Amid COVID-19 outbreak:
Does the Force Majeure defense apply to your contractual obligations per se?
Georgian Legislation endows parties with the right to suspend temporarily or to decline fulfillment of contractual obligation(s) when force majeure occurs, though there are some conditions to when and how force majeure clause might be invoked as a defense against the contractual failure.
Declaration of the State of Emergency due to COVID -19 outbreak immediately had and continues having a massive adverse impact on the fulfillment of obligations under commercial contracts. Large-scale shutdowns of businesses mandated by 30-day nationwide lockdown placed companies in acute distress. In most cases, it is hard to define the scale of adverse impact on certain contractual obligations of the parties. As most of the small and medium-sized enterprises struggle to continue the business, experience financial problems and drop of income during the State of Emergency performance of contractual obligations becomes increasingly challenging, and it is crucial for them to understand where they stand legally.
II. Is the State of Emergency a force majeure event per se?
The Legislation defines the State of Emergency due to the outbreak of epidemic as a force majeure event and grants to the Government the right to limit some of the human rights temporarily. International Law, as well, supports this approach, for example, see International Covenant on Civil and Political Rights, Article 4. At the same time, Legislation does not have a stand-alone definition of the term Force Majeure. Only Articles of some major normative acts list events, including the State of Emergency, as the justification for triggering the force majeure clause. However, multiple different articles of the contractual law may be invoked when a force majeure event occurs.
Defense of the State of Emergency as a force majeure event applies when restrictions implemented under the State of Emergency ruling make the performance of contractual obligations impossible or partially impossible.
Two possible scenarios shall be considered on the matter:
a) When a contract includes Force Majeure clause
Most commercial contracts contain force majeure clauses. As a rule, the model force majeure clause defines the State of Emergency due to pandemic as an event that may lead to the suspension or impediment of contractual obligation(s); or
b) When the contract itself does NOT contain Force majeure clause, but Force Majeure may be invoked under the General Law of Contracts
Even when the contract does not explicitly include the force majeure clause, it is still applicable under the Law of Contracts.
Whether a commercial contract includes the particular provision or not, following preconditions, have to be satisfied in order force majeure to be invoked,
- Direct Impact
to be partially or fully released from the performance of contractual obligations due to the State of Emergency as a force majeure event, it must have a direct impact on the performance of the obligations.
Please note that the burden of proof lies on the invoking party.
- Validation of force-majeure defense
in order the reference to the force majeure event to be well-founded, the following requirements should be met:
- the event must be beyond the control of the parties and not self-induced;
- the event must be unforeseen and inevitable;
- the event must make it impossible for the party to perform contractual obligation(s);
- a causal-effective connection must exist between the event of force majeure, on the one hand, and the failure to fulfill the obligation on the other hand.
- Notification to counterparties
Invocation of Force majeure clause requires invoking party to notify their counterparties duly and promptly regarding the force majeure event that partially or fully obstructs the execution of their contractual obligations and is beyond their control.
The legal status of international contracts may be slightly different and depends on the construction of the contract as well as on the applicable law clause (some jurisdictions require force majeure clause to be explicitly incorporated into the contract, in order to be applicable). However, some actions of government bodies might become helpful for the invocation of the force majeure clause in international commercial contracts. For example, many government authorities like CCPIT (China Council for Promotion of International Trade) have issued “force majeure certificates” declaring COVID-19 outbreak as a force majeure event or have issued blanket orders for the same reason.
III. Right to revise or rescind the contract due to force majeure under the doctrine of frustration
The doctrine of frustration as such is used in Common Law systems only, but Georgian legislation allows parties to change/rescind a contract for similar terms though it does not entail the term “Doctrine of Frustration.”
Here are some examples of legal terms a contract may be revised or rescind under, according to the Georgian legislation in force:
- Law of contracts under the Civil Code of Georgia grants to the parties the right to revoke the contract if it becomes impossible or unlawful to perform, provided that the failure in performance is not the fault of the obligor.
- Additionally, in the absence of a force majeure clause from a commercial contract, the triggering of other specific contractual clauses provided by the Civil Code, such as those related to material adverse effect, termination or repudiation of the contract, adjustment of the contractual terms to changed circumstances, may also be assessed in light of the COVID-19 outbreak.
- The contract or other commitments under reciprocal deal may be revoked under the mutual consideration of the parties if the performance is no longer relevant to them
- In case of default due to Force-Majeure, triggering of the Civil Code Article on the impossibility to perform a contractual obligation(s) may be considered as well.
Given examples are for illustration purposes only. Each matter (contract) should be assessed individually for the application of certain terms.