Checklist to assess the impact of Coronavirus on contractual performance

The recent global outbreak of the coronavirus disease (“COVID-19”) is having a severe impact on the global socio-economic system at multiple levels: from cancelling top-notch events (such as tech fairs, sporting events, gatherings of more than 1,000 participants) to full or partial lockdowns. The business community therefore wonders if and when such direct or indirect (i.e. measures taken by states, entities or individuals as a consequence of the COVID-19) impact can justify the failure to perform contractual obligations.

In very general terms, a party can be considered not liable for the failure to perform any of its obligations if it proves that such failure was due to an impediment beyond its control:

• If the failure consists in a current or permanent invincible obstruction to perform because of extraordinary events or circumstances that could not have been foreseen by the parties, force majeure is the legal remedy often invoked to exempt liability. This remedy may lead to (a) the termination of the contract or (b) the suspension of contractual performance until the event/s cease/-s to constitute an impediment to compliance.
• If the failure relates to unforeseen events which significantly affected the initial equilibrium of the contract, by placing an excessive burden on one of the parties, hardship would be the legal remedy invoked to exempt liability. This remedy may lead to (a) the termination of the contract, (b) the adaptation of the contract or (c) the suspension of contractual performance until the event/s cease/-s to constitute an impediment to compliance.

The possibility to invoke the above legal remedies, as well as the identification of the events or circumstances which warrant their invocation, strictly depend on the (a) law governing the remedies and (b) the contractual wording.

The identification of the applicable law is a rather straightforward exercise if the parties have made a clear contractual choice in this respect. Conversely, in absence of such a choice, the judge/arbitrator will have to identify in accordance with the applicable rules of conflict of law whether the above-mentioned legal remedies are governed by a single national law (e.g. Swiss law) or by international legal instruments (e.g. the United Nations Convention on Contracts for the International Sale of Goods).

Certain legal systems provide that parties are entitled to invoke force majeure or hardship only if they have contractually established this possibility and identified the events or circumstances that would trigger the application of such legal remedies. Under other legal systems, such as Swiss law, these remedies can be invoked on the basis of the statutory principles of “impossibilité de l’exécution” or “théorie de l’imprévision”, even if they are not contractually established and described in detail by the parties.

In any event, and irrespectively of the applicable law, a well-drafted force majeure or hardship contractual clause certainly increases the chances of successfully invoking the foregoing legal remedies. Their application is indeed almost never straight-forward and will need an individual case-by-case assessment of, among others:

• The real intention of the parties when drafting the contract;
• The risk allocation agreed between the parties;
• The foreseeability of the events making performance impossible or excessively burdensome;
• The causal link between those events and the nature of the lack of performance.

If you wish to receive further clarifications, please do not hesitate to contact Giulio Palermo and Celia Cañete.