Covid-19, contractual obligations and force majeure

Back to Young Lawyers' Committee publications

Zeina Obeid
Obeid Law Firm
zeina@obeidlawfirm.com

Hassan Khalifeh
Obeid Law Firm
hassan@obeidlawfirm.com

The Covid-19 pandemic and the mitigation measures taken by states, including Lebanon, has caused significant disruptions to business and fundamentally changed the way corporations are operating. Amid these disruptions, businesses have been actively engaged in assessing their risk exposure, liabilities and defences in relation to potential contractual breaches caused by Covid-19, as well as in enacting mitigation measures. There has been a particular focus on identifying and assessing force majeure provisions present within existing contracts. 

The Covid-19 pandemic has underscored the importance of using force majeure to repudiate the performance of burdensome contractual obligations that were undertaken prior to its outbreak. Unless the parties are able to rely on force majeure provisions, or renegotiate the terms of the contract, they may be liable for a breach of contract caused by Covid-19 or its related state-enforced sanitary and public health measures.

Force majeure has assumed a significantly greater relevance today, as businesses struggle to understand how it will be construed in light of Covid-19.

This article discusses the different approaches to force majeure found in civil law jurisdictions (as compared to common law jurisdictions), with a particular focus on Lebanon, while highlighting important developments that have occurred in relation to Covid-19.

Force majeure as legal concept

Force majeure is derived from Roman law and is an implied legal doctrine in many civil legal systems, such as in the French system. The concept of force majeure translates roughly as ‘a superior force’ and refers to the occurrence of an event that is outside the reasonable control of a party, which prevents that party from performing its obligations under a contract. The ability to claim that force majeure exists depends on the applicable law and the wording of the force majeure provision itself.

A party affected by a force majeure event will be relieved from performing its obligations under the contract insofar as the contract permits. In the absence of specific wording, the scope of force majeure is assessed under the law governing the contractual relationship between the parties.

Force majeure in contracts

The definition of force majeure varies from contract to contract and is dependent upon what events fall within the scope set out in the provision. Each force majeure provision is drafted differently and interpreted based on its wording. Some provisions set out a specific list of events understood to be force majeure and beyond the control of the parties. Common examples include terrorism, civil or military disturbances, natural catastrophes and malfunctions or breakdowns of machinery. However, most force majeure provisions contain broadly worded definitions in respect of events that are generally outside the control of the parties. These broad definitions can sometimes include wording such as ‘acts of god’, which are intended to cover a wide range of situations.    

Force majeure has assumed significantly greater relevance today, as businesses struggle to understand how it will be construed during Covid-19. However, force majeure clauses generally do not directly address or include the event of a pandemic, and as a result there is considerable uncertainty as to whether Covid-19 qualifies as a force majeure event.

Certain international institutes, such as the International Chamber of Commerce (ICC), provide model clauses that can be incorporated either expressly or by reference. As a result of the current uncertainty created by Covid-19, the ICC has recently updated its force majeure clauses to adapt to the commercial effects of the pandemic. Among the updates to the clauses, the new ICC force majeure clause allows either party to terminate the contract if force majeure is an impediment for more than 120 days.[1]

In the absence of specific determination under the contract, force majeure is construed pursuant to the law governing the contractual relationship between the parties.

Force majeure under governing law of contract

The concept of force majeure does not function uniformly in all jurisdictions. Common and civil law legal systems provide different solutions for unexpected events preventing performance of a contract.

Common law generally does not recognise a doctrine of force majeure as a standalone legal concept that can be implied into a contract.[2] Rather, it is the product of an express commercial agreement between the contracting parties.[3] It is important to note that there is no generic definition of force majeure in common law, as it is a matter of contractual interpretation in each case. As a force majeure clause is a contractual mechanism, and not a common law doctrine, its effectiveness will depend solely upon the manner in which it is drafted.

For example, under the law of England and Wales, force majeure is not a standalone concept: it is a feature of contract and not of the general common law. Contractual performance will be excused due to unexpected circumstances only if it falls within the relatively narrow doctrine of frustration. The doctrine of frustration applies by default unless the parties drafted an express force majeure clause into their contract.[4] A party’s ability to claim relief for a force majeure event under English contract law will therefore depend on the force majeure provision contained within the contract, which must necessarily be considered in light of its precise terms.[5]

With regard to jurisdictions adopting the civil law system, there are many similarities in terms of the legal framework for force majeure and exceptional circumstances. The civil codes of many Arab countries have incorporated provisions that mirror the basic concepts of force majeure and imprévision.[6]Whilst force majeure relates to the objective impossibility for an affected party to perform its obligations under a contract and protects parties from contractual liability, exceptional circumstances relate to the doctrine of unforeseen events, which make it unreasonably onerous on one party to continue performing their obligations. The judge has the discretion to modify the existing obligations of the contracting party.[7]

In Lebanon, the current legal framework does not provide for a definition of force majeure. Lebanese doctrine and jurisprudence dictate that force majeure extinguishes contractual liability when its conditions are met and when it is the reason for the non-performance of obligations.[8]

Article 342 of the 1932 Lebanese Code of Obligations and Contracts (COC) refers to force majeure as an event that renders the performance of contractual obligations impossible and that ‘the debtor must prove the existence…’ thereof.[9]In this case, the obligations that were not performed due to said event are extinguished and are no longer enforceable.[10]However, such obligations are not extinguished when the force majeure event was preceded or accompanied by the debtor’s fault.[11]

For an event to qualify as force majeure, three conditions must be met: the event was unforeseeable[12]; irresistible (ie, unavoidable);[13]and the debtor had no hand in the occurrence of the event (ie, the event is exterior to the debtor). Only when these conditions are met will the debtor be exempt from any contractual liability. However, the parties may still contractually agree to abide by the terms of the contract even in case of force majeure. The parties may also agree to qualify as force majeure events that are not usually characterised as such.[14]

Unlike several other Middle East and North Africa (MENA) jurisdictions, Lebanese law does not provide a specific legal framework for contractual issues arising from unforeseen events in private contracts, nor does it grant the judges explicit powers to intervene when an unforeseen event that alters the contractual equilibrium occurs.[15^]Despite the absence of explicit legal provisions, it is common practice in Lebanon for the parties to a contract to agree to include a clause on unforeseen events, to mitigate the hardship or unforeseen events that could undermine the parties’ abilities to perform the contract or that could cause a substantial change in the value of the contract. Such clauses, which aim to restore the contract’s equilibrium, are valid under Lebanese law on the basis of the principle of contractual freedom.[16]

On 15 April 2020, the investigating judge in Tripoli rendered a decision in which he found that the Covid-19 outbreak was deemed an event of force majeure. Although this decision was rendered in a criminal case, it provides an indication of how judges are approaching the Covid-19 pandemic and its characterisation as an event of force majeure.

More recently, the parliament issued Law 160 on 8 May 2020, which provides for the suspension of legal, judicial and contractual time limits from 18 October 2019 to 30 July 2020, to mitigate the effects arising from the inability of the state and its citizens to adequately exercise their legal, procedural and contractual rights due to Covid-19. However, the law does not explicitly provide that Covid-19 be deemed a force majeure event.

The way forward

Although it appears that courts of civil law jurisdictions have been, in certain instances, characterising Covid-19 as a force majeure, it remains difficult at this stage to predict whether Covid-19 could generally be deemed a force majeure event. This remains to be assessed on a case-by-case basis.

In light of the scale and rapidity of the changing circumstances surrounding Covid-19, and the measures taken by states in this respect, much will depend on the severity of the outbreak; on whether the disruption suffered as a result goes beyond that experienced in other situations; and on the willingness of the courts to take into account the difficulties caused to commercial activities.