The FINANCIAL — “COVID-19 is causing business disruption all over the world, and many companies are evaluating whether they can postpone, suspend, or cancel their contractual obligations because of it. But force majeure protection does not automatically apply just because of a worldwide pandemic,” says Jennifer Ancona Semko, Partner and Chair, at Washington Office Litigation & Govern and Co-Chair, North American Commercial Litigation, Baker & McKenzie LLP.
“Instead, the company has to evaluate the language of the force majeure provision in its contract, consider the applicable law, and determine whether COVID-19 has made
its performance truly impossible. Under the laws of most US states, a company cannot escape its obligations just because the contract has become less profitable or more difficult to honor. And the laws of most
US states also require a company to try to perform through some other means before it can claim the protection of force majeure”, she told The FINANCIAL.
“Force majeure is a legal doctrine recognized in the US (and many other jurisdictions) that excuses a company’s performance under a contract if an unforeseen event, beyond the company’s control, makes performance of its obligations impossible. The right to claim “force majeure” can come from an express provision in the contract or, if the contract is silent on the issue, from general legal doctrines like “impossibility” or “impracticability” or “frustration of purpose” (if available in the applicable jurisdiction). If the contract involves the sale of goods, other laws might apply that create some protections for companies suffering from an unforeseeable crisis (like the Uniform Commercial Code in the US)”.
Q. TF. Is it really force ma- jeure event in all countries? Can it be speculation for some countries ?
A. Whether or not the events sur- rounding the pandemic rise to the level of force majeure really de- pends on the specific facts of each situation. Most courts will want to see proof that the pandemic has truly made performance of a con- tractual obligation impossible. For example, a government business closure order may trigger force majeure if it requires a company to cease operations and, thus, makes it impossible for the company to complete its manufacturing obligations under a contract. Or if a company cannot obtain the raw materials it needs to manufacture goods because those materials are trapped in a port quarantine, force majeure may be triggered. On the other hand, if market changes caused by the pandemic have simply made the contract less profitable, a court likely will not view that as a true force majeure event.
Q. TF. What will happen when Pandemic ends?
A. The answer depends on the language in the contract. In many contracts, a company’s perfor- mance is simply suspended during the force majeure event and must resume once the event is over. In some contracts, if the force majeure event continues for a defined period of time, one or both parties have the right to terminate the contract com- pletely.
Q. TF. Can companies delay payments of taxes in the event of force-majeure?
A. As you probably know, the US government has extended the dead- line for filing and paying federal income taxes this year because of COVID-19. Unless the government taxing authority has expressly ex- tended a tax payment deadline, in my view it would be very risky (and unadvisable) to withhold or post- pone tax payments.
Q. TF. Should companies sue partners that delay payments or fulfillment of obligations?
A. I think most lawyers, even litigators like me, would agree that filing a lawsuit should be an option of last resort. Litigation is costly, time consuming and distracting for the company. Many of the clients I have been working with over the last several weeks during these very difficult times are trying their best to find commercial solutions when these issues arise. But if negotia- tions fail, a solution can’t be found, and the company concludes that it makes good business sense to pursue their contractual rights in court, a lawsuit may become neces- sary.
Q. TF. Which companies and industries are in main risk area?
A. Certainly companies in the air- line, hospitality, retail, and bar/restaurant sectors have been very hard hit by COVID-19, due to the obvious drop in customer demand and, in some cases, government closure or- ders. But we have seen that a wide variety of industries are feeling the negative effects of the pandemic.
HFW experts that specialise in international commerce comment that some companies, evidently including LNG importer CNOOC, have begun to declare Force Ma- jeure (FM) in response to the dif- ficulties they face, and the Chinese government is issuing FM certifi– cates to companies unable to meet their contractual obligations in an attempt to protect them from breach of contract claims.
“The question arises – will this work? Will declarations of FM, or even government issued FM certif- icates, be effective to protect Chinese (or other) companies struggling to meet their contractual obligations?
Many international trading contracts are governed by English law, and it is hard successfully to rely on an FM clause to avoid contractual responsibility under English law.
There is no guarantee that a government certificate will make any difference – in fact, it might give Chinese companies a false sense of comfort, resulting in them claiming FM when in fact they are not contractually entitled to do so, and then facing a claim for breach of contract anyway”, agency commented.
FM clauses frequently require evidence to be served in support of any claims and contain notice provisions which must be complied with to the letter.
Claims for FM have been rejected by the courts as a result of noncompliance with notice provisions.
Is COVID-19 Force-Majeur Event?
The short and somewhat tedious answer is that it depends on the spe- cific circumstances, and therefore, a specific assessment of the circum- stances in each individual case is re- quired. But generally speaking, the threshold for categorizing an event as force majeure is very high, Ernst & Young one of the leaders in assur- ance, tax, transactions and advisory services states.
The time of entering into the spe- cific contract is also relevant: Was the contract entered into prior to or after the outbreak of COVID-19? On 30 January 2020, WHO announced that COVID-19 is a Public Health Emergency of International Con- cern, and therefore it seems unlikely that COVID-19 can constitute a force majeure event for a contract entered into after this date. For contracts en- tered into prior to 30 January 2020, but after the outbreak of COVID-19, a closer examination of the specific circumstances is required in order to assess whether COVID-19 con- stitutes a force majeure event in the specific situation.
Both quarantine and self-isolation are also grounds for suspension of employment relations, PwC Georgia warned.
“The person who is in quaran- tine in the medical institution is given temporary disability certifi– cate; in case of quarantine (includ- ing self-isolation) that undergoes in non-medical environment, a legal document that equals to medical certificate is issued by the Minis- try of Internally Displaced persons from Occupied Territories, Labour, Health and Social Affairs of Georgia.
The period in quarantine or self- isolation shall not be treated as annual leave.
Termination of the employment contract is generally viewed as the last resort, and therefore the employ- ers are advised to take all measures not to terminate the agreements. In this respect it is advisable to first talk to employees, review the employ- ment arrangements, working hours, compensation, offer employees to use their paid and unpaid leave, etc.
In the event an employee refuses to agree on changes in the employ- ment contract, or take paid or un- paid leave, an employer may have right to terminate the employment agreement.
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