IS COVID-19 A FORCE MAJEURE EVENT UNDER VIETNAMESE LAW?
The recent outbreak of COVID-19 (Coronavirus) and the spread of the virus, which began in Wuhan and is expanding globally have significantly impacted operations worldwide when countries all over the world enact many safeguards and protection measures and governmental actions to slow down the spread of the disease. Some discontinuity for businesses may include:
- closures of workplaces and ports;
- disruption to supply and distribution channels;
- disruption to several businesses;
- restriction of free movement of personnel and shortage of labor;
- cancellation, suspension or postponement of events; and
- seriously reduced market demand.
On the one hand, such safeguards and actions are necessary to prevent the disease spreading. While on the other hand, such measures may impact business operations in Vietnam and globally. Specially, in this context, many questions regarding legal and commercial consequences have been raised between contracting parties. If you feel confused in such time of social upheaval, we would like to suggest some legal issues and questions for you to follow in order to identify the problem you are having more clearly
1.Force Majeure Event
The term “Force Majeure Event” (“FME”) is probably the most frequently mentioned term in business these days.
To determine a FME in the context of mutual agreement, clearly and primarily, it must be based on the contract which the parties have signed. The determination of the FME and the terms of dealing with circumstances arising from this event shall, first of all, be based on the provisions of the contract signed by the parties. Accordingly, the parties will endeavour to handle the situation according to the mutually agreed contract.
If the contracts do not include any provision pertaining to a FME which may favor one side; and if there is any further dispute between the contracting parties on a FME, in Vietnam, it must be interpreted, handled and settled in accordance with the Civil Code No. 91/2015/QH133 and the Commercial Law No. 36/2005/QH114.
According to Article 156, Clause 1 of the Civil Code 2015, “an event of Force Majeure is an event which occurs in an objective manner which is not able to be foreseen and which is not able to be remedied by all possible necessary and admissible measures being taken.” Upon further analysis, in order for an event to be considered a FME, three elements are required to be converged:
i. Objective factors: due to objective circumstances such as wars, epidemics, floods, etc.
ii. Unpredictable: These are events that occur completely independently without the will of the parties and the parties do not think it can happen at all.
iii. Irreversible: An event, although all necessary measures and capabilities have been applied, but still cannot overcome the consequences caused by an objective event or an unforeseen incident.
Enterprises which are directly affected by the COVID-19 epidemic which have been unable to perform the obligations of the contracts which they have entered into, to ensure enterprises’ rights and benefits, it is necessary to pay attention to the following questions:
- Is there a Force Majeure or termination for convenience clause?
- Do you have the right to delay or defer purchases?
- Is a contract partner entitled to invoke Force Majeure?
- Did the contract partner do what is required to invoke Force Majeure?
- What are the consequences of Force Majeure?
- Is emergency relief available?
- If there is no FME clause, what are the penalties for cancellation?
- What are the payment terms, and what penalties are there for late payment?
- Do you have the right to modify or substitute products?
- Are there price brackets, bands, indexes or other adjustment mechanisms that could be invoked?
- What happens if your supplier declares bankruptcy?
Significantly, the most-asked question is whether a FME such as the COVID-19 outbreak be acceptable as an excuse for non-payment or delayed payment in purchases. It is necessary to analyze whether the COVID-19 epidemic has all three elements mentioned above to be considered a FME.
In the current context, the authorities which have issued governmental orders to not allow activities and quarantine of activities of transactions of goods, people and services between certain areas affected, or at risk of being affected by the COVID-19 epidemic. Such epidemic can be considered to meet the requirements of (i) Objective and (ii) Unpredictable due to the decision of the Government. Perhaps element (i) and (ii) are relatively clear and uncontroversial.
However, the third element “Irreversible” may be legally disputed because the parties must prove that “The consequences of that event cannot be overcome despite taking all necessary measures and allowances.” In instances where the COVID-19 epidemic is considered a FME, non-payment or delayed payment in purchases by the purchasing party is not considered a contract violation.
3. Necessary steps to ensure an enterprise’s rights and benefits
Enterprises should inform the other party in advance of the possibility and difficulties of contractual non-performance under the influence of COVID-19 epidemic in the form of a FME to minimize losses from damages which may be incurred.
Enterprises affected by the COVID-19 epidemic can re-negotiate the contract regarding the part of the obligation unable to be performed due to the COVID-19 epidemic.Moreover, figuring out ways to prove the third element, “Irreversible”, of the FME for the COVID-19 epidemic. Such element is a contentious and difficult one to prove. Therefore, enterprises should record and keep all evidence during the time of epidemic and contractual performance, such as the State’s announcement of the decision to suspend business operations.
The COVID-19 global pandemic is still complex. To avoid undesirable consequences, each individual or business should actively monitor in order for timely information capture. In addition, enterprises must use all their best efforts to coordinate with the other contracting party and follow governmental policy and any medical measures to mitigate any impediment.
The current Vietnamese law also prescribes, in general,facts which are considered Force Majeure. Therefore, when drafting a contract in the future, it is important that the parties prepare specified provisions which clearly define a FME and the notice obligation when one party is unable to perform the contract when a FME occurs.