The outbreak of the coronavirus disease 2019 (“Covid-19”) is having large impacts on people and business. There may also be legal consequences of Covid-19 and Vinge has received many questions from clients regarding the possibility of invoking force majeure or other contractual objections as a result of the outbreak of Covid-19. We have therefore produced this general article to provide information in this regard. The information below is of a general nature and neither can nor should be construed as a substitute for legal advice in relation to an individual matter.
• It cannot be ruled out that epidemics, such as Covid-19, could under certain circumstances be considered as a force majeure event.
• Under Swedish law there may be additional grounds to invoke in the absence of a force majeure clause or when a force majeure clause in the relevant agreement cannot be invoked.
• To summarise, an overall assessment needs to be made on a case-by-case basis considering all relevant circumstances at hand.
It is relatively common to include force majeure clauses in commercial agreements governed by Swedish law. Such clauses may be of a general nature, referring to circumstances beyond the relevant party’s control, without providing any examples of such events, or they can be more detailed and include references to specific events, such as war, strikes, natural disasters, lock-outs, blockades or other similar circumstances over which such party had no control. Occasionally, force majeure clauses include an explicit reference to epidemics or pandemics. The invoking party may, depending on the wording of the force majeure clause and other relevant circumstances, be exempted from performance under an agreement.
In order to assess whether a certain event, such as the Covid-19 outbreak and the consequences thereof, would trigger a force majeure provision in a contract, all relevant circumstances at hand will need to be considered. It is, inter alia, relevant to consider the wording of the force majeure clause, applicable law, the specific reason for disruption or inability to perform, such as decisions taken by an authority as a result of the Covid-19 outbreak, infected employees or issues relating to suppliers or sub-suppliers and whether it is possible to find any alternative solutions or to mitigate the negative impacts of the Covid-19 outbreak in any other way.
It is important to note that many force majeure clauses require parties to give prompt notice of any force majeure event, and there are often ongoing obligations of notice and co-operation for as long as any force majeure event continues. The party invoking force majeure generally needs to comply fully with any such obligations.
Parties that are currently drafting force majeure clauses should consider including express provision for the possible consequences of the Covid-19 outbreak. One suggestion in this respect is to consider not only to force majeure under the governing law of the contract, but also force majeure under any other applicable local law, such as the law of the place of performance. It is relevant to note in this regard that some countries, notably China, have implemented specific force majeure certificates and other legislative measures.
As a main rule, interpretation of agreements under Swedish contract law is to be carried out by taking into consideration not only the wording of the agreement, but also the circumstances at the point in time when the parties entered into the agreement and the joint intention of the parties when the agreement was entered into.
One particular issue under Swedish law is whether, when interpreting a force majeure clause, a court or arbitral tribunal should have regard to how underlying Swedish law in general would treat the situation at hand had no force majeure clause been included in the agreement between the parties, i.e. whether regard should be taken of any non-mandatory law, e.g. the Swedish Sales of Goods Act, the United Nations Convention on Contracts for the International Sales of Goods (“CISG”), etc.
The Swedish Sales of Goods Act
Section 27 of the Sales of Goods Act includes a provision that is similar to a force majeure provision and reads as follows:
The buyer shall be entitled to damages in respect of loss suffered as a consequence of delay on the part of the seller, unless the seller establishes that the delay is a consequence of an impediment which was beyond his control, which he could not reasonably have been expected to have anticipated at the time of the sale, and the consequences of which he could not have reasonably avoided nor overcome.
When making the assessment of whether a party (the seller) can avoid liability for damages for delay pursuant to this provision, several circumstances need to be at hand: (i) there has to be an impediment, (ii) the impediment has to be out of the party’s control, (iii) the party must show that it was not able to foresee the impediment, and (iv) the party must show that it is not able to overcome or avoid the impediment or otherwise mitigate the effects of the relevant event.
The determination of whether a party was not able to foresee an impediment depends on the specific situation. Illness is something that employers, to a large extent, need to take into consideration and plan their business around. For example, employers need to have enough employees to be able to handle seasonal influenza. However, in some cases, sick leave could be deemed to be outside the relevant party’s control even if it usually is something employers are deemed to have control of. This could be the case if the extent of the sick leave is extraordinary and not foreseeable for the employer. This implies that the assessment may be different if the relevant party suffers from extensive sick leave due to an epidemic that no one expected.
Article 79 of CISG
CISG contains a provision which is similar to the provision in the Swedish Sales of Goods Act, namely Article 79:
A party is not liable for a failure to perform any of his obligations if he proves that the failure was due to an impediment beyond his control and that he could not reasonably be expected to have taken the impediment into account at the time of the conclusion of the contract or to have avoided or overcome it or its consequences.
It should be noted that Article 79 of CISG only gives the impeded party exemption from liability for damages; other remedies remain open to both parties. However, CISG Advisory Council Opinion No. 7 suggests that it may be open to a court or tribunal to “adapt” the contract in light of such changed circumstances.
Section 36 of the Swedish Contracts Act
Section 36 of the Swedish Contracts Act provides that a term in an agreement may be modified or set aside if it is unreasonable having taken into consideration, among other things, the general circumstances, and that the entirety of the agreement may be set aside if it is unreasonable to demand the continued enforceability of the agreement without the unreasonable term.
It is important to note that Section 36 is only very rarely applied in commercial contracts, and exceptional circumstances are required. Nevertheless, Section 36 of the Swedish Contracts Act may potentially be invoked when new circumstances have arisen after the parties entered into the agreement. It could potentially be argued that the Covid-19 outbreak constitutes such a new circumstance and that a certain contractual obligation has become unreasonable as a result of such a fundamental change of circumstances.
Other possible objections
Further, Swedish law may allow a party to refuse to perform its contractual obligations if such performance has become impossible. This could for example be the case if it is impossible for a provider to deliver products to its customers due to a shut-down of a factory as a result of the Covid-19 outbreak. However, it is generally very difficult to prove that performance has become impossible. It should be noted that the other party may claim damages for non-performance, depending on the circumstances, and the invoking party must nevertheless try to find alternative solutions and mitigate the effects of any such impossibility.
In addition, it might be possible for a party to refuse to perform its contractual obligations if the performance has become illegal. This could e.g. be the case if an authority decides to impose import bans or takes any other measure as a result of the Covid-19 outbreak that affects the contracting party’s possibility to comply with the agreement. In addition, a party could potentially terminate a contract for reasons of an “important ground”, as mentioned above.
We recommend that specific legal advice is sought before taking any measures, in relation to the application of a force majeure clause or otherwise, due to the Covid-19 outbreak.