International Contracts: How has the global pandemic impacted international contracts?

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.

In this example, a typical force majeure clause highlights circumstances – generally an unpredictable event – where a party is excused from performing its contractual obligations. Such clauses very often recommend a procedure the contracting parties have to follow to avoid liability for non-performance following the unpredictable event – in the most obvious recent case, COVID-19.

Meanwhile, in Germany, for example, the term is codified, but not in any particular section of the civil code, so the legal alternative is provided in the form of ‘impossibility’. Similarly, in Italy no specific definition of force majeure exists and the alternative is referred to as ‘hardship and impossibility’.

As a result of these interpretations, different jurisdictions either have a more narrow or much wider interpretation of force majeure and frustration and it’s a point IR Global members talk through in detail
in the following pages.

Nevertheless, most legal codes tend to have common factors regarding force majeure, which is when a party relies on the doctrine to demonstrate that it has been engaged in particular circumstances that have resulted in the non-performance of a contract. The party that cites force majeure will need to establish that an event such as war, natural disaster or acts of God have occurred. In this case the unforeseeable event in question is the COVID-19 pandemic. Once it is established that an event has occurred, the contracted party that wants to trigger force majeure has to show the court that the event has prevented, delayed or impeded its ability to perform any contractual obligations.

Unsurprisingly, as a result of the Coronavirus, businesses the world over are claiming that as a consequence of a force majeure event they are not able to perform their contractual obligations, and require an extension to fulfil their obligations, to renegotiate terms to terminate the contract altogether, among other factors.

One element that needs to be taken into account by legal teams is the question of whether the event could have been foreseen. Nobody could have predicted the sheer scale and effect of COVID-19 in all the jurisdictions, but pandemics have occurred in the past; for example, the SARS epidemic of 2003. For many businesses and lawyers, the issue involves the disruption to contracts resulting from COVID-19 triggering a force majeure clause. Under French law, for example, an event is not considered to be a force majeure if it could have been foreseen when the contract was signed, while in English law force majeure is not defined and does not apply unless the parties agree that it should (in the relevant contract).

In a world reeling from the COVID-19 pandemic, then, it would be advisable to extend the definition of force majeure to include pandemics and quarantines. Ultimately, the impact of the pandemic has highlighted the importance of defining specific force majeure clauses to contracts.

Different interpretations also cover the common law doctrine of frustration, if there’s an absence of force majeure. With frustration, a contract is discharged if the event makes it impossible to perform. In common law, frustration is a narrow doctrine that is applied to prevent parties from using it to escape a bad contract, but in countries such as Italy frustration can be interpreted in broader terms.

In the following pages, x9 IR Global members give their insights into the issue of international contracts, force majeure (or impossibility) and risk in the age of the COVID-19 pandemic. For many different jurisdictions, issues around non-performance of contracts are still being discussed by legislators as businesses and governments come to terms with the pandemic.