International Contracts in a Pandemic

2020 / 08 / 24

Translated from Spanish by Katrina Rebecca Heimark, researcher at the Instituto de Investigación Científica (IDIC) and translator.

In addition to the widespread effect on the health and lives of millions of people, the health crisis caused by COVID-19 has had a devastating impact on international trade. The WHO’s declaration of a public health emergency of international importance on January 30, 2020, followed by the adoption of national measures to prevent the spread of the virus—such as quarantines and border closings—has created insurmountable obstacles in numerous countries. This situation also brought with it the inability to fulfill several international agreements and cast doubt outright on the universal principal that “a contract is a law between the parties” and its corollary “the binding strength of contracts.”

In order to free themselves from their responsibilities and the payment of damages, the parties may examine the contractual clauses that would allow them to invoke the argument that the breach of contract is due to a cause that is beyond their control. The externality of the event, its unpredictable and overpowering characteristics, and the causal link between the pandemic and the breach of contract should allow for the designation, in each specific agreement, of the existence of force majeure or perhaps a prohibitively burdensome provision, among other legal measures.

In any case, it is necessary to consider the date of the execution of the contract in order to evaluate the unpredictability of the event: either before January 30th or after said date. It is important to also mention that the WHO’s declaration of a pandemic was made as recently as March 11, 2020. From that moment on, the unpredictable nature of those contracts executed after said date was erased with a stroke of the pen. Time can thus tip the balance.

If obligations have become too burdensome given the health crisis, the parties should negotiate an adaptation to the new circumstances. If an agreement cannot be reached, the definitive severance of the contract can also be brought to the table. Once again, in this case it would be ideal that the contracting parties exempt themselves under mutual agreement. If this cannot be achieved, their claims should be examined and assessed by a judicial or arbitral tribunal.

The problem with international contracts is that, given their nature, they entail different countries. Thus, a contract could be executed in France between a Peruvian and Chinese company, and yet have, as a place of fulfillment, Germany or the United States. In this case, if there is an absence of a specific contractual clause, the question arises regarding which law magistrates or arbitrators will apply in their determination of the requirements of force majeure or an excessive burden, or if the contract may be renegotiated, for example.

In terms of purchase agreements, the United Nations Convention on Contracts for the International Sale of Goods (United Nations Commission on International Trade Law, 2011), ratified in 89 countries, has the ability to apply the law governing the contract and perhaps resolve the dispute. In other contexts where this agreement has not been ratified, the diversity of laws between countries will likely generate more than one complication.

Indeed, while the notion of force majeure, of French origin, takes precedence in the legal field and exists in the Peruvian Civil Code, there is no express reference to it, for example, in the German Civil Code. Common law systems, on the other hand, acknowledge excusable non-performance, risk of loss, or the frustration of purpose (Legal Information Institute of Cornell Law School, n.d.a, n.d.b). These are legal figures that, while they could lead to the severance of the contract, they also demonstrate specificity in common law systems (Chamie, 2010).

On the contrary, other countries are already making advances regarding proof of the unpredictability of events. In China, the relevant authority (1) has issued thousands of force majeure certificates (“China force”, 2020; “China issues”, 2020) to Chinese companies that have been affected by COVID-19. However, it is important to note that, in the international contractual arena, these certificates do not necessarily exonerate the company from the responsibility of a breach of contract. The assessment should take place on a case by case basis by a judicial or arbitral tribunal that examines each particular dispute.

In this respect, the most important international seats of arbitration are preparing for the avalanche of cases to come. For example, the International Chamber of Commerce’s International Court of Arbitration published an updated model of a force majeure and excessive burden clause last March, which includes the pandemic in relationship to the causes that make up force majeure (International Chamber of Commerce, n.d.).

Furthermore, if all the countries in the world have been impacted by the pandemic, it is expected that they all may present similar claims, stemming from the inability to fulfill international contracts given the COVID-19 outbreak. Obviously, these disputes may have not only different resolutions, but even opposite or contradictory results depending on the country where the lawsuit was filed.

Given the uncertainty that the dizzying spread of this new disease presents, international contracts that are best poised to deal with this crisis are those whose contractual clauses are under the jurisdiction of both national law and laws that are applicable beyond the borders of one’s country. This is the challenge that lawyers and negotiators face in the globalized 21st Century.

Note

(1) China Council for the Promotion of International Trade and the China Chamber of International Commerce (http://en.ccpit.org/info/index.html).

References

Chamie, J. F. (2010). Frustration of contract e impossibility of performance en el Common Law estadounidense. Revista de Derecho Privado, 18(enero-junio), 95-122.

China force majeure certificate issuance pass 5600 amid virus outbreak - trade body. (2020, March 11). Reuters.

China issues over 1600 force majeure slips to coronavirus-hit companies. (2020, February 17). China Daily.

Comisión de las Naciones Unidas para el Derecho Mercantil Internacional. (2011). Convención de las Naciones Unidas sobre los Contratos de Compraventa Internacional de Mercaderías.

International Chamber of Commerce. (n.d.). ICC Force Majeure and Hardship Clauses.

Legal Information Institute of Cornell Law School. (n.d.a). Uniform Commercial Code.

Legal Information Institute of Cornell Law School. (n.d.b). § 2-615. Excuse by failure of presupposed conditions.