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Since a few weeks, the world news has been dominated by reports on the Coronavirus. More and more countries, including Indonesia, impose travel bans and other measures which greatly impact trade and investment. Every business potentially affected must carefully take the necessary actions to minimize all risks.
In particular, we strongly advise all our clients to proactively mitigate their risk stemming from interruptions to their own operations or those of critical suppliers. We have already advised several of our clients from China and Indonesia on what steps they ought to take in order to manage their risks.
Taking into account the most recent developments as well as building on our experience in assisting our clients, we now offer a free tool for all clients, the Schinder Law Firm Coronavirus Contract Risk Assessment Checklist.
This Checklist allows you to make a quick assessment of your contractual situation and gives you a preliminary indication of what measures you can take in light of the Coronavirus crisis.
Step 1: determine whether there is a force majeure clause in your contract
Your legal relationship with each of your business partners is mainly governed by contracts. Some commercial contracts include a force majeure clause.
Force majeure essentially frees the contracting parties from liability or obligation in the instance of an extraordinary event or circumstance beyond the control of the parties.
Step 2: assess the force majeure clause in your contract and your current situation
A force majeure clause in the contract, does not automatically exempt from liability/obligation. The extraordinary event or circumstance beyond the control of the parties must be covered by the wording of your force majeure clause.
The wording may be very narrow, comprising only “acts of God” – natural hazards outside human control, such as an earthquake or tsunami, for which no person can be held responsible. A broader wording also includes instances of war, strikes or riots.
Since many factories in China had to stop production upon governmental decree, the China Council for the Promotion of International Trade (CCPIT) has been issuing “force majeure certificates” to Chinese companies.
Whether such certificate allows to establish that under the contract in question there was an instance of force majeure depends entirely on the wording of your clause.
Finally, keep in mind that force majeure means impossibility – there are no other options. If it is still possible to meet the contractual obligations, but only at a higher cost or with more efforts, there is no case of force majeure.
It is therefore necessary to carefully assess the force majeure clause and whether alternative options (a different factory/supplier, etc.) are available.
Step 3: make/review a force majeure claim in compliance with your contract
Force majeure is often triggered by giving notice to your business partner within a certain time limit. Notify your business partner immediately in an instance of force majeure.
Provide/obtain as much information about the situation as you can, in particular
(i) an explanation how the situation affects you (e.g. number of factories affected, etc.);
(ii) the beginning of the force majeure event (date); and
(iii) the expected end of the force majeure event (expected date).
If you cannot provide the information right away because you do not possess sufficient information, supplement your force majeure claim as soon as you can.
If you are not provided with sufficient information, demand for a supplement notice and keep reminding your contract partner until you obtain such information.
Step 4: consider options under statutory law
Although your contract does not contain a force majeure clause, you may still be able to make a force majeure claim if statutory law allows so.
For instance, under Article 79(1) of the Convention on the International Sale of Goods (CISG), when there is an impediment beyond a party’s control and the party could not reasonably be expected to have taken the impediment into account at the time of the conclusion of the contract, such party is exempt from liability.
If the parties have excluded the CISG from its application, under Indonesian law, Article 1245 of the Indonesian Civil Code (ICC) stipulates that neither indemnification nor interest shall be charged to a party incapable of performing its obligations due to a force majeur e event. Special rules exist for the construction industry.
Step 5: carefully consider the consequences of making a force majeure claim
Making a force majeure claim is a rather grave action with possible grave consequences. Your business partner may no longer wish to deal with you in the future and your reputation may suffer severely.
On the legal side, when you make a force majeure claim, your contract partner may have the right to terminate the contract.
Such right depends entirely on the contract (and/or statutory law). Depending on the overall situation, it may thus be wiser to pay a penalty or accept a price reduction.
Under the CISG, the party which makes a force majeure claim may also risk contract termination from the respective other side, depending on the factual circumstances in question.
Step 6: make sure you don’t exceed the duration of the force majeure situation
If you make a force majeure claim, keep in mind that the exemption from liability only lasts for the duration of the force majeure situation.
Be sure that this duration is not exceeded. If your contract partner claims that there is an instance of force majeure, request for regular updates.
Step 7: consider alternative options to making a force majeure claim
Depending on your factual situation as well as on your contract/the applicable statutory law, other remedies may be available, such as making a hardship claim.
Does the Coronavirus crisis allow to make a force majeure claim? This question cannot be answered in a single phrase.
Whether the closing down of many factories because of a government decree amounts to force majeure largely depends on the wording of the force majeure clause in your contract and/or the applicable laws.
A government-forced close down of factories is clearly beyond the parties’ control, but it is not an “act of God.”
Indeed, we are aware that several European companies have refused to accept force majeure claims by Chinese companies for exactly that reason.
Ultimately, only an analysis of the language of the contract and the applicable laws can provide an answer. It is thus necessary thoroughly examine both; a definite answer can only be provided on a case by case basis.
The above is not to be regarded as legal advice, it merely provides a quick tool to get a preliminary assessment. In order to properly understand your legal situation, we always recommend that you consult with us.
We have already helped numerous clients, who then had clarity on their contractual situation and knew exactly what steps to take. Contact us today to arrange for a consultation.