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Articles - 27/04/20

Dealing with the Unexpected: Force Majeure in the Times of Cholera

This article was produced by our sister Law firm in the US De Almeida Pereira PLLC

The lovers Lorentino and Fermina, in Gabiel Garcia Marque´s classic “Love in the time of Cholera”, are separated by circumstances outside of their control. Today  many companies find themselves similarly unable to fulfill their wishes and perform their obligations vis-à-vis business partners, supplier, customers, and contractual counter-parties. Covid-19 has ground commerce to a halt leaving many business uncertain of what lies ahead and how their commercial relationships will fare.

Force Majeure is recognized in many legal systems worldwide. While the concept may have different formulations across jurisdictions, it essentially frees contractual parties from liability or obligation when an extraordinary event or extenuating circumstance beyond the control of the parties prevents one or both parties from fulfilling their contractual obligations. Classic Force Majeure events include wars, riots, epidemics, natural disasters, or other events that can be legally considered acts of God.

Formulations of Force Majeure  

The classic formulation of Force Majeure is reflected in the Convention on the International Sale of Goods (hereinafter ‘CISG’). CISG Article 79 states that “[a] party is not liable for failure to perform any of his obligations if he proves that the failure was due to an impediment beyond his control and that he could not reasonably be expected to have taken the impediment into account at time of the conclusion of the contract or to have taken the impediment into account at the time of the conclusion of the contract or to have avoided or overcome it, or its consequences.” This sets out three requirements for the defense of Force Majeure, namely that: (i) the cause of non-performance is beyond the control of the party invoking and seeking to rely on Force Majeure; (ii) the event was not reasonably foreseeable; and (iii) the event or its consequences cannot be overcome.

In addition to the requirements of Force Majeure in the law applicable to a contract, parties often set out specific Force Majeure clauses in their contracts. These clauses are generally deemed to be valid and applicable if they are deemed to represent the wishes and intent of the parties and as such can vary significantly as to their scope and coverage. Many contractual Force Majeure provisions include specific lists of events that the parties agree shall qualify as Force Majeure. The International Chamber of Commerce Force Majeure Model Clauses (2003 and 2020 versions) include specific references to events such as plagues or epidemics. The fact that  such specific events are listed indicate that these are presumably deemed to qualify as Force Majeure events and the affected party may only need to prove that it was unable to avoid or overcome the consequences of the event.

Businesses negatively impacted by Covi-19 should carefully review their contracts for the existence of Force Majeure clauses and ascertain whether the applicable law provides protections for non-performance due to pandemics such as Covid-19. Further, parties ought to verify if the dispute resolution clause in their contracts provides for disputes to be resolved by way of international arbitration (ad-hoc or institutional) or litigation.

Ultimately, the decision makers in any Force Majeure dispute will find themselves balancing the principles of Pacta Sunt Servanda – the notion the legally binding agreements must be performed and the need to take into account unforeseen events and their consequences which could make a contractual obligation excessively onerous or impossible to perform. If a contract incorporates boilerplate language, the decision makers will have some flexibility and room to interpret vague or broad language. Each case will rase its own particularities concerning the contractual obligations of each party.

Notice of Force Majeure: the case of Global Tungten

Generally, the party seeking to rely on Force Majeure clause is required to provide notice without delay to the other party of the Force Majeure event and make known its intent to invoke Force Majeure.

Global Tungsten & Powders Corp. v. Largo Resources, Ltd, Award in ICC Case 19566 of 2014 (hereinafter “Global Tungsten”) is illustrative of the notice requirements in some Force Majeure clauses. In Global Tungsten, the Tribunal had to decide on the question of whether the notice requirement of the Force Majeure clause had been met, and if not, whether it was to be considered a condition precedent to the right to invoke the clause. The Tribunal held that “clear language is required in order for a Force Majeure notice obligation to be construed as a condition precedent”. This holding demonstrates that the nuances of a specific clause can have a significant impact on the characterization of the Force Majeure clause and an effect on a party´s ability to avoid contractual liability on the grounds of a Force Majeure event.

We further note that in the International Chamber of Commerce Force Majeure Model Clause 2020 edition, if the duration of the impediment invoked substantially deprives the contracting parties of what they were reasonably entitled to expect under the contract,  either party has the right to terminate the contract by notification  within a reasonable period. It would be apt to note that unless otherwise agreed, the 2020 version now provides that the parties expressly agree that the contract may be terminated by either party if the duration of the impediment exceed 120 days.

Conclusion

Covid-19 has undoubtedly transformed our way of life, our commercial and social relations, and the results of this pandemic ripple will become apparent for some time to come. Force Majeure as defense to contractual claims will certainly be one of the key issues argued, and Courts and Tribunals will have to consider the extent to which the virus itself, the government responses, and the resulting consequences companies face, can or should form the basis upon which a party may avoid contractual liability. Businesses should consider their legal advisors and review their contracts to ascertain what, if any, resource they may have due to Covid-19 and its adverse effects.

 

Diogo Pereira is a partner at De Almeida Pereira

Kirsten Teo is a counsel at De Almeida Pereira

 

De Almeida Pereira PPLC, our sister Law firm in Washington, D.D., has deep experience in disputes involving Force Majeure. Please contact diogo.pereira@dealmeidapereira.com if you require further information. If you need assistance in Brazil, please contact thiago.ribeiro@depauladias.com.