Partner at Andersen Tax & Legal
Director at Andersen Tax & Legal
Lawyer at Andersen Tax & Legal
The impact of novel Covid-19 outbreak on international trade relations seems beyond doubt. In this context, the force majeure excuse has recently gained importance and visibility.
Therefore, it is worth analysing this legal structure and, more concretely what are the prerequisites generally required to apply the force majeure excuse and which are its effects.
Additionally, the force majeure excuse will be analysed under the United Nations Convention on Contracts for the International Sale of Goods and UNIDROIT principles perspective. At the same time, a brief research has been conducted in order to summarize international arbitration trends with regards to the application by arbitral tribunals of the force majeure excuse.
Furthermore, a brief study has been conducted containing the principal measures adopted by leading international and national arbitration dispute resolution institutions in order to mitigate the adverse effects of the Covid-19 pandemic.
II. Recourse to force majeure event as a result of the Covid-19 Pandemic
1. Terms and conditions established in the contract and governing law clauses
In order to determine the solutions that are applicable to the contingencies occurring in a contractual relationship on the occasion of Covid-19, the terms and conditions expressly agreed by the parties to the contract in relation to extraordinary situations must always be taken into account first, based on the grounds of the pacta sunt servanda principle. In order to determine the interpretation and effects of the force majeure excuse between the parties to a contract, governing law clauses should be paid particular attention as these will establish how we should interpret this excuse.
2. Necessary requisites in order to trigger a force majeure clause
A «force majeure» clause consists of a estándar clause found in contracts in which a party will not be held liable for any failure or delay in the performance of the agreement for the period that its failure or delay is beyond the party’s reasonable control, when the event of force majeure materially affects the performance of any of its obligations under the agreement and could not reasonably have been foreseen or provided for. However, the party will not be excused for a failure or delay resulting only from general economic conditions or other general market effects.
In order to determine the interpretation and effects of the force majeure excuse between the parties to a contract, governing law clauses should be paid
In order for the contractual parties to trigger the force majeure clause, certain requirements must be (generally) met:
- i. it must be a wholly unforeseeable circumstance at the time of signing the contract («ad imposibilia nulla obligation est»);
- ii. the referred circumstance itself must prevent contractual performance;
- iii. the event must be an extraneous cause not attributable to the non-performing party;
- iv. there must be a direct causal link between the event and non-compliance; and,
- v. the unforeseeable event arose after the contract was entered into.
Finally, it is also important to mention that one of the elements to be taken into account when approaching this type of situation is good faith during the execution stage of the contract, as it will be a fundamental element in the assessment of the situation by the Sole Arbitrator or Arbitral Tribunal.
If the above requisites are met, the consequences are certain. They will normally lead to suspension, renegotiation, and/or termination of the contract if the non-complying party proves that performance has been rendered impossible by an insurmountable impediment arising after the conclusion of the contract. Nevertheless, it should be taken into consideration that: (i) a case by case analysis is crucial under these case based scenarios; and (ii) that these general considerations may vary depending on the concrete applicable law at stake.
3. The Force Majeure excuse under the United Nations Convention on Contracts for the International Sale of Goods and UNIDROIT Principles
The occurrence of an extraordinary event outside the debtor's control has been enshrined in various legal instruments governing international contracts as a valid excuse for excluding liability for damages.
On the one hand, Section 79 of the United Nations Convention on Contracts for the International Sale of Goods («CISG») encompasses the elements of force majeure as a concept, i.e. the unforeseen nature of the event, its inevitability and being unconnected with the debtor.
On the other hand, Section 7.1.7 of the UNIDROIT Principles also contains a definition of force majeure. Nevertheless, the definition of force majeure contained therein is necessarily of a rather general nature.
The most noticeable difference between Section 79 CISG and Section 7.1.7 UNIDROIT Principles is the absence of a counterpart to Art. 79(2) CISG in the UNIDROIT Principles. This omission reflects the gap between the assumed function that this paragraph was to take in the mind of its drafters and the misunderstandings and complexities inherent in the distinction of excuses based on the failure of a third person to perform.
Finally, we may also ascertain that the UNIDROIT Principles contain provisions on hardship, in contrast to CISG.
4. Summary of «Force majeure» Case Law in International Arbitration
In the International Chamber of Commerce («ICC») Case number 16369 of 2011 (Buyer (Switzerland) v Seller (Kosovo)) (1) the Sole Arbitrator considered that a radical change in market conditions was not to be assumed by either one of the contractual parties, but rather constituted a shared risk. The Sole Arbitrator established that the agreed price formula with certain fixed parameters and a number of variables, including increases and decreases in the treatment charge as a function of above average and below-average settlement prices, in the Tribunal's view reflected the Parties' understanding that market shocks were not to be assumed by either one of them but rather constituted a shared risk.
The Arbitral Tribunal of Mexico’s Arbitration Centre rendered an award in the so called «El Niño» (2) Case, in which it considered that weather events did not meet all the criteria set out in Article 7. 1. 7(1) of the UNIDROIT Principles. Indeed, the storms and floods were beyond the control of the defendant, but their occurrence could not be considered unpredictable by the defendant who, in the course of his long activity in agriculture, had experienced similar events several times. In addition, the Respondent did not give notice to the Complainant of these events and their impact on his ability to comply as required by the same Article 7. 1. 7(3).
In Macromex Srl v. Global International Inc., a 2007 American Arbitration Association case, the court rejected Globex’s force majeure defence and ruled that the seller was not exempt from liability under Article 79 for failing to deliver goods to the buyer. A Romanian buyer and a United States seller concluded a contract of sale for chicken leg quarters. The seller agreed to deliver the goods by May 29, 2006. After the conclusion of the parties’ agreement, an outbreak of avian flu prompted the Romanian government to ban all chicken imports that were not certified by June 7, 2006. The seller failed to obtain the required certifications because it was late in shipping the goods. Ignoring the buyer’s suggestion to ship the goods to another port, the seller later sold the goods to another buyer. The seller claimed that the Romanian government’s decision to prohibit all noncertified chicken parts amounted to a force majeure event and voided the parties’ contract. The court distinguished between «surmountable impediments» in which case a seller has to provide substitute performance if reasonable, and «insurmountable impediments» in which case performance can be excused without substitution. Macromex was closer to surmountable impediments so the court found that seller had to provide delivery to the buyer at another port when delivery at the first port specified in the contract became impracticable.
5. An Example of a Force Majeure Clause: ICC Force Majeure Clause 2003
The ICC Force Majeure Clause 2003 (3) proposes a clear and complete stipulation that will provide greater security for international contractual parties.
The Clause has three main purposes: (i) first, it is intended that the new clause should assist the largest possible number of users; (ii) second, it is intended to give the list of events a function which goes beyond the merely illustrative, such that a party would find it easier to invoke the clause if it could point towards one of the listed events; (iii) third, it was important not to afford a party invoking a listed event too much protection.
The number of international arbitrations will increase due to the fact that contracts may not have included any Force majeure clauses
6. Impact of Coronavirus as a «Force Majeure Excuse» on future International Arbitration disputes
It is beyond dispute that the number of international arbitrations will increase due to the fact that contracts may not have included any Force majeure clauses, or, if so, they might be incomplete.
Additionally, the sharp drops that worldwide market stocks are suffering and will apparently continue to suffer in the near future, will mean that parties to international contracts will advocate that arbitrators declare that Covid-19 is a force majeure event. As the English media have already reported (4) , China’s Council for the Promotion of International Trade has already issued 4,811 force majeure certificates due to the declared pandemic. These documents «will help entities claiming against another party in the Chinese domestic markets; most claims will not hold up internationally».
Perhaps, it is most probable that the new Covid-19 situation leads to Online Dispute Resolution (ODR) or «e-arbitration», in which hearings are starting to be held through electronic devices and documents submitted only through electronic means of communication.
III. Impact of Coronavirus On International Arbitration Institutions: Which measures have the main arbitral institutions adopted?
The main international and national arbitral institutions are taking measures in order to: (1) reduce the impact that Covid-19 will have on arbitral proceedings; and (2) protect the safety of the people who may be involved in an arbitration proceeding.
1. International Court of Arbitration
Internationally speaking, the ICC Institution is strongly advising that all communications with the Secretariat of the ICC Court or ICC ADR centre be conducted by email. For Pending Proceedings, the ICC indicates that if parties or arbitrators need to send any correspondences (including awards and ADR decisions) to the Secretariat, they should promptly inform the case management team ahead of dispatch. Hearings and other meetings scheduled to take place at the ICC Hearing Centre in Paris have been postponed or cancelled, therefore for information on future bookings parties and counsels should contact the ICC Hearing Centre.
On the 9th of April, the ICC issued a Guidance Note on Possible Measures aimed at Mitigating the Effects of the Covid-19 pandemic («Guidance Note»). Its main purpose consists in: (i) recalling the procedural tools available to the parties, counsel and tribunals to mitigate the possible delays through greater efficiency, as Covid-19 pandemic has definitely dis-arrayed all the timelines and schedules; and (ii) providing guidance concerning the organisation of hearings by audioconference.
Regarding the first purpose, ICC proposes a list of non-exhaustive procedural options and tools in order to increase the efficiency of the arbitral procedure, v.gr., organizing mid-stream procedural conferences in order to assess with the parties the most relevant issues to consider possibilities for focusing on the most efficient means to resolve those issues, or identifying issues that may be resolved without witness and/or expert evidence or on the basis of written questions from the opposite party or the tribunal and written answers from the witness or expert. Additionally, regarding the service of documents and notifications, ICC strongly recommends that parties agree to the electronic notification of the award. Nevertheless, the Secretariat may only proceed in this manner if the parties have explicitly agreed so.
Concerning the second purpose, ICC recommends to celebrate virtual hearings in order to avoid unwarranted and even prejudicial delays. To this effect, the Guidance Note includes a number of suggested clauses for inclusion in cyber-protocols of procedural orders dealing with the organisation of virtual hearings.
When preparing the celebration of virtual hearings, ICC points out that several elements should be taken into consideration, among others: (i) granting privacy of the hearing; (ii) considering different time zones when fixing the hearing dates; (iii) establishing procedures in order to verify the presence of and identifying all participants, including technical administrators; and (iv) usage of shared screen views. The Guideline Note points out several platforms which are of a considerable utility, such as Microsoft Teams, Vidycloud, Skype and Zoom, but warns that each party, counsel and tribunals should make their own due diligence as to the suitability of the platform.
The Guidance Note warns that the Covid-19 pandemic should not necessarily delay tribunal’s deliberations or their preparation of draft awards, as these activities can be conducted remotely. Therefore, the time limit for the submission of draft awards to the Court remains in effect.
2. American Arbitration Association
The American Arbitration Association («AAA») has translated to its public that it remains active and operational, although no hearings will take place in AAA hearing facilities until at least 1st September 2020.
3. London Court of International Arbitration
On the 16th March 2020, the London Court of International Arbitration (hereinafter referred to as «LCIA») issued an update (5) on the effects that the Covid-19 would have in the arbitral proceedings taking place under the LCIA.
Since 19th March 2020, the LCIA's staff is working remotely. As a general rule, the LCIA will correspond with parties and arbitrators by email only.
Lastly, the LCIA issued a message on the 16th of April 2020 (6) , where parties and arbitrators were encouraged to discuss any impact of the pandemic and potential ways to address it in an open and constructive manner. Arbitral Tribunals and parties are asked to mitigate the effects of any impediments to the largest extent possible while ensuring the fairness and efficiency of arbitral proceedings. In so doing, LCIA affirms that «they are invited to use the full extent of our respective institutional rules and any case management techniques that may permit arbitrations to substantially progress without undue delay despite such impediments.»
4. Madrid’s Civil and Commercial Court of Arbitration
In a national level, the Civil and Commercial Court of Arbitration («CIMA»), based in Madrid, released a communication on the 16th of March 2020 (7) . Its main points may be summarized as following: (i) all Court’s staff is working on remote; (ii) in-person hearings where production of evidence was scheduled are suspended; (iii) other meetings or hearings can be celebrated by phone if the parties ask for it; (iv) time limits and other deadlines are all suspended. The decisions contained in the referred communication have not been, as yet, amended.
The adopted measures will, in most cases, disrupt the ordinary course of the arbitral proceedings and will, without doubt, require particular attention from lawyers and arbitrators.
IV. Practical Approach
Covid-19 is presenting daunting challenges to enterprises which are currently feeling overwhelmed due to the fact that corporations are uncertain on how to manage the Covid-19 contractual challenge.
On one hand, contractually speaking, we recommend that enterprises follow the following recommendations:
- • Carry out a thorough analysis of the contractual clauses together with a lawyer, in order to clarify current and potential impacts in the contractual relationship.
- • Analyse the possibility of triggering force majeure clauses, even according to the law governing the contract.
- • The party alleging non-compliance with its obligations should expressly indicate in the communication in question that this is because of the Covid-19 outbreak, considering it to be a force majeure event.
- • If a force majeure clause makes it necessary to notify the counterparty in order to be invoked, undertakings should follow this requirement scrupulously.
- • In any case, seek legal advice to ensure you do not compromise your own position.
On the other hand, procedurally speaking, we recommend that when parties and counsels are involved in an arbitral proceeding they try to:
- • Unite efforts in order to continue, as possible, with the arbitral proceeding’s established timelines.
- • Promote the usage of electronic means of communication in between the parties, counsels, tribunals and Secretariats, when possible.
- • Assess if hearings or conferences should be postponed, or if these may be conducted through virtual means of communication. When the celebration of an e-hearing remains possible, cyber-protocols could be previously agreed by the parties in order to ensure due process.