The Covid-19 pandemic has caused severe damage to domestic and international commercial business. The authorities’ restrictions on entry and travel, the suspension of social activities and mass gatherings, and the temporary suspension of economic activities in certain areas in order to control the pandemic and protect public health have resulted in commercial business stagnation and decline.
Not surprisingly, many companies have raised concerns about the damage caused by the Covid-19 pandemic, especially regarding liability for compensation for breach of commercial contracts (due to production materials shortage, foreign workers’ inability to enter the country to work; suspension of production and business during the pandemic, etc.). This Insight will discuss the concept of ‘Force Majeure’ and related doctrines and provide businesses with guidance on how to protect their operations in these uncertain times.
What is a ‘Force Majeure’?
Article 156.1 of the 2015 Civil Code defines a ‘force majeure’ as an objective event which is unforeseeable and cannot be remedied even though all necessary and possible measures have been taken. Although this provision belongs to the group of regulations related to the statute of limitations, the definition is widely applied in civil and commercial legal relations.
According to the above definition, an event may be considered a ‘force majeure’ if three factors are satisfied. The event must be (i) objective, (ii) unforeseeable, and (iii) irremediable. However, because the 2015 Civil Code does not stipulate any specific criteria for each factor, the determination of whether an event comprises the elements of a force majeure is dependent upon the ruling of the competent dispute settlement authorities (Court or Commercial Arbitration) when a dispute occurs.
There do exist some legal authorities that provide examples of industry-specific cases that are considered force majeure, including: (i) natural events (e.g. earthquakes, hurricanes, floods, tsunamis, fires,1 etc.) and (ii) man-made events (e.g. riot, rebellion, hostilities, opposition, sabotage, embargos, sieges, blockades, any act of war or hostilities whether war is declared or not,2 etc.).
The consequence of the existence of a force majeure is to render the affected party unable to perform its obligations under the contract. Article 351.2 of the 2015 Civil Code provides: “Where an obligor fails to perform an obligation properly due to an event of force majeure, it shall not bear civil liability, unless otherwise agreed or otherwise provided by law.”
Distinguishing ‘Force Majeure’, ‘Objective Obstacles’ and ‘Fundamental Change of Circumstances’
‘Objective obstacles’ are obstacles caused by objective circumstances that render it impossible for a person with civil rights and obligations to know that his or her legitimate rights and interests have been infringed or for that person to exercise his civil rights and obligations 3. An objective obstacle is similar to a force majeure in that there is an ‘objective’ factor, but there is no requirement to prove the existence of the other two factors (unforeseeable, irremediable).
Objective obstacles have wider range of consequences than force majeure, not only rendering the affected party unable to perform its obligations, but also applicable to cases where the affected party does not have the ability to discover that their legitimate rights and interests have been infringed.
Fundamental change of circumstances
It is considered a ‘fundamental change of circumstances’ when all 05 of the following conditions are satisfied 4:
- There was a change of circumstances due to objective reasons, occurring after the contract was entered into;
- At the time the contract was entered into, the parties were unable to foresee the change of circumstances;
- The change in circumstances was so significant that the contract would not have been entered into or would have been entered into with completely different terms if the parties had foreseen such change;
- The continuation of the contract performance, without changing the terms of the contract, will cause severe loss and damage to one party; and
- The party whose benefits were affected had taken all necessary measures to the best of its capability and appropriate to the nature of the contract, but was unable to prevent or mitigate the damages
Thus, a ‘fundamental change of circumstances’ is also objective, unpredictable, and irremediable. The difference between a fundamental change of circumstances and a force majeure is reflected in three factors: (i) the ‘unforeseeable’ factor has a broader scope of application than force majeure, not strictly limited to unexpected events, but consisting of any event that occurred which was not contemplated by parties at the time of contract execution; (ii) the change of circumstances was so significant that it affected the fundamental basis of the contract execution between the parties; and (iii) the continuation of the contract performance would cause severe damage to a party.
A fundamental change of circumstances cannot be used as a basis for postponement of the affected party’s obligations of performance or as an exemption from liability. Although the change of circumstances caused the affected party to suffer severe damage, if this party continues to perform its obligation, the change of circumstances did not render the affected party unable to perform under the contract (i.e. the affected party was still able to perform the contract, even though it would suffer severe damage if contract content is not modified). When a fundamental change of circumstances occurs, the affected party is only entitled to (i) request the other party to renegotiate the contract or (ii) request the Court to amend or terminate the contract. However, the party receiving the offer to renegotiate the contract is not obliged to negotiate or accept any offer from the affected party.
Is Covid-19 a ‘Force Majeure’ in Commercial Contracts?
Covid-19 has been declared a ‘pandemic’ in Vietnam 5. The 2005 Commercial Law 6 does not provide a definition of a force majeure, nor does it stipulate that a ‘pandemic’ may act as the basis for a party to postpone its performance of an obligation or exempt a party from liability.
If the contract terms define ‘pandemic’ as a force majeure
- Both parties shall be obliged to comply with the agreement in the contract and the provisions of the 2005 Commercial Law on the exemption from liability for force majeure (extension of the contract term, refusal to perform the contract); and
- Based on our experience, if there is a dispute the competent dispute settlement authorities usually give priority to applying the agreement between the parties in the contract to recognize an exemption from liability due to force majeure.
If the contract does not define ‘pandemic’ as a force majeure
The competent dispute settlement authorities will invoke the definition of a force majeure event specified in Article 156.1 of the Civil Code 2015 when considering the three factors: (i) objective, (ii) unforeseeable and (iii) irremediable.
Whether the Covid-19 pandemic is considered a force majeure event varies from case-to-case. The rationale for this is:
- The (ii) element of ‘unforeseeable’ may no longer exist because the Covid-19 pandemic began in early 2020 and has lasted for nearly two years; and
- The (iii) element of ‘irremediable’ needs to be considered on a case-by-case basis, depending on the actions and remedial measures that a party has taken.
Example 1: A dispute requesting exemption from compensation liability due to breach of contract on the time to provide travel services during the Covid-19 pandemic season. The contract was signed before the outbreak of the pandemic, but at the time of tour’s departure, the tourism company could not proceed due to the request of the authorities to suspend operations in the field of tourism and the restriction on entry into country X.
This case is considered as a ‘force majeure’ because it was ‘irremediable’.
Example 2: A dispute requesting exemption from liability for compensation for a sale of goods contract due to scarcity of input materials for production, resulting in unsatisfactory quantity and delivery time.Due to the pandemic, the original provider of the input production materials could not supply Company A as planned.
However, Company A was still obligated to find other sources of materials to ensure the proper performance of the (sales of goods) contract with Company B, even though the cost was higher than originally planned.
This case is not considered as a ‘force majeure’ because it was ‘remediable’.
Is Covid-19 an ‘Objective Obstacle’ or a ‘Fundamental Change of Circumstances’?
For each particular case, there are no clear guidelines to determine whether the Covid-19 pandemic is either an objective obstacle or a fundamental change of circumstances. If the parties wish to apply the provisions of ‘objective obstacle’ or ‘fundamental change of circumstances’, they must demonstrate that the signature elements of each case are satisfied. It should be noted that, when applying a ‘fundamental change of circumstances’ provision, the time of contract execution is the key factor. If the contract was signed after the outbreak of the Covid-19 pandemic, it will be difficult to argue that the parties could not have foreseen the change of circumstances caused by the Covid-19 pandemic.
Experience in Preventing Risks When Executing Contracts
When drafting and executing commercial contracts, the parties should carefully define which specific scenarios the ‘force majeure’ clause will include (e.g. pandemics, natural disasters, fires, wars, etc.). The parties should also delineate the specific consequences that follow and the notification obligation in the event of a force majeure in order to mitigate any damages that may arise.
Normally, when a force majeure occurs, one consequence will be the waiver of liability for the obligor (the obligor does not have to compensate). However, the parties may still agree on the opposite consequence, namely that the obligor still has to compensate, depending on the specific needs of the parties when entering into 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 email@example.com.
- Decree No.37/2015/ND-CP (amended and supplemented in 2021) details regulations applying to construction contracts
- Circular No.02/2019/TT-BCT (amended and supplemented in 2019) concerning wind power project development and power purchase agreements for projects.
- Article 156.1 of the 2015 Civil Code.
- Article 420.1 of the 2015 Civil Code.
- Decision No.447/QD-TTg dated April 01, 2020.
- Commercial Law No.36/2005/QH11, amended and supplemented in 2017 and 2019.