(+34) 976 233 383


General Interest

Can a company invoke a

Posted on 6/3/2020

Can a company invoke a

The outbreak of the "corona (Covid-19)" virus in China and later in other countries, including the European Union, has resulted in government measures to contain the virus. These measures range from restrictions on the movement of people and goods to the closure of factories and transport centers (ports and airports).
These government measures, designed to contain the epidemic, can cause significant disruption in business operations of companies, in particular the disruption of supply chains and services. In this context, companies are asked the question of whether the parties to a contract can invoke a "state of emergency" in the event of an epidemic that excludes their contractual obligations.
Principle: Pacta sunt servanda
In principle, each contracting party is liable under the "pacta sunt servanda" principle. According to this principle, in the international contract of sale, the seller must ensure that the object of the sale is delivered to the buyer as agreed, without defects and on time, and also that the ownership of the object is transferred. In industrial construction, the contractor must ensure that the components and workers arrive at the construction site in time so that the plant can be erected and accepted at the time agreed contractually. Consequently, delays in delivery or construction have consequences that can trigger liability for damages.
In certain circumstances, the contract and the applicable law provide for exceptions to the obligation to comply or to pay damages. The terms "force majeure", "contract frustration", "material adverse change" and "Hardship Clause" are used in the contractual clauses to describe these exceptions, which provide for various legal consequences, including disclaimer.
This article sets out the prerequisites and legal consequences, as well as the recommendations for the adoption of measures in case of delays as a result of epidemics in international contracts such as purchases of clothing, fabrics, machines and parts of replacement or in contracts of work and construction of plants.
Delays due to "Covid-19"
Every year, epidemics or pandemics (for example, influenza) occur in the world that, from a legal point of view, do not affect the contractual relationship between the parties, that is, they do not change the distribution of contractual liability. However, if government measures are added to combat an epidemic, as is currently the case with Covid-19 (in the past also with SARS and Ebola), these restrictions may lead to delays, defects in merchandise or even impossibility of compliance in special cases.
Contractual Disclaimers
Whether or not a contracting party can invoke the contractual exemption in case of an epidemic depends mainly on whether a corresponding contractual provision has been agreed precisely for these cases. These force majeure clauses, among others, are now standard in many international contracts for the purchase and construction of plants. In principle, the clauses require that events occur that have an external influence on the contract, which could not be foreseen, that could not be avoided by own measures and that have prevented or, in any case, severely damaged the fulfillment of The contracting parties.
As a general rule, the contractual definition of exceptional cases includes, in this regard, government measures to combat epidemics and their consequences. In addition to the definition, legal consequences and behavioral obligations must also be regulated precisely in the contract: mutual information and damage reduction obligations; temporary suspension of contractual rights and obligations; assumption of expenses due to the consequences of force majeure and possibility of termination of the contract (long stop date).
Legal disclaimers
In addition, both in the cases described above and in the event that the contractual parties have not determined any contractual clause of limitation of liability, the legal provisions will apply.
The legal exemption from liability under the "United Nations Convention on Contracts for the International Sale of Goods (CIM)", of 1980, would apply especially for international sales contracts "B2B". The prerequisite for disclaimer in accordance with Article 79 of the CIM is that the supplier cannot fulfill its obligations under the contract due to an unpredictable and unavoidable impediment. The exemption does not refer to the obligation to deliver, which, like the existence of the contract, remains basically unchanged, unless delivery becomes permanently impossible due to government measures; rather, the "only" exemption refers to the possible obligations to pay damages for delay or defects. The exemption itself is limited in time to the duration of the impediment.
If the epidemic only affects part of the delivery obligations, the limitation of liability will also affect only those partial obligations. It should be noted that only legal claims for damages under the CIM are excluded. International jurisprudence discusses whether the exemption from liability also includes contractual penalties (penalties) and global damages (liquidated damages). In the event that the supplier receives insurance compensation or compensation for goods delayed or confiscated by the State, he may have to hand over this compensation to the buyer by analogy with Article 84 II of the CIM.
Unlike the international sales law, there is no special legal basis for the exclusion, on an exceptional basis, of the performance in the construction of international plants. Therefore, the respective national legislation applicable to the construction contract must be examined to find regulations that exempt the contractor from his obligation to comply in the event of an epidemic that affects construction or requires an adjustment of the contract.
In countries such as Germany (§ 313 BGB), France (Art. 1195 CC; applicable for contracts after day 1.10.2016), Italy (Art. 1467-1469 CC) and Portugal (Art. 437 CC) there are legal rules that are applicable to the plant construction contract or also to the purchase contract. In Spain, Austria, Switzerland and South Korea, the exemption from the obligation to comply due to unforeseeable circumstances is recognized by the courts. Common to all these legal systems is that foreclosure is based on the principle of "rebus sic stantibus clause".
In China similar rules to "force majeure" can be found in articles 117 and following of the Chinese Contract Law, which are summarized under the term "force majeure". According to them, an event is considered force majeure if it is objectively unpredictable, inevitable and insurmountable. In the past, Chinese jurisprudence described such disturbances related to the SARS epidemic. Under Chinese law, the precondition for invoking the exception is the obligation to inform the counterpart of the existence of the disturbance due to a case of force majeure and to present the appropriate evidence (the so-called force majeure certificates). Assistance to prove that there is a case of force majeure can be obtained by requesting a force majeure certificate from the China International Trade Promotion Council (CCPIT). On January 30, 2020, the CCPIT created an online platform through which affected companies can request a force majeure certificate.
In the following, and as a summary, general criteria are indicated that can be formulated as prerequisites for applying the exception under which the obligation to comply with a subsequent contractual adjustment will be excluded: The basis of the contract must be affected (for example, in the event that the merchandise, such as clothes or photovoltaic modules, cannot be manufactured or transported due to the epidemic, nor can they be obtained elsewhere). In this case, none of the contracting parties would have concluded the contract, and the triggering event is so exceptional and so serious that adherence to the contract in the planned manner would lead to unreasonable results. It should be noted that the jurisprudence of all these countries mentioned above imposes very high demands on these criteria. In principle, it is always the seller or the entrepreneur who assumes the risk of acquisition, which only rarely should be divided between the two parties.
Recommendations for contractors in case of an epidemic
In the context of the current restrictions of Covid-19, we proactively recommend the following legal practices and measures to companies in the fields of international merchandise purchase and plant construction:
- Examination of the contract: First, it should be examined whether there is a force majeure clause in the relevant contracts and, if so, if the Covid-19 virus can be subsumed therein. It is also important to know what consequences the contractual clause provides for each party, and whether they contain certain deadlines or obligations to act.
- Examination of the applicable law: As a complement to a contractual provision or if there is no specific clause in the relevant contract, the applicable law should be consulted (see above).
- Contact with the counterpart and documentation: It is advisable to contact in writing with the affected counterparts at an early stage.
- Adoption of measures to mitigate damages: In relation to contact with the affected contractual parties, measures should also be discussed and applied to keep the damages and losses as small as possible. The process of establishing contacts, as well as planning and implementing measures, must be accurately documented.
- Collect certificates / tests: Parallel to the previous steps, the affected companies must compile all the regulations and publications of the local and state authorities of the affected countries.
- Post-contractual agreement in case of conflicts (ADR / arbitration): for the fast and economic resolution of disputes in case of breach of contract, for example, according to the principles of

Go to the original source of the news >>

© Cremades& Calvo-Sotelo - C/ Paseo Independencia 21 , 1º Centro, 50001, Zaragoza, España - (+34) 976 233 383 -