COVID-19 and force majeure. Is there any connection

Giambrone team has the answer.

Negative consequences of the coronavirus COVID-19 outbreak on businesses are widely known. Malls and restaurants are being shut down, borders are closed in many countries, restrictions to mass gatherings and events are evident.

World Health Organization has proclaimed this outbreak a pandemic and businesses have been calculating damages incurred. According to the data presented by the Economist Intelligence Unit the world tourism industry might have lost around $80b. Fashion retailers such as Zara and Bershka have requested a discount on rent from mall owners. Private education sector has shifted to a distant teaching and, inevitably, some customers in this sector have noticed a quality decrease connected thereto as many of the private schools were not ready to immediately change their operational mode. Some have encountered problems with a stable internet connection, others were not ready to trasfer the content in digital format or have been very slow in rendering services. Law firms have been preparing to expand litigation and alternative dispute resolution departments as we can clearly envisage the increase of judicial and non judicial disputes on rent, rendering services and damage claims, most likely followed by banruptcy applications.

The current situation in the global economy is the indicator of “a global force majeure” which has occurred across the globe. Market agents are restricted in performing their contractual obligations due to government anti-covid measures therefore they receive huge fines for such a default. This, in its turn, leads to financial losses. In the case of a default proclaiming force majeure is widely applied by the parties to a contract in order to waive the liability. In several countries public officials have been evaluating a possibility for an official recognition of COVID-19 pandemic as force majeure, especially for legal application in the public sector. However from a legal point of view the definition of force majeure does not include a definite recollection of facts, actions or circumstances that can qualify as such. So, it is not apparent that the covid-19 outbreak globally or in a particular country will automatically be considered as force majeure circumstance. It is a common practice in commercial law to include in commercial contracts general clauses that refer to the decisions of the local chambers of commerce on force majeure. The parties to a contract are free to include pandemics, flood and fire as well as other factors in force majeure clauses, nevertheless all of these factors must respect two general requirements: 1) have an extraordinary nature, i.e. they are not common during normal running of business and 2) be unpreventable, which means that any market agent, acting in a usual way, would not be capable of preventing the occurance of this factor or its consequences. Determination, proof and application of force majeure circumstances leads according to many jurisdictions to a civil liability waiver of a party. Therefore each time a party claims application of force majeure clause in a contract for default due to covid-19 outbreak it has to prove it.

A part from force majeure clauses there are other legal mechanisms that a party may undertake in order to protect its rights. These mechanisms include, but are not limited to, termination of duty under contract and modification of an existing agreement. The former mechanism is applied when both parties to a contract are unable to perform under the contract whereas the latter is applied when the circumstances in a market have drastically changed in respect to the initial situation valid at the moment of stipulation of such a contract, so a subsequent addendum or modification of a contract might be useful if the parties wish to continue their commercial relationship and not be penalized with fines or enter in a long-term litigation. Force majeure is a compulsory clause for a foreign commercial contract, if unexistent, a chamber of commerce responsible for the local territory may refuse to issue a certificate of force majeure to a party. In such cases it is common practice to appeal to the court, unless local legislation contains legal regulation on the matter that can assist in settlement of a dispute by a non judicial way. 

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