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Coronavirus - Questions raised on commercial contracts performance - Estonia

  • Estonia

    07-03-2020

    Companies that have already suffered damages or that think that the virus outbreak is likely to cause damages should start reviewing their contracts and agreements with business partners in order to establish potential legal consequences of the outbreak and measures of its mitigation. 

     

    Force Majeure

    Commercial contracts usually contain provisions that allow for suspension of provision of services, incl. cancellation of product shipments due to certain events, which render impossible or commercially unfeasible any performance of a party’s contractual obligations at the time and in the manner agreed in the contract. Generally, such events are classified as force majeure circumstances although, depending on the contract, other terms may be used.

    For the purpose of establishing the meaning of the concept it is also necessary to take into account the national law applied to the particular contracts.

    For instance, Article 117 of the PRC Contract Law defines force majeure as an objective event or circumstance which is unforeseeable, unavoidable and insurmountable. If the governing law of the relevant contract is English law, the concept of force majeure is not automatically read into the contract and will need to be a contractual right agreed by the parties. If there is no force majeure provision in your contract, you will need to consider other remedies (detailed below) to establish bases for excusing breach of contract.

    In Estonia the definition of force majeure is specified in § 103(2) of the Law of Obligations Act, which is also applicable if it is not set forth in the contract: Failure to fulfil any obligations is justifiable, if the obligor has violated their obligation due to force majeure. Force majeure are circumstances which are beyond the control of the obligor and which, at the time the contract was entered into or the noncontractual obligation arose, the obligor could not reasonably have been expected to take into account, avoid or overcome the impediment or the consequences thereof which the obligor could not reasonably have been expected to overcome.

    It is necessary to take into account that according to Estonian law, parties may specify in their contracts such conditions of force majeure that differ from the wording set out in the Act. 

    The precise meaning and effect of a force majeure clause will depend on the specific wording of the clause and its interpretation under the relevant governing law of the contract. There are however a number of points that need to be taken into consideration by companies over the next few days and weeks before they invoke the force majeure provisions of a contract or when they receive a force majeure notice:

    • Does the outbreak or the measures undertaken by the Chinese government or the governments of other countries affected by the coronavirus fall within the definition of force majeure in the contract? International agreements might contain a defined (exhaustive) list of circumstances that constitute force majeure. Commonly listed events of force majeure include: acts of God (including earthquakes, volcanic eruptions, landslides); natural catastrophes. Moreover, according to the general definition force majeure events are also deemed to include plague or epidemic; wars, invasion, armed conflict; blockades, embargoes; sabotage; nationwide strikes; acts of government etc. This outbreak is quite interesting in that it involves a naturally occurring epidemic as well as a number of government actions such as the quarantines, extended holidays, transportation blockages etc., other contracts simply define a set of criteria which must be met for the event to be considered a force majeure event, for example, the event be beyond the reasonable control of the party or cannot have reasonably been foreseen by the parties.

    • Has the outbreak or the measures undertaken by the Chinese government or the governments of other countries impacted upon performance or the performance of one’s contractor or contract counterparty under the relevant contract? Generally, a condition precedent for the application of the force majeure clause is that the force majeure event must have a negative impact on the capability to perform the contract. The degree of impact (e.g., whether performance must be impossible or merely materially affected) will depend on how it is defined in the relevant contract and the applicable governing law.

    • Does the force majeure clause include any other provisions which need to complied with? For example, a contract may provide that a party looking to rely on a force majeure provision should notify the counterparty within a specified time frame or using a particular method (such as service of notice in writing by post rather than electronically by email). It is extremely important to note that such provisions may in effect be conditions precedent to the affected party’s right to rely on the force majeure clause. There may also be obligations in the force majeure clause or the applicable governing law that require the affected party to take certain steps to avoid or mitigate against the impact of a force majeure event. Therefore, if the affected party fails to comply with all the requirements stemming from the contract or the legislation of the country in question, their non-performance may not be excused under the force majeure clause.

    • Who has the burden of proof? Generally, the burden of proof is on the party seeking to rely on force majeure provisions to prove that an event gives rise to a permissible delay, which had the effect of preventing them from performing their obligations under the contract. Therefore, companies intending to rely on circumstances of force majeure should obtain as much information as possible about the events affecting them. Companies who are currently in receipt of force majeure notices from their contractors or contract counterparties should respond requiring them to provide complete information in relation to the force majeure event and how it has affected the relevant party. 

    • It is possible that the contract in question also provides that if the services are suspended for longer than a specified time period then one or more parties may terminate that contract. It is therefore crucial that companies make themselves aware of any deadlines set out in the contract where the force majeure provisions have been invoked and whether there are possibilities for discussing these deadlines. In addition to evaluating force majeure provisions in contracts, it would be advisable for companies to also consider what avenues of redress, including dispute resolution mechanisms, are provided for in such agreements in relation to any costs or losses arising out of or in connection with the non-performance of contractual obligations.

     

    Force majeure shield

    Companies doing business with Chinese companies should, nevertheless, take into account that the China Council for the Promotion of International Trade (CCPIT) is offering force majeure ‘shield’ certificates to companies based in China that are unable to perform their international obligations due to the coronavirus outbreak, and wish to rely on the force majeure clause. Affected companies will need to submit certain documentation to the CCPIT before obtaining the certificates (such as proof of delays or transport cancellations). What is unclear at this stage is how such certificates will fit within the contractual force majeure regime that the parties have agreed.

     

    Amendment and termination of contracts

    If the contract does not have permissible delays or other force-majeure type events, and the force majeure clause is not applicable to the contract due to the applicable law, then parties will need to consider alternative routes through which to obtain relief.  

    Where the governing law is PRC law, a party may argue that the coronavirus outbreak has caused hardship on such party in terms of performing their contract, and that the contract should be either amend or terminated. In PRC, in order to amend the contract on such basis it is necessary to resort to the courts. One should take into account that according to the current practice, courts in PRC have been rather cautious in identifying such finding the existence of hardships.

    In Estonia this situation is regulated by § 97 of the Law of Obligations Act (VÕS), which stipulates that if the circumstances under which a contract is entered into change after the entry into the contract and this results in a material change in the balance of the obligations of the parties due to which the costs of one party for the performance of an obligation increase significantly or the value of that which is to be received from the other party under the contract decreases significantly, the injured party may demand amendment of the contract from the other party in order to restore the original balance of the obligations.

    If the bases for amendment of a contract exist but, due to the circumstances, amendment of the contract pursuant to § 97(1)is not possible or would not be reasonable with respect to the other party, the party aggrieved by alteration of the balance of the obligations may withdraw from the contract or, in the case of a long-term contract, cancel the contract pursuant to the procedure provided for in § 196 of VÕS.

    This means that the party wishing to amend or terminate the contract must first serve a respective notice to the other party. 

     

    Conclusions

    Thus, businesses, including Chinese companies, should ensure that the relevant contractual and legal requirements are followed where they are seeking to rely on force majeure provisions in relation to the non-performance of contractual obligations, whether as a result of the coronavirus outbreak or the measures undertaken by the Chinese government (or other governments) which have undertaken measures to contain the coronavirus. Companies should also assess the costs and losses of non-performance of contractual obligations and seek to control the losses and put alternative arrangements in place where feasible.

    It would be reasonable to closely monitor the current situation and be decisive at this early stage in order to adapt their strategy and mitigate the financial impact. Further, from an employer’s perspective, companies should similarly monitor the situation on a regular basis, taking guidance from their respective authorities and from international bodies. 

     

    Send us your question:

    Maivi Ots

    Managing Partner

    maivi.ots@eversheds-sutherland.ee

    Disclaimer

    This information is for guidance purposes only and should not be regarded as a substitute for taking legal advice. Please refer to the full terms and conditions on our website.

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