Does the coronavirus constitute an event of force majeure?
The coronavirus is spreading. The number of infections is increasing rapidly and the government has announced drastic measures to control the spread of the virus. Public life has virtually come to a standstill as a result. Trade and industry are also suffering from the exceptional situation facing the Netherlands and large parts of the world. Many companies will therefore most likely be unable at some point to perform all or some of their contractual obligations. Their contracting parties will in their turn incur losses as a result.
The question presents itself whether the corona pandemic and the government measures imposed as a result justify reliance on force majeure and, if so, what consequences successful reliance on force majeure will have.
1. What is the legal definition of force majeure?
If a debtor fails to perform an obligation, the law provides that an event of force majeure is involved if the debtor cannot be blamed for the breach. That is the case if the breach is not due to any fault of the debtor and is not at its risk under the contract or by generally accepted standards.
In practice, briefly stated, this means that the debtor cannot perform its obligation as a result of an impediment that is not attributable to the debtor.
2. May parties contract out of the statutory force majeure regulations?
Contracting parties may opt to contract out of the statutory force majeure regulations. That is frequently done in practice. Many (Dutch and international) contracts describe what the parties regard as force majeure and what consequences they attach to it. Parties may, for instance, classify circumstances as force majeure that are not classified as such by law. Government measures and force majeure at a supplier, for instance, are regularly classified as force majeure. It is then a matter of contract interpretation whether, for instance, the obligatory closure of bars and restaurants comes under the contractual definition of force majeure. If so, that does not yet mean that reliance on force majeure will succeed. There must also be a sufficient connection between the circumstance in question (the government measure) and the impossibility to perform the obligation in question. The interpretation of the agreement and the specific situation are therefore always relevant.
Once it has been established that force majeure exists under the contract, it must be ascertained whether the consequences are regulated in the contract. The parties may opt, for instance, to limit or rather to expand the other party’s rights under the law. That may be described in general terms or in very exact terms. It may relate to (unilateral) amendment or termination of the contract, but also to the obligation to observe waiting periods or to take measures to minimise the consequences of force majeure. The contractual arrangement prevails over the law and must therefore be the first point of reference.
3. Does the statutory arrangement apply if the contract contains no provisions on force majeure?
If force majeure is not regulated in the contract, the statutory arrangement applies. It is apparent from case law that strict requirements apply to force majeure. The impossibility to perform the obligation must be such that it is practically impossible for the debtor to perform, or performance must be so disadvantageous that it cannot be required of the debtor. Force majeure must be proven by the party that relies on it. That is usually the party that is required to perform but is unable to do so, i.e. the debtor.
4. Does the coronavirus justify reliance on force majeure?
It cannot be said beforehand whether the coronavirus or the government measures taken in response justify reliance on force majeure. It must be assessed in each individual case what exactly the obligation entails, whether performance is indeed impossible and whether the reason for that impossibility is due to the corona crisis or the measures consequently imposed. All the specific circumstances must then be taken into account. If, for instance, the obligation can be performed with the help of a government aid measure, reliance on force majeure is unlikely to succeed. If performance of the obligation would jeopardise the debtor’s health, which is possible in the case of the coronavirus, the likelihood of successful reliance on force majeure is greater. At the time of the bird flu crisis in 2005, a court assumed force majeure when the debtor was unable to take delivery of eggs from its supplier due to a transport ban imposed by the government.
5. What happens if force majeure is established?
If an event of force majeure is established, the creditor can no longer demand performance of the obligation in question. The creditor furthermore cannot claim reimbursement of loss incurred. This applies for the duration of the event of force majeure. But the creditor is not left entirely empty handed. As a rule, it may opt to dissolve (ontbinden) all or part of the agreement, so that it is released from its own obligations. It can reclaim any advance payments made after such dissolution. If the debtor benefits from its failure to perform an obligation, the creditor may, in principle, also claim that benefit. But that benefit is capped at the creditor’s loss and is awarded only insofar as that is reasonable. The specific circumstances of the case play an important role also in this respect.
No court judgments in the field of force majeure as a result of the corona outbreak have been published yet. We will therefore have to wait and see how courts deal with this issue in specific cases. We will keep you informed.