Even though force majeure clause is positioned in general provisions of any contract, it is a must-have clause that helps the contracting parties mitigate risks and exclude the parties’ liability. It is absolutely important to have lawyers draft up the force majeure clause in a specific transaction.
The outbreak of Coronavirus (COVID-19) has disrupted the world’s economy from every aspects and has caused tremendous damage to people and property. Coronavirus has caused the pandemic over 200 countries which resulted in the economic losses. Does the outbreak of COVID-19 invoke “supernatural force” beyond human control? This incident is well-known as Force Majeure event stemming from Roman law and defined in diverse ways. When a Force Majeure event occurs, an obligor to an agreement or specific transaction constitute an excuse for not performing its obligation to an obligee. Therefore, the provision of Force Majeure event plays a role to mitigate risks caused by economic, political or natural events.
However, in practice, this provision seems to be less interested by the contracting parties and sometimes, it is not drafted thoroughly in order to reflect exactly the parties’ intentions. Therefore, the provision of Force Majeure event should be drafted carefully because the dispute settlement body may hesitantly consider to identify an event as Force Majeure event unless it is provided clearly in the contract.
Regulation of Force Majeure
Under Vietnamese laws, “a Force Majeure event is an even occurs in an objective manner which is unforeseeable and insurmountable even if all necessary and attempted measures has been applied to mitigate damages” (Article 161 of the Civil Code 2015). Therefore, an event is considered as a Force Majeure event if it satisfies the following elements: (i) it must occur objectively; it is unforeseeable; and (iii) it is still unforeseeable even though all necessary measures and available abilities has been applied.
Most countries following the Civil law system recognize and stipulate the Force Majeure event, such as French and Belgium while German and Italy prefer to analogy of concept “impossibility of performance”. In general, they do not give a specific term and element, instead of providing certain criteria to clarify the Force Majeure event, like the laws of Vietnam. Besides, countries following the Common law system do not have any definition of “Force Majeure”. Alternatively, the laws of these countries apply the doctrines of “frustration” or “impracticability”. The root cause of the differences in using the term stems from actually resolving some special case when contracts are not performed correctly. In particular, the Force Measure event is only applied when the contractual performance is impossible in civil law countries system, while the term of frustration or impracticability refers only to an event or something “different” from the agreed content in the contract. Hence, the area of applying the term of frustration and impracticability is always limited and interpreted based on the content of the contract agreed by parties.
In accordance with the laws of Vietnam and other countries, the term of Force Majeure event is not a mandatory regulation to be provided in the contract. It is also defined unclearly. Therefore, an event considered as a Force Majeure event is subjects to provisions and interpretation of the contract. The more detailed of the term of Force Majeure is set, the more the parties are protected when the Force Majeure event occurs.
Are force majeure events all-inclusive?
It is worth noting that the drafter should avoid ambiguous drafting of force majeure events. Even by doing so well, it is not always certain that risks are under absolute control. For instance, the construction agreement between a project owner and a main contractor provides that the non-performance of a third party (sub-contractor) will be deemed as Force Majeure event and the main contractor would waiver its contractual obligation in favor of the project owner. In addition, a few developers for residential housing project intend to adjust original zoning and construction plans after the launch of official sale campaign in order to increase the number of apartments for sales and gains additional profits as the market is going up gradually. However, the adjustment of zoning plans will adversely affect customers who have already purchased the apartments (such as obscurity of apartment view, high population density and overcapacity of utilities, etc.). Thus, it is interesting to consider whether the approval of the zoning plan by government agencies constitute a Force Majeure event (government order/regulations) which would exclude the developer’s liability.
As the applicable law does not recognize the principle of exempting the obligor in interested circumstances as stated in force majeure event, it is recommended that the drafters need to reformulate conditions and effect of the force majeure events.
The term of Force Majeure should contain three major parts as follows: (i) detailed description and nature of Force Majeure (which events are included and excluded in force majeure events); (ii) the so-called regime includes notification, evidence, and remedies in writing when a Force Majeure event occurs; and (iii) solutions for potential consequences of the Force Majeure event, for example, duty to overcome obstacles or mitigate losses, suspension or termination of contractual performance, extension of performance, and proposal for renegotiation.
In addition, the experienced drafters must be aware of slight differences between force majeure clause and hardship clause, and force majeure and exemption of liability. Even though it is not always clear-cut in drafting up the differences among these three concepts in a contract, it is practically necessary to know when and how to use in the course of contract drafting.
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