Force Majeure - Unanswered Questions And A New Approach

Following the commentary of Assoc.Prof.Dr Do Van Dai in the series of Legal commentaries of experts from the Vietnam International Arbitration Center (VIAC), in this interview, we will listen to the comments and opinions of Lawyer Nguyen Quoc Vinh - Partner of Tilleke & Gibbins Law Firm - Arbitrator at the Vietnam International Arbitration Center (VIAC) on the unanswered questions and a new approach to force majeure in order to give useful advice for minimizing possible risks.

Covid-19 is currently the centre of attention. Assuming that Covid-19 is a kind of force majeure event, many individuals and businesses have invoked this factor to be relieved from their liability. However, in many cases, this relief is beneficial to one but harmful to the other.

In your opinion, how should we understand the relief from liability when force majeure events arise?

At the beginning of the epidemic, borders had already been closed, which led to the inability to deliver goods. The more dangerous the epidemic became, the tighter preventive measures (banning the export of some products, closing shops except for essential services) were.

Due to the above influence, force majeure was suddenly “sought after”. Enterprises and citizens who are not specialized in law simply understand that they are influenced by COVID-19; hence, their obligations to the other party must be discharged. How can I produce and deliver goods if raw materials are banned from export at the borders? The company does not pay my salary, which is a force majeure event, how can I pay bank debts or rent?!

Among those situations, many may satisfy the conditions to be considered force majeure and thus the affected party is relieved from its obligations. Legally, to be considered a force majeure event, 3 conditions must be met according to Clause 1 Article 156 Civil Code of Vietnam 2015, which are:

- First, is it an objective event that is unforeseeable?

- Second, can this event be overcome or not?

Note: If it is true that the enterprise cannot produce or provide services, they need to explain why they cannot overcome the situation in other ways, for example by hiring a third party to ensure performance of contract?

- Third, also related to the second condition, has the affected party applied all necessary measures within its ability or not?

Note: If it is true that the supplier is prohibited from exporting raw materials, but why do businesses not find alternative domestic or foreign sources?

If one party has to bear costs such as hiring labor and purchasing materials despite being affected by a force majeure event, can they require the other party to make a payment? The answer is a force majeure event relieves both parties from their obligations. Therefore, the basic principle is that each party bears its own damage. In more developed jurisdictions, the doctrines of good faith, fair dealing or unjust enrichment can be applied to help restore a portion of the cost. Unfortunately our legal system is not at such a complex level.

There are cases in which the parties who owed money or payment invoke force majeure clauses to refuse or delay payment obligations.  What are your opinions on this and how can we resolve?

Clause 2, Article 351 of Vietnam's Civil Code stipulates that: “Where an obligor is not able to perform a civil obligation due to an event of force majeure, it shall not have civil liability, unless otherwise agreed or otherwise provided by law. ”

There are two statements here, first, when a force majeure event occurs, the affected party is exempt from liability, contractual obligations to be exact because there are more than one type of liabilities, to the other party. Second, unless the parties agree otherwise or otherwise provided by law.

With regard to payment obligations in typical contracts like sales and loan contracts, the Civil Code stipulates that: “A purchaser must pay the full price at the agreed place and time.”(Clause 1, Article 440 Civil Code - Payment obligation); “Where the property lent is a sum of money, the borrower must repay the lender the loan in full when due.” (Clause 1, Article 466 Civil Code - Obligations of borrowers to repay loans). These are similar to the obligation to pay rent in lease contracts or the obligation to pay salaries and wages to the employees provided in the Labor Code.

Although Vietnamese law and law textbooks do not state clearly, in advanced legislations, the payment obligation is an "absolute" obligation because:

- First, the event can be overcome (borrow from a third party);

- Second, it would be very difficult to prove that a person who loses money has "applied all necessary measures" to "not lose money";

- Third, the vast majority of transactions in society are related to the obligation to make a payment. If force majeure is applied, all transactions/contracts, which are the foundation of social wealth and faith, might collapse. A party can easily use the excuse that they have not received money, or they do not have enough money, or they lost money to refuse to fulfil the obligation they have committed to, which affects the other party.

However, there are exceptions to which force majeure may also apply to payment obligations. For example, due to foreign exchange control during a pandemic season, a country may impose a regulation that overseas payments in foreign currency must be permitted by the government. If the obligor is not allowed to make a payment by the government, in this case a force majeure event will probably apply.

As for the remedy, for the first time in Civil Code 2015, Vietnam introduced the concept of hardship in Article 420. This concept shares several similarities with force majeure, such as they both require an objective event, or the affected party must take all necessary measures, etc. But there is one difference. With force majeure events, the affected party must prove that they "cannot overcome". Meanwhile, the affected party can still overcome hardship, meaning they are still able to perform the contract. However, performance of the contract will cause a significant (economic) disadvantage to the obligor. For instance, raw materials are still available for production but the price has increased 10 times since the signing of the contract, hence, the performance of the contract will make the obligor suffer a heavy loss. In this case, the Civil Code allows the affected party to request the other party to renegotiate the contract or if the other party disagrees, request the court to terminate the contract or modify the terms of the contract to restore the equilibrium of interests of the parties. This is a new provision of the Civil Code that the parties should consider.

Please clarify, is it true that when a force majeure event arises, one party or the parties has the right to terminate or cancel the contract?

First the parties must see what are the consequences of force majeure agreed upon in the contract. Does the affected party have the obligation to notify the other party? Then are the parties entitled to extend the contract within a period of time specified in the contract? If the force majeure event still prevails when this time limit expires, does one or the parties have the right to terminate the contract?

In case the parties forget to include force majeure clause in the contract, if the contract is governed by Law on Commerce, the parties can refer to Article 296 on extension of time limit for performance of contracts.

In case the contract of the parties is not governed by Law on Commerce in general or Article 296 of Law on Commerce in particular, the parties should refer to Clause 2, Article 351 Civil Code or Clause 1, Article 294 of Law on Commerce. Here the law stipulates that: “Where an obligor is not able to perform a civil obligation due to an event of force majeure, it shall not have civil liability.". I understand the lawmaker's intention is to relieve all responsibilities and obligations of the parties when a force majeure event occurs. In other words, when a force majeure event occurs, if an extension cannot be agreed upon, the contract will be automatically terminated. However, as mentioned above, the use of the term "no liability" is inaccurate because there are many types of civil liabilities (responsibility to transfer objects, to compensate, to pay interest...).

In advanced legislation, the term "discharge" is used, which is more precise. Once the obligations of one party are discharged, because this is a bilateral contract (the two parties have corresponding obligations), the other party's obligations are also discharged. Thus, the contract is terminated.

As a lawyer, do you have any advice for businesses to help them avoid as much damage as possible when a force majeure event arises?

Firstly, before entering into a contract, it is always necessary to consider  whether the force majeure clause is consistent with your contract. Force majeure does not apply to all contracts (e.g. donation contracts, loan contracts). However, many contracts will require force majeure provisions (sale contracts, construction contracts, service provision contracts).

If your contract requires a force majeure clause, then consider how the clause should be drafted. Note that the list of force majeure events listed in the contract is also very important, it may include unfavourable events for you. For example, do you accept "high tide" as force majeure? Are provisions on notification obligation, contract extension period, consequences included in the force majeure clause?

Second, when the contract has been concluded and the situation satisfies the conditions of force majeure provided in the law, clients need to understand their rights and obligations, such as obligations to notify, renew contracts, etc. Is there any chance for the contract to be continued (by contract extension or with a third party’s assistance)?

Third, if the client's case does not meet the conditions of force majeure, take into consideration whether they are able to request to renegotiate the contract or terminate the contract as stated in Article 420 of Civil Code.