Commercial contracts and the COVID-19 outbreak: when is reliance on force majeure successful?
Governments worldwide are taking measures because of the COVID-19 outbreak (the coronavirus). These measures have far-reaching consequences, also for businesses. If businesses have concluded contracts, the basic principle is that they must comply with the obligations arising from these contracts. What if, as a result of the corona crisis, you are unable to meet your contractual obligations, such as supplying goods to your customers? Can your customers claim compensation from you on that basis, or can you successfully invoke force majeure? And what are the consequences if such an appeal is successful?
The starting point under Dutch law is: a party to an agreement is liable for all damages resulting from his failure in the performance of an agreement, unless such failure is not attributable to him. A failure is not imputable if the relevant party is not to blame and if he is not accountable according to the law, a legal act (e.g. a clause to this effect in an agreement) or generally accepted practice. If the failure in performance is not imputable, then there is force majeure. Force majeure shall stand in the way of performance. In that case the relevant party is not obliged to pay damages to the other party as the failure in performance by the relevant party is not imputable. However, in principle the other party does have the possibility to terminate the agreement, unless the failure in performance, in view of its special nature or minor importance, does not justify this termination with its consequences.
If a party fails to fulfil his obligations due to the outbreak of the COVID-19 virus and the sudden and unforeseeable measures as a result, does this qualify as force majeure? In answering this question it is first of all important whether the parties have included a force majeure clause in the agreement (or general terms and conditions).
If the parties have included a force majeure clause in the agreement, then the court will have to assess whether the COVID-19 outbreak qualifies as force majeure on the basis of the so-called Haviltex criterion (i.e. when interpreting an agreement, not only the literal wording of the contract must be taken into account, but especially what the parties intended and what they could reasonably expect from each other). In interpreting the force majeure clause, the intention of the parties and the legitimate expectations on both sides are therefore decisive.
If the parties have not included a force majeure clause in the agreement, the court will have to determine whether force majeure is present on the basis of the law and generally accepted principles. What is important here is the direct cause of the failure in performance. For example, if there is an export and/or import ban that makes the delivery of goods impossible, it can be argued that the failure cannot be attributed to the party that is obliged under an agreement to deliver the goods, because he is not to blame and he should not be accountable for the failure in performance. After all, the failure in performance is caused by the government's emergency measures.
Also in the absence of a force majeure clause it will have to be assessed on a case by case basis whether a party’s failure in performance is imputable to him. The following aspects, among others, are important in this respect:
- whether the relevant party can fulfil his obligations in an alternative way (e.g. importing from a country that is not subject to an import ban; delivery by ship instead of by plane);
- whether the Dutch government or a foreign government has designated the COVID-19 outbreak as a force majeure situation; and
- similar cases in case law, such as rulings in connection with bird flu.
We are currently not aware of any court ruling as to whether or not a party’s reliance on force majeure in connection with his failure in the performance of an agreement as a result of the outbreak of the COVID-19 epidemic is successful. If the court is asked to give an opinion on whether or not force majeure is present, then, based on the interpretation of the force majeure clause included in the agreement or general terms and conditions (if any) and all the circumstances of the case, it must be assessed whether a reliance on force majeure is recognized.