Force majeure and the application of force majeure article when arising Covid-19

In early 2020, the world economy was in severe crisis due to the outbreak of the Covid-19 epidemic. The appearance of this invisible “troublemaker” has affected the temporary stability of the market economy due to the lockdown policies of many countries, tighten borders, trade between nations and regions is seriously reduced. In this situation, many individuals and businesses have considered the Covid-19 epidemic as a Force Majeure to be exempted from the responsibility when performing contractual obligations. So, what is the prevailing Vietnam law on Force Majeure and whether Covid-19 will be considered as a reason for contracting parties to be exempted from their responsibilities?

According to Clause 1 of Article 156 of the Civil Code 2015: “An event of force majeure is an event which occurs in an objective manner which is not able to be foreseen and which is not able to be remedied by all possible necessary and admissible measures being taken”. It means that to be considered as a Force Majeure, such event should meet those conditions at the same time as follow:

An event which occurs in an objective manner is an event arising from external factors which do not originate from any parties of the Contract.

An event which is not able to be foreseen when such event occurs beyond the expectation of the parties at the time of entering the Contract.

About the legal consequences of Force Majeure, according to Clause 2 of Article 351 of the Civil Code 2015: “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”. Thus, when an event of force majeure occurs, the affected party shall be exempt from liability and exempt from the obligation to perform the contract with the other party, unless otherwise agreed by the parties or otherwise provided by law.

Base on those above legal bases, how should we view the Covid-19 epidemic? Will the Covid-19 epidemic be considered as a “lifebuoy” when discharging obligations to affected parties?

It can be seen that Covid-19 occurred as an objective and unforeseen event, resulting in many losses of human and property that were virtually irreparable. For that reason, we believe that Covid-19 can be considered as a Force Majeure.

So that when Covid-19 was considered as a Force Majeure, how did this Force Majeure affect the contract performance and other transactions of the businesses?

The Covid-19 epidemic appeared as a tsunami that shook the economy and divide businesses into two (02) categories: (i) Businesses that are not affected by Covid-19, and ( ii) Businesses that are affected by Covid-19.

While the outbreak of the Covid-19 epidemic threatens the global economy, there are many businesses continue to run stable businesses with revenues similar to those of the same period last year. These are businesses that are not influenced by Covid-19, so we believe that the provision of Force Majeure does not necessarily apply to these businesses.

When the Covid-19 epidemic broke out, the businesses operations and financial situation of some business were either positively or negatively affected. Some businesses operating in the health sector, especially in the field of medical equipment, or trading, coordinating the operation of e-commerce trading floor, social networks, software, and applications electronics … have better business activities due to increased demand for health, entertainment, and home shopping. Therefore, in our opinion, the provision of Force Majeure does not necessarily apply to these businesses.

Conversely, we believe that the provision of Force Majeure should be applied to businesses that are being adversely affected by Covid-19. These may be businesses that are experiencing financial difficulties, heavy losses, or are on the brink of bankruptcy or forced to dissolve due to direct effects from the Covid-19 epidemic or direct effects from the Government’s policy regarding disease prevention. For example, in early April 2020, the Government issued a policy of social distancing to prevent and control diseases. Businesses that are directly adversely affected by the social distancing policy are those whose business lines are affected negatively and financial resources are reduced from the closure and freeze of operations, such as businesses operating in the fields of restaurants, hotels, tourism, resorts …

In the time of crisis for these businesses, the application of the provision of Force Majeure will be necessary when clearing the obligations of the affected party, contributing to reducing the burden of fulfilling the obligations for businesses under the signed Contract.

Thus, in our opinion, The Covid-19 epidemic can be considered as a Force Majeure. However, not all businesses are subject to the provision of Force Majeure. The application of the provision of Force Majeure is only necessary for businesses directly negatively affected by epidemics or from strong policies of the Government to minimize damages that Covid-19 may have been and is going to happen. In addition, for businesses positively affected or not affected by Covid-19, it is necessary to strictly comply with the terms of the signed Contract and create favorable conditions to support for businesses negatively affected by epidemics, towards economic stability and social stability after Covid-19.

We do hope that the information in this article is useful for your work.

Kindly regards,

Lawyer Nguyen Thanh Ha

Email: ha.nguyen@tntplaw.com