Force majuere event: from regulations to practice in the context of Covid-19 epidemic

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Force majuere event: from regulations to practice in the context of Covid-19 epidemic

The epidemic considerably impacts the contractual performance of a party/a company. The term “force majeure events” is referred to by contractual parties for exemption of obligations to limit potential damages to which they are exposed. The implementation of the term in legal practice, however, remains a difficult issue even for experienced
lawyers.

How is force majeure event provision governed?

Pursuant to Article 156.1 of the Civil Code 2015, a force majeure event is a situation that occurs beyond the reasonable control of any party in a transaction and is unpredictable. Its consequences are irreparable although all permissible and necessary remedies are applied.

Accordingly, there are three conditions that an event shall meet to be considered as a force majeure event, which are:

(i) The event must be objective;

(ii) The event must be unforeseeable; and

(iii) All permissible and necessary remedies are applied but cannot
repair damages.

In general, force majeure provision is left open for free negotiation by parties rather than being regulated in detail. Therefore, the interpretation and application of this rule are significantly dependent on the contractual context case-by-case, and on the basis of goodwill and faith.

Condition 1: The event must be objective

The Civil Code 2015 does not provide criteria to determine an event to be objective. To the most common interpretation, an event occurs objectively if it happens without intents of any involved parties of a contract. In other words, parties to a contract do not deliberately make such an event or let it be. Clearly, things beyond the subjective will of a person are various and numerous, legislators cannot specify criteria to shape how an objective event shall be.

Condition 2: The event must be unforeseeable

Similar to Condition 1, the Civil Code 2015 does not regulate specific criteria to decide whether an event is unforeseeable. In common sense, an unforeseeable event can be interpreted that is unable to be predicted by any sides within their ability.

The matter is how to assess the ability of the contractual parties in foreseeing an event that is possible to happen in the future. To be objective and rational, it is agreed by a majority of lawyers that the assessment must be based on the fact that whether or not a normal person in the same situation can predict the event. This means if an ordinary individual in the same contractual context is able to foresee the event, the parties of the contract are not allowed to apply the force majeure provision to exempt their obligations.

An equally important issue is a reasonable time that parties have to anticipate the occurrence of an event that may obstruct their contractual performance. Obviously, representations and warranties of parties are provided under objective elements, conditions and background at the time a contract is signed. So, any unforeseeable situation at that time is accepted to be a force majeure event. However, if an event is not forecasted at the time of entering the contract, but is predictable during the execution of the contract, such an event shall not be considered as force majeure.

Condition 3: All permissible and necessary remedies are applied but cannot repair damages

In case of a force majeure event, contractual parties are required to remedy consequences by all acceptable and necessary measures. This condition is appropriate for the principle of goodwill and honesty in attempts to perform obligations under an agreement, which is a conventional rule in the contractual norm.

The Vietnamese law once again lets it open for the parties to discuss and agree on the degree that such remedies are proper. Yet, according to most legal experts, the remedies should not be purely viewed from the economic perspective. This means other factors should be additionally considered such as experience, personnel and other available facilities which are able to be used for remedy.

What are the legal consequences of a force majeure event?

Article 584.2 of the Civil Code 2015 prescribes that breaching parties, in case of a force majeure event, are not obligated to compensate parties who are damaged. Nevertheless, the law does not mention the exemption of other types of obligation such as penalty, paying interests or being forced to comply with contracts. In contrast, Article 294.1.b of Commercial Law 2005 specifies that breaching parties are exempted from contractual obligations in case of force majeure events. As can be seen, the regulation does not limit types of obligation which are exempted, thus, it can be interpreted as all duties under contracts are relieved. In practice, before signing contracts, contractual parties may clearly agree on specific obligations which can be exempted in case of a force majeure event, and this is totally appropriate with the principle of freedom to enter into an agreement.

Overall, there are the following common types of relief:

(i) Exemption from damages and/or penalty;

(ii) Extension of due dates or deadlines;

(iii) Suspension of contractual obligations such as delivery, storage, etc;

(iv) Exemption from liabilities due to delay or non-performance;

(v) Termination of contracts;

(vi) Re-negotiating terms and conditions of contracts.

Has Covid-19 considered a force majeure event?

The Covid-19 pandemic itself and orders of State’s bodies to provisionally lockdown and suspend most activities nationwide may be considered as force majeure events. The occurrence of the outbreak is beyond the intent of anyone (Condition 1) and its widespread, as well as adverse impacts, are unforeseeable (Condition 2). The cure for Covid-19 is certainly beyond the capacity of contractual parties and the orders of governmental bodies are compulsory that they can do differently (Condition 3).

Are all contracts and obligations applied relief measures?

Except for being mutually agreed otherwise, unfortunately, not all contracts and obligations can be exempted. As the above analysis, it seems that only contracts signed before 01 February 2020, the date on which the Prime Minister officially declared the emergency of the outbreak of COVID-19, can be reasonably acceptable to be applied the
force majeure clause. Agreements entered after that cannot be considered similarly because it violates the unforeseeable condition of a force majeure event. Any individual must be aware of the seriousness and the impact of the declaration of the Prime Minister.

Moreover, not all activities are suspended. Banking and necessities supplying services are allowed to sustain their operation to serve residents.

Therefore, obligations that are not considerably affected such as payment, debt repayment, provision of necessities, etc. cannot be exempted or delayed for too long.

Conclusion and recommendations for enterprises

The implementation of force majeure event provision is eventually dependent on the negotiation and consensus of contractual parties on the basis of the specific contractual context. The analysis hereof is based on theory and general view, and should only be referred to as a basis for rational consideration.

Enterprises can refer and apply the following doings:

(i) Reviewing contracts that are in progress to find out which ones can apply force majeure clauses to suspend impractical obligations at the moment.

(ii) Be aware of forms and deadlines required for making notifications about the force majeure events as well as the suspension of contractual performance where applicable.

(iii) Preparing a set of evidence to prove the suspension of obligations or termination of contracts is reasonable and factual proof.

(iv) Contacting partners or clients to negotiate on upcoming obligations and set forth proper resolutions for both sides.

 

This article is a part in our Covid-19 Legal Handbook published on the first wave of pandemic in Vietnam in 2020. We hope you can find it is still useful currently. The full handbook can be read here.