What Impact of Force Majeure and Basic Change of Circumstances for Contractual Relations During Covid 19 Pandemic?

Whether purpose contract has been achieved or not does not only depend on compliance with contract but also is controlled by conditions, objective circumstances. In the current pandemic situation, which regulations do participants in contract need to pay attention to?

 

According to Vietnam laws, event shall be regarded as force majeure if it meets three conditions: (i) objective factors; (ii) not able to be foreseen; (iii) not able to be remedied by all possible necessary and admissible measures being taken. It should be noted that epidemic is regarded as event of force majeure if there is factor of “not able to be remedied”. Covid-19 pandemic, in legal aspect, initially was not a force majeure event. Only when it broke out and the Government issued Directive on nationwide social distancing, it appears that this pandemic become force majeure event. Specifically, according to request of Directive, all operation must stop, and this request seems to make Covid 19 epidemic meeting enough three mentioned conditions. Legal consequences of force majeure event is that if there is loss, and the obliger shall not take responsibility.

However, in the current pandemic situation, not all contractual relations will apply above principle. When force majeure event occurs, factor in performance of contract must be considered. This is fundamental difference between definition of “force majeure event” and “basic change of circumstances”. Specifically, the contract will not be performed in force majeure event and will be performed with many considerable changes compared to initial estimate in basic change of circumstances. According to the laws, the change of circumstances shall be deemed basic when it meets all following conditions: (i) The circumstances change due to objective reasons occurred after the conclusion of the contract; (ii) At the time of concluding the contract, the parties could not foresee a change in circumstances; (iii) The circumstances change such greatly that if the parties know in advance, the contract has not been concluded or are concluded, but with completely different content; (iv) The continuation of the contract without the change in the contract would cause serious damage to one party; (v) The party having interests adversely affected has adopted all the necessary measures in its ability, in accordance with the nature of the contract, cannot prevent or minimize the extent of effect.

In the case of basic circumstances change, the affected party may request the other party to the re-negotiate the contract in a reasonable period of time. If the parties can not reach an agreement on amending the contract within a reasonable period of time, any of the parties may request a court or arbitration to terminate the contract at a specific time or amend the contract to balance the lawful rights and interests of the parties due to basic change of circumstances. The court may only decide to amend the contract in the event that the termination of the contract would cause greater damage than the cost to perform the contract if it is modified. In the process of negotiating on amendments and termination of the contract and the court or arbitration handling the case, the parties must continue to perform its obligations under the contract, unless otherwise agreed.

In the current pandemic situation, many places are still allowed to operate normally but there must be careful prevention measures. But these prevention measures are the cost that enterprise has to cover which is not small. Therefore, the contract can still be performed but one party has to suffer huge losses compared to initial estimate. In this case, the law allows parties to re-negotiate. If parties cannot reach any agreement, such case shall be brought to the court or arbitration to be solved. There are two possibilities: firstly amending the contract to balance the parties’ rights, secondly terminating the contract at a specific time if the contract cannot be amended.  And it is important to consult with dispute lawyers for possible options before taking the matters further to protect best interests in the transaction.

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