Lauri Railas participates in the IR Virtual Series – International Contracts: How has the global pandemic impacted international contracts?

Lauri RailasFounder of the Firm, Railas Attorneys Ltd.

Foreward by Andrew Chilvers

The COVID-19 pandemic is one of those once-ina-lifetime events that few people predict but which affects everyone – individuals, businesses and governments.

During the past four months the pandemic has caused huge disruption to companies across the globe as many have suddenly found it impossible to fulfil their contractual obligations. From retail and the construction industry to hospitality and manufacturing, every area of the world economy has suffered.

As a consequence, lawyers and their clients are now rushing to look more closely at the force majeure doctrine as an option for businesses that are no longer able to perform their contractual obligations.

Different legal systems have different legislative definitions for force majeure. For instance, English common law – unlike in civil law – has no universal definition. The ability of a contracted party to invoke force majeure will depend on the presence of a force majeure clause and the particular terms set out in the contract.

Can force majeure justify a suspension of performance or the unilateral imposition of new deadlines or cancellations of purchase orders?

The occurrence of a force majeure event justifies the suspension of the performance of contractual obligations by the affected party and this depends, obviously, on how your contract has been drafted. A unilateral imposition of new deadlines sounds harsh, but it could be possible after invoking force majeure and provided that the length of the impediment is known. You would not have to negotiate new deadlines. Force majeure clauses in the contract preserve the continuity of the contract up to the agreed time after which termination is possible.

If you depend on the law only – and I’m referring to the Vienna Convention and the UK is not a party – under the CIC convention non-performance could be a fundamental breach of contract, even if you avoid paying damages based on force majeure. Consequently, you don’t have to pay damages because your delivery is delayed but, in any case, if you are delayed this constitutes a fundamental breach. According to the CIC convention, as defined by Article 25 of the convention, then you might cancel the contract and if you have a force majeure clause, then the second clause regulates when you can terminate. The cancellation of purchase orders would require the possibility of termination. Again, a force majeure clause dates when termination is possible; whether the buyer is entitled to hold back payment if the seller cannot deliver due to force majeure again depends on the force majeure clause and applicable law. Therefore, I would say give a cautious, yes, to that question.

In Finland and the Nordic countries it is extremely rare that the court might adjust contracts. It is obviously possible to use arbitrators and even the arbitrators could also adjust contracts.

Does the COVID-19 crisis and possible breach of international contracts fundamentally alter assumptions surrounding risk allocation, supply chains and access to markets?

We are very much dependent on exports, producing investment commodities such as power plants, machines and so forth.

At the moment we haven’t experienced that many problems, but obviously the order books are relatively empty right now, particularly in areas such as ship building – cruise ships, for example. That creates problems if nobody is going on cruises. The government has subsidised big and small businesses, but as my colleagues have said, no one could have predicted the type of risk analysis ahead of COVID-19. That initial phase has already passed.

Nevertheless, heavy industry will need to import components from countries such as China and those supplies have all but dried up in the past few months. And if you don’t have any components, you cannot make the product and that has created big problems. From a risk point of view, I think companies will want to mitigate risk by ensuring that components are closer to the locations of production. That’s really important.

Many businesses will now be considering this possibility and make risk management a key aspect of their operations. I’ve tried to understand about the consequences of that risk-based approach in terms of law and it’s very difficult to invoke changing circumstances in contractual relationships in general.

We can predict that COVID-19 will cause trouble in the future, but we cannot build on general clauses. I think that companies will have to draft more carefully prepared contracts to try to understand unpredictable circumstances.

Where a contract does not contain a force majeure clause, how simple is it for parties to consider the doctrine of frustration? In which jurisdictions would this apply?

Frustration is an English law doctrine. It generally means that the non-performance of the contract is not attributable to the parties and, as a result, there is a valid excuse for non-performance. The contract becomes, in a way, null and void through the operation of law and frustration provides one party with the defence in an action brought by the other. It kills the contract itself and discharges both parties automatically.

Finish law does not contain frustration as such, nevertheless, similar results might be reached. I now refer to our contract act, which is a pan-Nordic contract act involving all the Nordic countries, Denmark, Finland, Norway and Sweden and Section 36 of this act makes it possible for the parties to have their contracts adjusted on the basis of changing circumstances. A judge or arbitrator may adjust or set aside unfair contract terms.