classified as a force majeure event. Consequently, parties unable to perform their contractual obligations due to the pandemic can invoke force majeure to avoid liability. For instance, the China Council for the Promotion of International Trade (CCPIT) issued force majeure certificates during the pandemic to assist businesses in proving that COVID-19 disrupted their contractual duties.
Hong Kong: In Hong Kong, force majeure is not codified but is recognized under common law, provided it is expressly included in the contract. Hong Kong courts generally interpret force majeure clauses based on the contract's language and the surrounding circumstances. COVID-19, given its global impact and the governmental restrictions it triggered, is likely to be considered a force majeure event if the clause includes terms like "epidemics," "pandemics," or "governmental actions." The pandemic has thus been used as a valid ground for suspending or terminating contractual obligations without liability. While Hong Kong courts emphasize the need for a strict interpretation of force majeure clauses, they also recognize that the application of these clauses depends on the specific wording of the contract and the surrounding circumstances.
The Court of Final Appeal's (CFA) judgment on the general principles of the force majeure clause can be summarized as follows:
- Â The interpretation of a force majeure clause is not a "free-standing legal principle." A force majeure clause, like any other contractual provision, is to be given a fair reading in its factual matrix.
- Since contracts are made to be performed, but a force majeure clause is invoked to remove or modify obligations of performance, it ought to be subject to a strict construction. Any ambiguity of the force majeure clause would be resolved against the party seeking to rely on the same.
- However, it does not mean that the Court would interpret a force majeure clause with hostility or discourage such a clause. It is still a matter of freedom of contract on the part of the parties.
The application of these principles has been illustrated in several recent court cases:
- 2021 Court of First Instance (CFI) Case: In this case, although the court ultimately ruled against the tenant invoking force majeure, it did so because the specific clause in the contract was tied to physical damage or destruction of the premises, not the pandemic. However, the court did not dismiss the pandemic as a potential force majeure event but rather emphasized that the clause's wording was not broad enough to cover it​.
- 2022 CFI Case: Similarly, in another case, the court recognized the potential for a force majeure claim related to the pandemic but again found that the specific wording of the clause was too narrow. The clause was linked to physical accessibility and damage, which did not apply to the situation caused by the pandemic​.
These cases highlight that while the courts require specific and precise wording in force majeure clauses, they do not inherently reject the idea that COVID-19 can be a force majeure event. Had the contracts explicitly included pandemics or government actions as force majeure events, the courts might have ruled differently, recognizing COVID- 19 as a legitimate trigger for force majeure.
Germany: German law, specifically § 275(1) of the German Civil Code (BGB), allows for the non-performance of a contract if performance becomes impossible due to an event beyond the party's control. The COVID-19 pandemic qualifies as such an event, making it a force majeure situation under German law. Courts have acknowledged that the pandemic was unforeseeable and unavoidable, thus relieving parties from liability when it directly prevented the performance of their contractual obligations.
France: Article 1218 of the French Civil Code defines force majeure as an event that is beyond the control of the obligor, was not foreseeable at the time of the contract, and prevents performance of the contract. French courts have recognized that the COVID-19 pandemic meets these criteria, particularly due to its unforeseen nature and the government-imposed restrictions that made performance impossible for many businesses. As such, COVID-19 is considered a force majeure event under French law, allowing affected parties to be released from their contractual obligations without liability.
United States: In the United States, the recognition of COVID-19 as a force majeure event depends on the specific state law and the language of the contract. Courts have increasingly recognized COVID-19 as a force majeure event, especially in cases where contracts explicitly mention pandemics or government-mandated lockdowns. A notable case, JN Contemporary Art LLC v. Phillips Auctioneers LLC (2021), ruled that the COVID-19 pandemic could constitute a force majeure event, excusing non-performance if the contractual language supports such an interpretation.
Vietnam: Vietnamese law, under Article 351 of the Civil Code, defines force majeure as an event that occurs in an objective manner, is not foreseeable, and cannot be remedied by all necessary measures. The COVID-19 pandemic falls under this definition, making it a force majeure event in Vietnam. This recognition allows parties affected by the pandemic to avoid liability for non- performance if they can prove that COVID-19 directly caused their inability to fulfill contractual obligations.
International Law (CISG): The United Nations Convention on Contracts for the International Sale of Goods (CISG), under Article 79, exempts a party from liability if they can prove that failure to perform was due to an impediment beyond their control, which was not foreseeable at the time of the contract and could not be avoided. The COVID-19 pandemic has been recognized as such an impediment in arbitral decisions under the CISG, confirming that it qualifies as a force majeure event. This recognition under international law provides a uniform basis for excusing non-performance in international sales contracts affected by the pandemic.
Conclusion
Across various jurisdictions, including China, Hong Kong, Germany, France, the United States, Vietnam, and under international law through the CISG, the COVID-19 pandemic is widely recognized as a force majeure event. This recognition generally exempts parties from liability for non-performance of contractual obligations, provided that the pandemic directly impeded their ability to fulfill those obligations and that force majeure clauses were appropriately drafted and invoked.
This uniform recognition across diverse legal systems underscores the global understanding of COVID-19 as an unforeseeable, unavoidable, and insurmountable event, which aligns with the core principles of force majeure. Consequently, businesses and contracting parties in these jurisdictions can rely on force majeure provisions to mitigate the risks associated with non-performance during the pandemic.
