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23-03-2020

Does Corona constitute force majeure?

Commercial contracts for the delivery of goods and services form the backbone of business. The leading principle of Dutch contract law is that contracting parties must abide by their contractual obligations. This leading principle seems self-evident. However, the COVID-19 pandemic is causing an increasing number of companies to default in the performance of their contractual commitments. Among the companies hit hardest are travel companies, day-care organizations and companies that rely on the supply of goods from China or other countries where a ‘lockdown’ is in place. Many of these companies argue they are unable to perform their contractual obligations due to force majeure. But does Covid-19 really constitute force majeure?

What is force majeure?
Force majeure refers to events beyond the control of a contract party that make it impossible for him to fulfill his contractual obligations.

Whereas the term force majeure does not appear in the Dutch Civil Code, contractual parties cannot be forced to perform their obligations and cannot be held liable for damages to the extent that their non-performance cannot be attributed to them. Whether a breach is attributed to a contracting party depends in part on the contents of the contract. As such, the parties to a contract can limit or broaden the scope of circumstances that will be attributed to them. This is often done by including a definition of force majeure in the agreement or the general terms and conditions governing the contractual relation. In such a definition, parties can specify situations that in their relation will be considered force majeure, such as strikes, wars, natural disasters or epidemics. To limit the scope of the statutory provision regarding force majeure, guarantees can be included in the agreement. By way of a contractual guarantee, the debtor assumes the risk of the guaranteed fact and he can therefore no longer invoke force majeure if that fact materializes. It therefore depends largely on the specific wording of the agreement whether or not the COVID-19 virus epidemic can qualify as force majeure.

Force majeure in case of corona virus?
If the agreement does not explicitly refer to a pandemic as a force majeure event, and invoking force majeure is not excluded by a guarantee, a party that wants to invoke force majeure will have to turn to other leads. We would like to mention two important leads:

  • In Dutch case law an appeal on force majeure due to the outbreak of the bird flu has already been honored.
  • The China Council for the Promotion of International Trade has identified the failure of performance of contractual obligations due to the outbreak of the Corona virus as force majeure.

These leads are of a general nature. In each case the court will need to take into account all specific circumstances of the case. It can be imagined that an appeal on force majeure because of a strict government measure, for example prohibiting the supply of products from a certain area or introducing an entry ban, has a greater chance of success than the failure to perform due to illness of personnel. Such a strict government measure would lead to an absolute impossibility to perform the contractual obligation. In addition, an important factor will be whether a party still has alternative options for complying with his contractual obligations, if necessary under less favourable conditions for the company, which in principle will be for its own account.

Consequences of force majeure
 Whereas a party to a contract cannot be forced to perform his obligations to the extent that his non-performance is due to force majeure, and force majeure could even justify a temporary suspension of those obligations, it is important to note that the existence of force majeure does not prevent the other party from terminating the agreement, provided the default is serious enough. As such, a breach of contract still brings with it a certain risk, even in times of force majeure.

Conclusion
Since no Dutch case law on invoking force majeure for the Corona/COVID-19 virus epidemic yet exists, it is not possible to predict how the existing case law and other leads will be used in practice. In each case the judge will have to take into account the force majeure clause concerned and all the circumstances of the case. That being said, we do believe that in certain cases an appeal on force majeure due to the Corona/COVID-19 virus may be justified, in particular if compliance is absolutely impossible due to strict government measures. With a specific provision in the contract that qualifies the outbreak of an epidemic as a force majeure event, the company will in principle have a strong case. In the absence of such a provision, the company will have to rely on the leads mentioned and the specific circumstances of the case.

Against this background it may be recommended that companies include in a future agreement a clause explicitly identifying the outbreak of an pandemic/epidemic as a force majeure event.

Finally
If we can be of assistance or if you have any questions regarding the above, please contact Philip ter Burg, Simone Gorissen or one of our other specialists.

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