Force Majeure in times of corona
Assessment and our advice
Due to these unusual times, it may be that you are faced with a situation in which you are unable to fulfill your contractual obligations or follow the agreed timetables. In such case, it is important for you to review your respective contract and consider if you can and should invoke a possible force majeure situation to avoid potential negative consequences of not fulfilling your contract.
First, examine your contract to check whether it contains a force majeure clause. If the answer to the question is yes, then the next question is if the clause contains any reference to a situation like the one at hand. If there is a mention of an epidemic or pandemic disease, you can move to the next step. If no, re-examine the clause and look for a “catch-all” wording that would suffice in the current situation, such as “Act of God”.
Also check the law applicable to your contract. If the applicable law is the Finnish Sale of Goods Act or the CISG, your liability for the correct performance of the contract might be exempted by it.
Once you have studied the force majeure clause, you need to examine the cause for your inability to perform the contract. The crucial thing to be sure of is that the lack of performance is caused by the prevailing situation, i.e., the coronavirus and the restrictions imposed. It is unlikely that the virus itself would be accepted as a force majeure, but the prevailing restrictions and hindrances which the virus causes should be examined. Assess, if the restrictions, such as a quarantine, restrictions of movement etc. causes your inability to perform.
If the cause is clear, assess if you could, using reasonable efforts, overcome the impediment or at least mitigate the disturbance. If not, then the next step is to assess if the impediment would have been foreseeable. It should, in making this assessment, be noted that it is the responsibility of the party invoking force majeure to prove that the inability to perform was due to the cause. The invoking party shall also prove that all reasonable steps were taken to overcome and mitigate the situation.
Third, the (un)foreseeability requirement, invoking force majeure requires that the event was not foreseeable at the conclusion of the contract. The coronavirus outbreak should fulfill this requirement. It should be noted that for a contract concluded after the outbreak, it is difficult to argue that the implications on the performance of the contract were unforeseeable at the conclusion of contract. So, if the answer to the question on whether the contract was concluded before the outbreak is yes, the next step is a business decision.
The above three-point assessment is of crucial importance and should not be taken lightly. You must be sure that your inability to perform is due to force majeure. As, if you invoke force majeure and based on it suspend your performance under the contract and it is later at, e.g., legal proceedings deemed that the circumstances did not allow you to rely on force majeure, you will most likely be deemed to have breached the contract and the other party may demand compensation for this breach.
The relevant business decision before sending the force majeure notice, take note that there might be stipulations stating that the right to suspend performance will last as long as the event. However, more commonly, there may also be a stipulation stating that the other party has the right to terminate the contract after a specific time of force majeure. Therefore, it is crucial to 1) time the notification of force majeure right, and 2) assess what the ramifications are if the event lasts so long that the other party may terminate the contract.
Lastly do not forget the practicalities, going back to the force majeure clause, check whether the clause contain specific stipulations on the procedure of invoking force majeure. If yes, follow them. If not, your notice of force majeure should be made in writing and containing sufficient details on the cause of the force majeure, reference to the contractual duties you are unable to perform and possibly a rough estimate on time the force majeure is prevailing.
What is force majeure
Force majeure is in essence an event which makes it impossible or unreasonably burdensome for the other party to fulfill its contractual duties. However, the mere fact that something makes it difficult or even prohibits the other party from fulfilling its contractual duties does not in itself mean that force majeure is at hand. The fact that the fulfilment is no more economically feasible, does not constitute a force majeure.
A further important aspect of force majeure is that causality between the event and the inability to perform the contract exists, and that the event was not foreseeable at the conclusion of the contract. The event must also be such that it is beyond the control of the parties. To summarize, an event may constitute as a force majeure if 1) the event de facto makes the performance of the contract impossible or unreasonably difficult, 2) the event is beyond the control of the parties, and 3) the event was not foreseeable at the conclusion of contract.
By invoking force majeure, a party may limit its liability to fulfill its obligations subject to the contract, without being in breach of the contract. In practice, this can mean many different things such as not being obliged to deliver the purchased goods on time or complete some service under the contract.
Content of a possible contract
It is customary to have force majeure clauses in commercial contracts. These are, however, often so-called “midnight or boilerplate clauses”, which means that such a clause is seldom subject to much attention during the negotiations, but under scrutiny only when something unexpected occurs.
The clauses themselves often contain specific lists of events or occurrences that would constitute a force majeure. The core of the clause is usually that it relieves both parties from their obligation to perform their contractual obligations as long as the force majeure event exist. There is, however, also another aspect of the clause that should be taken into consideration. The clause usually gives the right to the parties to terminate the contract if the force majeure event continues for a prolonged time. This is a provision that should also be considered before serving the force majeure notice, in particular if there are indications that the contract no longer is attractive to the other party.
Should the contract not be clear on force majeure situations and Finnish law is the governing law of the contract, the Finnish Sale of Goods Act (27.3.1987/355, in Finnish: “kauppalaki) is the applicable law to contracts for the sale of goods between Finnish companies – if not agreed otherwise. The Act provides that a party may suspend the performance of its contractual duties if it proves that 1) there is an event that the party could not reasonably be expected to have taken into account at the time of the conclusion of the contract and 2) the consequences of it could not reasonably be avoided or overcome.
As Finland has ratified the United Nations Convention on Contracts for the International Sale of Goods (“CISG”), the CISG is applicable to the sale of goods between a Finnish company and a foreign company – if not agreed otherwise. Article 79 of the CISG defines force majeure as “… the failure was due to an impediment beyond his control and that he could not reasonably be expected to have taken the impediment into account at the time of the conclusion of the contract or to have avoided or overcome it or its consequences.”
What if neither of these laws is applicable? It does not automatically mean that the force majeure is a moot point. It is possible in some cases to invoke force majeure even without the supporting legislation, as force majeure can in Finland be seen as a generally applicable legal principle in commercial contracts. Therefore, it is very important to check what law is applied to your contract, as, e.g., the English law approach to force majeure and the interpretation of force majeure clauses is quite different form the Finnish approach.