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The Coronavirus and distributorship under the new ICC Force Majeure Clauses.

The purpose of this text is to introduce the new ICC Force Majeure Clauses in the context of the most conspicuous current example of an impediment beyond the control of the parties. The writer of this article was a member of the Drafting Group of the new ICC Force Majeure and Hardship Clauses, which are to be published soon. Also Fabio Bortolotti and Ercüment Erdem from IDI membership took actively part in the Drafting Group.

Lauri RAILAS - 24.03.20
Country expert - IDARB Arbitrator

At the outbreak of the coronavirus epidemy recenly declared pandemia by the World Heath Organization, deliveries of goods and contracts of sale are affected in many imaginable or unimaginable ways. The same is inevitably happening with the provision of those services requiring human encounters rather than sheer online connections but we confine ourselves to the delivery of goods in this text.

When sale of goods is affected, this inevitably has repercussions on the position of distributors, agents and even franchisees. When it comes to agency, the contractual problems in the main contract are immediately echoed in the agency. In distributorship and franchising, there is a chain of two or more contracts at stake and the distributor is affected by the problems the principal is facing.

 

The epidemy creates delays and non-performance

We should simply mention a couple of examples in technology trade to illustrate the problem. Companies producing advanced machines or equipment have reduced the cost of production of various components by scattering it to countries of lower production costs from which the components are being transported mostly to Europe or North America. A common example of a very complex product is the European Airbus aeroplane, which is said to contain thousands of components produced in dozens of countries. Even if the proportion of components is smaller, significant delays may still occur.  

Companies having complex supply chains are suffering from the shortage of components produced especially in China, which was first hit by the virus, and where measures were taken to isolate it by travel restrictions, layoffs and closings of production plants. The shortage of individual components inevitably affects the finalization of the end product unless replacing products or stores exist. However, modern logistics is geared to just-in-time deliveries in order to save costs by avoiding excessive storage. In turnkey contracts, the supplier is required to install the plant or equipment but may be prevented from doing so because of travelling restrictions to the country of the buyer. The most recent measure was a travel ban to the United States for persons coming from the EU countries imposed by President Donald Trump on 11 March 2020. These are the most commonly mentioned logistical problems the coronavirus creates, but others may be just around the corner.  

The problems linked to components may obviously relate to entire products to be resold by the distributor. The distributor is often outside the logistical supply chain and the goods are delivered directly from the principal to the distributor´s client by a chain of Incoterms although separate sales contracts exist.   

 

Force majeure as a relief    

A supplier usually undertakes to deliver the goods under contractual provisions which presuppose the payment of damages, liquidated and/or actual ones, in case the delivery time is exceeded. The structure and effect of these clauses very much depends on the legal regime applicable to the contract. The supplier may, however, be relieved from paying damages, if there exists a force majeure event. Force majeure is a French law concept having found its way into many or most legal systems. In Anglo-American law, the related concept of frustration of contracts is well known but it is not exactly the same thing and it is not possible to go into detail in this text about that. As force majeure is part (Article 79) of the Vienna Convention on the Contracts for the International Sale of Goods (CISG) and many standard forms of contract, it is extensively resorted to with a view to overcome the difficulties the world is envisaging with the outbreak of the virus.    

 

The new ICC Force Majeure Clauses

The International Chamber of Commerce has recently adopted its third ICC Model International Force Majeure Clause which will again be published together with the ICC Model Hardship Clause. The previous versions of these Clauses were published jointly in 2003. As national laws and contract practices may treat force majeure very differently, it is important to have in place an international benchmark and tool, which can be incorporated into contracts easily and which may set the stage for the development of international contract law in general.

In fact, there are now two ICC Model Force Majeure Clauses, a Short Form and a Long Form. Essentially, both versions work similarly, but it was though that the Short Form would be more attractive to smaller companies. 

According to the definition of these Clauses, "Force Majeure" means the occurrence of an event or circumstance ("Force Majeure Event") that prevents or impedes a party from performing one or more of its contractual obligations under the contract, if and to the extent that the party affected by the impediment ("the Affected Party") proves:

a) that such impediment is beyond its reasonable control; and

b) that it could not reasonably have been foreseen at the time of the conclusion of the contract; and

c) that the effects of the impediment could not reasonably have been avoided or overcome by the Affected Party.

As we can see, the Affected Party has a cumulative burden of proof of showing circumstances which impede the delivery, the foreseeability of the impediment and the non-existence of any means to overcome it.

However, the rigorous burden of proof is practically reversed when one or more of the Presumed Force Majeure Events apply. According to Clause 3.e) “plague, epidemic, natural disaster or extreme natural event” (emphasis by the author) qualify for Presumed Force Majeure Events. In such a case, the Affected Party need not prove that the impediment is beyond its reasonable control, or that it could not reasonably have foreseen the impediment at the time of the conclusion of the contract. The Affected Party only needs to prove that the effects of the impediment could not reasonably have been avoided or overcome by it.

A party successfully invoking the ICC Force Majeure Clauses is relieved from its duty to perform its obligations under the Contract and from any liability in damages or from any other contractual remedy for breach of contract, from the time at which the impediment causes inability to perform, provided that the notice thereof is given without delay. If this is not the case, the relief is effective from the time at which notice thereof reaches the other party.

A novelty in the ICC Clauses is that they now regulate the position of the contracting partner of the Affected Party, who usually is the one paying for the goods. The other party may suspend the performance of its obligations, if applicable, from the date of the notice. The obligations need be capable of being suspended. Typically, at least part of buyer´s payment obligations are tied to the delivery. Companies need to pay attention to this provision which may prove to be very significant for them.

If the impediment is of a long duration, the default provision in the ICC Clauses being 120 days, either party may terminate the contract. In accordance with the above, there are normally no damages to be paid in such a situation. 

 

Force majeure in a chain of contract

Where a contracting party fails to perform one or more of its contractual obligations because of default by a third party whom it has engaged to perform the whole or part of the contract, the contracting party may invoke force majeure only to the extent that its requirements are established both for the Affected Party and the third party. The Affected Party must prove that the force majeure conditions are met for the non-performance of the third party, who may benefit from the fact that the coronavirus as plague or epidemic is treated as a Presumed Force Majeure Event. 

A third party may be a supplier or subcontractor. Therefore, a distributor may invoke force majeure only if both the supplier (principal) and the distributor are affected by the impediment. A distributor may need to prove that it could not reasonably have avoided or overcome the Presumed Force Majeure Event. As it is normal to rely on just-in-time deliveries and that for branded products only individual sources of supply exist, this should normally not be too difficult.     

 

How to apply force majeure to the coronavirus epidemy?

The coronavirus creates impediments, which in the first place are not economic by nature since officials in many countries, most notably China and Italy, are issuing mandatory orders affecting companies. A bordeline issue could nevertheless be economic force majeure in the occurrence of which the impediment in the supply chain can be overcome by paying substantially more. Many complex situations may nevertheless need to be resolved. For example, what happens, if there is simply a corporate policy – and not an prerogative by officials - not to travel to countries or territories being affected by the virus, or requiring workers to stay at home? Is the company exempted by exercising precaution? 

 

Lauri Railas, IDI Country Expert for agency & distribution in Finland

 

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