In a previous update, we explored the concept of force majeure under Vietnamese law in light of the COVID-19 outbreak. However, in practice, it is common for parties to include force majeure clauses in their contracts. The scope and extent of these provisions may vary greatly from the statutory regime of the 2015 Civil Code and 2005 Commercial Law.
Force majeure clauses are, in their essence, an allocation of the risk of non-performance of contractual obligations by either party due to the occurrence of an event beyond the control of either party. In addition to force majeure, contracts also frequently contain other risk allocations provisions which may also come into play as a result of the COVID-19 outbreak, such as hardship.
In this update, we explore the contents of force majeure and hardship clauses commonly encountered in practice.
Typically, force majeure provisions will cover the following elements: (i) the definition of a force majeure event; (ii) the standard of non-performance, (iii) notice requirements; (iv) consequences and remedies, and (v) obligation to mitigate damages.
Parties often adopt definitions of force majeure events that are broader than the narrow statutory requirements of irresistibility, unforeseeability, and externality. The common formulation includes “an event that can be neither anticipated nor controlled”, “an event beyond either Party”, ‘events beyond the control of a party” or other similar wording.
This is often followed by a list of force majeure events which can include a number of situations that could be applicable in the current COVID-19 crisis. For example, some provisions expressly refer to the spread of disease; epidemics (or pandemics); lockouts; shortages of materials, labor, transport, or other supplies; or regulatory interventions.
This list is sometimes followed by catch-all provisions such as “any other cause beyond the control of the parties”.
Standard force majeure clauses set a high standard of non-performance, generally requiring a complete impossibility of performance. However, occasionally, parties agree on a lower threshold, only demanding that performance be ‘inadvisable’ or ‘commercially impractical’.
A party affected by a force majeure event will usually be required to provide a notice to the other party within a specified delay. If no delay is expressly set out in a clause, then notice should be given within a reasonable time period.
Furthermore, whether spelled out in the contract or not, it is best practice to substantiate notice details of the force majeure event. Depending on the circumstances of a case, these may include information regarding the impact of the event on the performance of a party’s obligation(s) under the contract, the estimated duration of the event as well as the delays and costs (expected and incurred). Other requirements for the service of notice may include elements of form, language, and delivery.
It is also best practice to expressly spell out the consequences and remedies in case of a force majeure event. Normally, a party affected by a force majeure event will be relieved from its obligations and exempt from liability for damages.
The available remedies will often depend on the nature and duration of the contract (one-off vs long-term arrangement). The first remedy would be the suspension of the contract for a given period of time. If the force majeure events persist beyond this period of time, then the parties would usually be entitled to unilaterally terminate the contract.
Other remedies sometimes encountered include an extension of time for the performance of an obligation or the renegotiation of the contract. Given that neither party will be at fault in the context of a force majeure event, each party bears its own costs.
In addition to the above, a party seeking to avail itself of a force majeure clause may be required to take actions to mitigate the damages resulting from the force majeure. Failure to do, or to give proper notice, may bar a party from seeking relief under a force majeure clause.
Therefore, when reviewing force majeure clauses in their contracts, businesses should pay particular attention to the following matters:
- How does the contract define force majeure? Does it expressly refer to disease, pandemic or other like situations?
- What standard of non-performance is set out in the contract?
- What steps must be taken to preserve contractual entitlements? What notice should be filed? What mitigation measures should be taken? Which records should be kept?
In practice, the force majeure clause often has a stringent application threshold requiring proof that the performance of an obligation is rendered impossible, which can be difficult to demonstrate.
Therefore, businesses should also explore other potential avenues for relief such as hardship, which can be easier to demonstrate than force majeure.
Hardship is another commonly found contractual provision which deals with situations where the occurrence of exceptional circumstances creates an excessive or unreasonable burden on a party to the performs of an obligation. Thus, in principle and unlike force majeure, hardship does not require an absolute impossibility to perform but only an alteration of the equilibrium of the contract.
Otherwise, similarly to force majeure, hardship clauses will generally require that the exceptional circumstance be an event be beyond the control of the affected party and unforeseeable at the time when the contract was signed.
Likewise, it common for hardship clauses to require the affected party to take reasonable steps to alleviate the adverse impacts of the event on the economic equilibrium of the contract.
The first-stop solution in case of a hardship event is usually a duty for the parties to attempt to renegotiate the contract. Failing which, the remedies available tend to vary between
(i) a right to unilateral termination of the contract by the affected party;
(ii) a right for either party to request the adjustment or termination of the contract by a court or arbitral tribunal; or
(iii) a right for either party to request the termination (but not the adjustment) by a judge or a court. Hardship is assessed on a case-by-case basis. The key elements which are usually considered in this analysis are the nature, term, and subject matter of the contract, as well as the market conditions (volatile or stable) in which it was concluded.
In Vietnam, if the parties do not include a hardship clause in their contract, the provisions of Article 420 of the 2015 Civil Code will apply. This article governs situations where an event alters one of the ‘basic circumstances’ underlying a contract. To be invoked, Article 420 of the 2015 Civil Code requires that a party demonstrate the following elements:1
- The change of circumstance must have occurred due to objective reasons which arose after the conclusion of the contract;
- The parties could not have foreseen the change of circumstances at the time when the contract was concluded;
- The change of circumstance is such that, had the parties known in advance, they would not have concluded the contract or would have agreed on “completely different” terms;
- The affected party would suffer “serious damage” if the contract was continued;
- The affected party could not prevent or minimize the effect of the change of circumstances despite having taken “all necessary measures in its ability” considering the nature of the contract.
If the parties cannot agree on an amendment to the contract “within a reasonable period of time”, then either party may request a court to terminate the contract or amend it “to balance the lawful rights and interests of the parties […]”.2 However, a court may only amend a contract if its termination “would cause greater damage than the cost of [performing the modified contract]”.3 The parties must also continue to perform the contract during the contract renegotiation and court proceedings.4
The criteria of Article 420 can thus be more stringent than standard contractual language. For examples:
- It places a high threshold for the impact of the event (the contract would not have been concluded or would have provided for a “completely different” obligation);
- It does not provide a clear time limit for the renegotiation of the contract;
- It restricts the choice of forum to national courts (no arbitration);
- It restricts the discretion of the court to amend the contents of the contract;
- It obliges the parties to continue the performance of the contract up until the rendering of the court decision, which can take a significant amount of time in practice.
Commercial parties affected by the COVID outbreak should therefore consider the possibility to renegotiate the terms of their agreements, bearing in mind the possibility and requirements to invoke hardship under a contract contain an express provision to this effect, or under the strict regime of the 2015 Civil Code.
1 Article 420(1) of the Civil Code
2 Article 420(3) of the 2015 Civil Code
4 Article 420(4) of the 2015 Civil Code