Practical Remarks on the Assessment of COVID-19 as Force Majeure in International Contracts
Matteo M Winkler, HEC Paris
The COVID-19 pandemic and the resulting governmental lockdowns have made performances in international contracts extremely difficult if not virtually impossible. While international contracts normally address the consequences of infectious diseases and the related public health measures in appropriate force majeure clauses, such clauses are often hard to implement as they present high levels of language complexity and technicality (see Fontaine and De Ly, pp. 401-451), while at the same time tending to replicate the typical inaccuracies and inconsistencies of the boilerplate (see Brunner, pp. 383-390).
A transnational notion of force majeure nonetheless exists which transcends the radical differences among the national systems and whose regime reproduces the related provisions of lex mercatoria, art. 7.1.7 of theUNIDROIT Principles and art. 79 of the Convention on Contracts for the International Sale of Goods (CISG), thus reflecting a general principle of law (as affirmed in Anaconda-Iran, Inc. v. Iran, par. 41-43). The essential features of this transnational notion of force majeure, which have been ultimately incorporated in the 2020 version of the International Chamber of Commerce (ICC) Model Force Majeure Clause, are unforeseeability, causation and insurmountability. First, unforeseeability comprises the requirement that the impediment claimed as triggering force majeure must not have been taken in charge by the affected party in the contract, either explicitly or implicitly, through risk assumption. Second, causation prescribes that only non-performances directly caused by the impediment can be excused. Finally, insurmountability requires that the consequences of the impediment could not be reasonably avoided or overcome.
Unforeseeability in force majeure is descriptive of the parties’ respective risk assumption under the contract. As such, it does not hinge on the possibility that the parties psychologically anticipated such an impediment when they entered into the contract, but on whether it appears that a reasonable person would take the risk given the information and knowledge that existed at the time of the contract. Under this standard, unless the contract was entered into after the outbreak of COVID-19 (it’s hazardous to set a precise date, as the pandemic hit countries in different times), whether the latter was foreseeable or not depends on the information available to the parties at the time of the conclusion of the contract.
What is required is an in abstracto «circumstantial» appreciation, demanding an assessment of the affected party’s possible specialized knowledge together with the objective characteristics of the event. Along this line, certain peculiarities of SARS-CoV-2 (namely, its high transmission efficiency, the hardship of its symptoms and the fatality rate compared to other known coronaviruses such as SARS and MERS) may be good evidence of the pandemic’s unforeseeability.
This said, the question of the pandemic’s unforeseeability would likely concern just a relatively marginal handful of cases, as this requirement can be missing in contractual practice (Fontaine and De Ly, p. 403). Moreover, under force majeure clauses reflecting the ICC Model Clause the affected party is exempted from proving that a specific impediment, if expressly contemplated in the impediments’ list, was unforeseeable. In the domestic context, however, the situation is more diversified, as unforeseeability could still be required even with a «catch all» force majeure clause (as inTec Olmos v. ConocoPhillips, pp. 182-185). In any event, the express mention of «outbreak», «epidemic» and alike within such a list appears to be crucial, as does the interpretation of the impediments’ list as exhaustive or merely illustrative in case no infectious disease is in fact contemplated.
Finally, the pandemic and the containment measures that ensued (normally contractually headed as factum principis) represent distinct alternatives on which the affected party can strategically leverage depending on the circumstances (without forgetting, however, that each of these events must be notified: cf. recently Seadrill Ghana Operations v. Tullow Ghana, par. 78-80).
To summarize, if the force majeure clause is solid enough, the unforeseeability requirement is confined to marginal cases. If unforeseeability is nonetheless required, then one should consider that:
- the novel coronavirus has certain distinctive epidemiologic characteristics that make it unique among all known epidemics, hence hardly foreseeable;
- unforeseeability must be assessed at the time of the conclusion of the contract;
- the standard applicable to the unforeseeability test is that of a reasonable person;
- the foreseeability test is a necessary shortcut for risk assumption (since an allocation of risk can only happen in relation to reasonably foreseeable events), hence hardly precise but rather case-specific;
- the foreseeability test applies both to the COVID-19 and the subsequent containment measures as possible impediments (e.g., Canary Wharf (BP4) T1 Ltd v. EMA, par. 211-216, found Brexit «not relevantly foreseeable» when EMA entered into its London headquarters’ lease agreement in 2011).
Force majeure requires a direct causal link between the event and the failure to perform. Obviously, such a link must exist at the time when the performance is still due (see Caviar case, par. 9) unless the contract provides otherwise (cf. General Dynamics UK v. Libya, par. 263-265).
In this logic, either COVID-19 or the subsequent governmental restrictions must have been the non-performance’s «but for» cause (Classic Maritime v. Limbungan Makmur, par. 31-62). Either hypothesis can occur in an incredibly extensive plethora of scenarios, such as where non-performance resulted from an overwhelming infection hitting a party’s whole workforce or in case of the shutting down of the whole commercial activity due to a governmental declaration of the party’s industry as non-essential.
The causation test is particularly harsh in the common law tradition, where the affected party must prove that the impediment not only made performance impossible but changed the nature of the outstanding contractual obligations and not just the party’s expenses or onerousness. This extremely high standard makes frustration extremely hard to be successfully invoked in long-term contracts (see Li Ching Wing v. Xuan Yi Xiong; Nat’l Carriers Ltd v Panalpina; Canary Wharf v. EMA, supra, par. 238].
Another important causation-related question concerns the possible impact of force majeure on the supply chain, where the cause of non-performance is clearly not COVID-19 but a major supplier’s failure to perform, in turn due to the pandemic. The rigid cumulative rule provided by the ICC model and art. 79(2) CISG, under which a contracting party is excused for non-performance due to a third-party non-performance only if the requirements for force majeure are established for both subjects, is likely to facilitate the finding of force majeure in national or regional supply chains over international ones, as the former may virtually follow similar contractual regime and be subject to the same containment measures, thus possibly fulfilling the same requirements of force majeure for the same event.
Some containment measures may indeed facilitate the finding of causation. In Italy, for example, the government passed a provision establishing that the respect of such measures is «always taken into account» (presumably by courts) to exclude the affected party’s liability for non-performance, «also in respect of contractual deadlines and penal clauses» (art. 3(6bis) of Decreto-Legge No. 6 of23 February 2020, added by art. 91 of Decreto-Legge No. 18 of 17 March 2020). This provision enlarged the scope of the force majeure defence against claims of performance raised against parties in distress because of compliance with the containment measures (as remarked by Benedetti, p. 214), although its extraterritorial effects remain questionable (as recently observed by Torsello and Winkler, p. 5).
To be invoked as force majeure, the impediment must be inevitable and its effect insurmountable. The underlying rationale is that the parties to a contract must do everything in their power to fulfil their obligations without waiting for an event which may later excuse non-performance (Macromex v. Globex Int’l Inc., AAA Award, 23 October 2007, II.B.ii).
This requirement is assessed under a commercially reasonable substitute test which demands to evaluate whether a reasonable person, in the same circumstances as the affected party, could have provided marginally different goods or performed with a different modality (different packaging, another route or place of delivery etc.; see CAP Award No. 3150, par. 33). There is an ongoing discussion among scholars about the proper standard for this test (e.g., Tallon, pp. 580-581 and, more recently, Liu, par. 4.4). Whereas a few argued for an in concreto appreciation, the reasonableness requirement seems to call for an in abstracto circumstantial approach (as that of unforeseeability), having regard to the impact of COVID-19 on a reasonable person with the same competences as the affected party.
Factors to be taken into account may therefore be:
- The suppliers’ geographical concentration in an area affected by total lockdown;
- The scope of the lockdown, possibly impacting the operability of the affected party and its own suppliers (essential v. non-essential activities; medical equipment etc.);
- The possible precautionary actions taken (or that should have been taken) by the affected party in order to insulate her employees or premises from COVID-19 (on which case see the recent order of the Tribunal Judiciaire de Nanterre regarding Amazon France’s logistics);
- The initiatives that the affected party assumed to avoid its own non-performance (like looking for alternative flights to transport the goods, as in the Cour de Cassation’s 1999 decision in Lema c/ Fatton).
Finally, it is important to note that, unless the contract provides otherwise, the financial force majeure never excuses a failure to perform. There is certainly a case to be made for hardship in the event of financial burdens directly arising out of COVID-19, but supervening onerousness raises distinct issues from force majeure which would exceed the scope of this post (see Berger and Behn, pp. 38-53). National containment measures may provide relief in this respect by suspending the effect of penal and liquidated damages clausesuntil the mitigation of the pandemic, as in France (cf. art. 4 of Ordonnance no. 2020-306).
Force majeure clauses are an essential tool to avoid the hard consequences of COVID-19. They may be imperfect in terms of language and consistency but still represent a strong shelter for parties in distress because of the pandemic. As litigation is increasing regarding claims for (non-)performance allegedly due to COVID-19 (as in Standard Retail Pvt. v. Gs Global), the existing heterogeneity of force majeure clauses and the complexity of the transnational definition of the same require a compass to navigate the legal hurdles generated by COVID-19. This post provides a few directions in this respect.