Coronavirus and Force Majeure in commercial contracts

D&I Alert

Posted on

17 Mar

2020

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Dittmar & Indrenius > Insight > Coronavirus and Force Majeure in commercial contracts

The COVID-19 coronavirus has quickly developed into a worldwide pandemic. The question is no longer whether there will be a coronavirus epidemic in Finland but instead what will be the financial, societal and human losses caused by the outbreak.

In this Alert, we discuss the possibilities to invoke the force majeure doctrine in Finnish law governed commercial contracts and suspend performance based on the doctrine.

What is ‘force majeure’?

Force majeure refers to impossibility or insurmountable hardship to fulfil the contract because of an unexpected, unforeseen event which has occurred after the conclusion of the contract and which is beyond the control or influence of the parties. The purpose of a force majeure clause in a contract is to limit a contract party’s liability to fulfil the contract if its fulfilment has become impossible or unreasonably difficult due to a force majeure event.

What does the contract say?

Force majeure clauses are customarily included in commercial contracts. These clauses are often standard boilerplate provisions which on many occasions have not been subject to much attention or negotiation. Typically, such clauses contain a specific list of events or circumstances which constitute force majeure and relieve a party from liability to fulfil the contract for as long as the force majeure event continues. Sometimes, a force majeure clause allows the other contract party to terminate the contract if the force majeure event continues longer than a certain period of time set out in the contract.

Accordingly, a party seeking to suspend its performance of a contract should first examine whether the contract includes a force majeure clause and, if yes, assess whether the current epidemic is covered by the clause. Since force majeure clauses typically contain only examples of situations which may be considered as force majeure events, unique situations like the coronavirus outbreak or other events caused by it may not be explicitly covered by the wording of many force majeure clauses. In such a case, it will be a matter of interpretation whether the coronavirus outbreak constitutes a force majeure event in the context of the contract.

What does the law say?

Sale of goods is covered by the Finnish Sale of Goods Act (27.3.1987/355, in Finnish: “kauppalaki”). The Act is non-mandatory and will be applied unless the parties have agreed otherwise. According to the Act, a party to a sales contract is entitled to suspend performance of the contract if it proves that the delay was due to an impediment which (a) the party could not reasonably be expected to have taken into account at the time of the conclusion of the contract and (b) whose consequences it could not reasonably have avoided or overcome. Impediments recognized in Finnish case law and legal literature as force majeure events include acts of war, upheavals of nature (e.g. an earthquake or flood), provisions of law (e.g. import or export restrictions) and general interruption of communications or payment services.

Finland is also a party to the United Nations Convention on Contracts for the International Sale of Goods (“CISG”). CISG is applied where a sale of goods contract is concluded between parties whose places of business are in different Contracting States or when the choice of law rules lead to the application of the law of a Contracting State. Article 79 of the CISG contains a provision similar to the one included in the Finnish Sale of Goods Act mentioned above according to which a party may be exempted from its contractual obligations in the event of force majeure for as long as such an event continues.

The threshold for invoking force majeure has generally been considered relatively high. Accordingly, we recommend assessing whether suspension of performance is directly caused by the coronavirus outbreak, such as travel restrictions imposed by public authorities, bans to attend large events and conferences, or compulsory quarantines, or whether it results from the indirect consequences of the outbreak, such as disruption of supply chains or voluntary quarantines. Depending on the circumstances, suspension of the contract could be interpreted as force majeure or as a measure taken for precaution.

What if application of Sale of Goods Act and CISG have been excluded?

In the event that the application of the Sale of Goods Act and the CISG have been specifically excluded, it may nevertheless be possible to invoke the force majeure doctrine as a legal principle generally applicable to commercial contracts. In such a circumstance, it may be possible to argue that the principles concerning force majeure contained in the Sale of Goods Act and the CISG reflect general rules of law which should applied even if the Sale of Goods Act and the CISG are excluded.

The coronavirus outbreak has become a global phenomenon and the situation is developing rapidly. If both contracting parties are expected to experience difficulties in performing their respective contractual obligations, it may make sense to initiate negotiations for the purpose of reaching a mutual agreement to suspend performance until the outbreak has been contained and the situation is clarified.

Key considerations and action points

Due to the immediate and thorough impact of the coronavirus outbreak to businesses in Finland and the society at large, we recommend businesses to:

  • review the force majeure clauses of their critical contracts and identify which partners and/or supply chains may be subject to interruptions or financial distress due to the outbreak;
  • consider what options are available to perform their contractual obligations and mitigate the effects of the outbreak;
  • if necessary, initiate negotiations to agree on suspension of performance or, if applicable, notify the other contracting party of a force majeure event.

Because force majeure requires that the event or occurrence is not foreseeable, businesses negotiating new contracts should not rely on traditional force majeure clauses but should include in their contracts delivery timetables which take into account the challenges brought about by the new situation. In addition to a usual force majeure clause, it is recommended to include in new contracts specific provisions allowing suspension of performance due to unexpected future developments of the coronavirus situation.

Further information

D&I’s experts are happy to discuss any questions or concerns that you may have concerning the legal implications of the coronavirus outbreak.

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