Is COVID-19 a ‘Force Majeure’ in Commercial Contracts?

Due to the outbreak of the respiratory infection disease caused by a new coronavirus (Covid-19), on March 11, 2020, the World Health Organization (WHO) declared a worldwide ‘pandemic’.  Reaching all parts of the globe, Covid-19 disease has had a complicated development, rapidly spreading across borders and affecting the world’s economy.

This disease continues to inflict a considerable amount of damage on domestic commercial activities and the international economy as well.  The competent authorities have implemented measures such as limiting entry and movement; suspending social activities and crowds; and halting business in some fields in an attempt to control the disease and protect the public health.  The disease and these protective measures are two of the reasons why the economy has slowed down.

Therefore, many companies are concerned about the impact of Covid-19, especially with regard to liability and compensation for breach of commercial contracts (having no production materials, the prohibition on foreign workers entering the country to work, formal and informal suspension of business, etc.).

Is Covid-19 a ‘force majeure’?

Under Article 156.1 of the Civil Code 2015: ‘An event of force majeure is an event which occurs in an objective manner which is not able to be foreseen and which is not able to be remedied by all necessary and possible measures.’

Thus, the question facing a business affected by the disease is to determine whether the three elements of a force majeure event are satisfied.  These are: Is the event (i) objective, (ii) not able to be foreseen, and (iii) not able to be remedied?  To answer this question is not a simple matter.  Essentially, the determination of whether there is a valid force majeure event is dependent on the facts of each case and the point of view of the jurisdiction (the Court or the Arbitration body) where a dispute occurs.  In general, a determination of force majeure may be made:

If the contract states that ‘disease’ is a ‘force majeure’

  • Both parties must comply with the agreement in the contract and the regulations of the Law on Commerce concerning exemption of liability in a force majeure event (extend time limit for performing the contract, refusing to perform contract); and
  • In our experience, if any dispute arises, the jurisdiction usually prioritizes the parties’ agreement in the contract to make decision on exemption from liability in a force majeure event.

If the contract does not agree that ‘disease’ is a ‘force majeure’ event

The jurisdiction will consider 03 elements of a ‘force majeure’ under Article 156.1 of the Civil Code 2015: Is the event (i) objective, (ii) not able to be foreseen, and (iii) not able to be remedied?

Whether an event is considered as a ‘force majeure’ or not depends on the facts of each particular case.  The third element (iii) ‘not able to be remedied’ needs to be considered in each specific circumstance.

Case 1: A dispute on exemption from liability for breach of contract concerning the time of providing travel services during the period of the Covid-19 disease.

The contract in question was signed before the outbreak of the disease but prior to the departure time of tour, the travel agency was not able to proceed because of the competent authority ordered a suspension of the tourism business and restriction on entry to Country X.

This event is considered as a ‘force majeure event’ because it was ‘not able to be remedied’.

Case 2:  A dispute on exemption from liability for breach of a purchase and sale of goods contract due to the lack of production materials, which affected the quantity of goods and the delivery time.

Because of the disease, the supplier could not supply materials to Company A as initially planned. As a result of the supply chain disruption, Company A had to find another more expensive supplier in order to fulfill the terms of the contract (sale of goods) to Company B.

In this case, it cannot be considered a ‘force majeure’ because it was ‘able to be remedied’ and the contract was able to be performed.

Important actions to take to prevent risk when entering into a contract

When drafting and entering into a contract, it is necessary to include a ‘force majeure’ clause which regulates which circumstances are treated as force majeure events (diseases, natural disasters, fire, wars, etc.), as well as the consequences and liabilities that will be incurred by the parties.  This will help to guard against uncertainty and reduce damage when a force majeure is announced.

When a force majeure event occurs, its consequences will generally be the exemption from liability for the obligated party (the obligated party will not be required to compensate).  However, the parties may also enter into a contrary agreement that assigns the risk for force majeure to the obligated party: i.e. the obligated party must also provide compensation depending on the specific requirements of the parties involved in the contract.

This article contains legal knowledge and professional terms, readers who are interested in the provisions of commercial contracts or force majeure under the Commercial Law of Vietnam, please contact our Commercial Litigators and Trial Lawyers at info@letranlaw.com.