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April 6, 2020

Force Majeure Clauses and Vietnamese Enterprises


Since the outbreak of COVID-19, clauses for force majeure events have become extraordinarily important to businesses. People have reached out to law firms to ask: “How can we understand force majeure events and their consequences according to the Vietnamese laws?” The persons who pose these questions are suppliers, banks, insurers, airlines, tourism companies, and other parties who are subject to payment obligations. Unfortunately, the more widely and extensively the epidemic spreads, the longer the list above will be.

Some common specific questions raised by businesses are:

  1. If my company is closed due to the epidemic, making the production and delivery of goods under a contract impossible, may I refer to force majeure clauses to refuse delivery or request another timeline for delivery?
  2. May COVID-19 entitle me to make a claim to insurers for compensation/payment under a business interruption or political risk insurance policy?
  3. The state has prohibited flights. What responsibilities do I have in regard to clients who have booked my tours?
  4. I borrowed money from the bank, now the epidemic is spreading, resulting in an inability to sell goods. May I refer to force majeure clauses to refuse or delay making payment of the principal or interest, etc.?
  5. I am renting premises, but the epidemic outbreak has resulted in my company closing and falling into debt. I am not able to pay the rental fees; thus, may I claim that a force majeure event prevented me from paying my rental fees?

This article covers the concept of “force majeure” according to the Vietnamese laws, in comparison with a number of systems around the world, in order to clarify the understanding and reveal some weaknesses of the current Vietnamese laws on this concept.

Relevant Law Provisions

Key provisions on force majeure are set forth in the 2015 Civil Code (“Civil Code”) and the 2005 Commercial Law (“Commercial Law”).

Specifically, Article 156.1 of the Civil Code defines: “An event of force majeure is an event which occurs in an objective manner which is not able to be foreseen and which is not able to be remedied by all possible necessary and capable measures being taken.”

Remark: The definition in the Civil Code is adequate and relatively clear. The rule on force majeure found in the Civil Code of Vietnam seems more advanced than those of other countries around the world, such as France, Germany, Japan, etc., for having itself such definition of a force majeure event. The Civil Code has recently been enacted, thus Vietnam has had time to learn from European commercial contract models (such as the UNIDROIT Principles of International Commercial Contracts of 2010 (“UNIDROIT Principles”)), including clauses on force majeure.

From the abovementioned definition of force majeure, one should note some important points: To determine whether or not a transaction can apply a force majeure clause under the Civil Code, the concerned parties must answer the following three questions of law: (1) Is it an objective (not subjective) and unforeseeable (by the affected party) event? (2) Could this event be remedied or not? (3) Also related to Condition (2), has the affected party taken all necessary actions within its capabilities?

If even one of the three conditions above is not met, a party’s failure to perform the contract shall not satisfy the legal conditions to apply the provisions on a force majeure event.

Article 351.2 of the Civil Code sets forth the consequences of a force majeure event (unless otherwise agreed by the parties): “Where an obligor is not able to perform an obligation due to an event of force majeure, it shall not have civil liability, unless otherwise agreed or otherwise provided by law.” Similarly, Article 294.1(c) of the Commercial Law permits the release of the obligor’s liabilities in the event of force majeure.

Some Fundamental Questions and Answers

Question 1: The Civil Code/Commercial Law states that when an event of force majeure occurs, the obligor shall be released from its “liabilities” (for example, not required to deliver goods or make compensation for damages, etc.), however, in this circumstance, do the “liabilities” of the other party still exist? Specifically, if I failed to manufacture and deliver products by the due date because of a force majeure event, but I had paid for raw materials, employees’ salaries, etc., am I entitled to require the buyer to pay for my related expenses?

Answer: Most contracts are onerous (i.e., bilateral contracts). Both parties have respective obligations to each other. For example, a party is obliged to deliver goods/provide services; the other party is obliged to pay the contract price. Therefore, if the laws (or the contractual agreements between the parties) allow the application of force majeure events to release one party’s obligations (not required to deliver goods, etc.), then by an analogical interpretation, the other party’s obligations shall be respectively released (not required to pay, etc.). The parties shall return to their positions to the point as if no such contract had ever been made (for a contract where the performance is in installments, such as for supply of goods or services from time to time via orders, they shall return to the point of the latest engagement which is impeded by a force majeure event).

The explanation above can be found in the law textbooks of many countries. Regretfully, it seems not to appear in any Vietnamese statutes or law textbooks, hence, this causes confusion in construing and interpreting the consequences of force majeure events.

Question 2: Extending the question above to a case where the buyer owes obligations to third parties, for example, a facemask raw materials manufacturer fails to deliver goods to an importer due to an event of force majeure (the government closes the borders). The importer therefore cannot deliver goods to retailers (drugstores, hospitals, etc.) per a regular supply contract, thus, what about the obligations/liabilities of these wholesalers and retailers? Can they apply force majeure clauses?

Answer: Failure by one party to perform its obligations owed to a third party due to its partner being affected by a force majeure event is a factor to determine whether or not the non-performing party is affected by a force majeure event. However, an important note is that in any case, to apply provisions on force majeure events, the three conditions mentioned above must always be satisfied. For the case of the importer producing facemasks, it must at least demonstrate that it “has taken all necessary actions within its capabilities” (in addition to satisfying Conditions 1 and 2) to apply the provision on force majeure event consequences. Specifically, it has sought but could not find any substitute material sources to produce and supply goods to the buyer, etc.

Question 3: Is a force majeure event applied to payment obligations? To be more specific, may the party who borrows money from a bank or the party who is obliged to pay under a sale and purchase agreement refer to the force majeure clause (due to epidemic, failure to sell goods, etc.) to refuse or delay making payment?

Answer: This case would likely be the most common scenario arising these days. With regard to payment obligations, the parties should pay attention to the important restrictions to apply the force majeure consequences. Article 351.2 of the Civil Code sets out that the affected party shall be released from “liabilities” provided that “… unless otherwise agreed or otherwise stipulated by the laws.”

With respect to payment obligations in contracts, typically sale and purchase agreements and loan contracts, the Civil Code prescribes: “The buyer is obliged to make payment on schedule, at the place and in the amount as stipulated in the contract” (Article 440.1 of the Civil Code – Payment obligation); “The party who borrows money is obliged to pay the full amount of money when it falls due” (Article 466.1 of the Civil Code – Borrower’s repayment obligation). Thus, force majeure cannot be applied in this situation to relieve an obligation to pay.

Hence, we can see the Vietnamese laws’ view on payment obligations under sale and purchase agreements and facility contracts with reference to force majeure events. This is fairly similar to other jurisdictions where the payment obligation is considered an absolute obligation.

However, there are exception to the payment obligation. For example, if for the purpose of controlling foreign exchange reserves, a government issues a directive which says any payment offshore must be permitted by the government. If a payor fails to obtain such governmental permit (regardless of its best efforts), then such failure in payment should be considered a force majeure event.

Question 4: In a force majeure event, may either party terminate/cancel the contract (if in the contract, both parties have made no agreements on termination in case of a force majeure event)?

Answer: Unfortunately, the Civil Code and Commercial Law fail to mention this consequence. Perhaps the Vietnamese lawmakers may have forgotten to provide the ultimate consequence regardless of their research of the UNIDROIT Principles on force majeure. [It is worth noting that the UNIDROIT Principles mention the possibility of a contract termination in Article 7.1.7(4).]

In other jurisdictions with a civil law system such as Japan, the consequence of force majeure is a “release of obligation.” Such stipulation or explanation appears to be more accurate than “release of liability” in the context of Vietnam, because Vietnamese laws categorize various types of liabilities such as liability to deliver things, to compensate for damages, to pay interest, etc. Once the laws permit a party to be released from its obligations in an onerous contract, where the obligations correspond to each other, the other party’s obligations shall be respectively released. When both parties’ obligations are released, the contract is inevitably terminated (or void due to impossibility in some other jurisdictions).

Question 5: Not all circumstances satisfy the three statutory conditions on force majeure; however, we are suffering from tremendous losses due to the epidemic, thus, do the Vietnamese laws provide for any other solutions/regulations for us to refer to and avoid losses?

Answer: In fact, not all cases where it is impossible or difficult to perform obligations satisfy the statutory conditions on force majeure. Getting back to the case of facemask supply, suppose the country exporting facemask raw materials has reopened its borders for trading and permitted exporting raw materials. However, the price of raw materials is now ten times higher than before the epidemic. The production and provision of facemasks by domestic manufacturers to hospitals and drugstores under regular supply contracts has become an economic burden of this party.

In this circumstance, the affected party may consider referring to Article 420 of the Civil Code (Performance of Contract upon the Fundamental Change of Circumstances). This article mirrors the article on “Hardship” under the UNIDROIT Principles. Pursuant to Article 420, a circumstance has fundamentally changed when: (1) The change occurs due to objective reasons after the execution of the contract; (2) At the time of contract execution, the parties could not foresee any change in circumstances; (3) The change in circumstances is so great that if the parties had known in advance, the contract would not have been executed or might have been executed, but with completely different content; (4) The continued performance of the contract would cause serious damage to one party unless the contract is revised; and (5) The affected party has adopted all necessary measures in its capability. The conditions are fairly similar with those of a force majeure event. The key distinction between a force majeure event and a fundamental change of circumstances is that where in the former the contractual performance is impossible, the performance in the latter is possible, but with grave disadvantages to the affected party.

When a circumstance changes and satisfies the five abovementioned conditions, Article 420 of the Civil Code enables the affected party to request a renegotiation of the contract with the other party. If the parties fail to come to new agreements, either party may request the court to terminate the contract or to revise the contract in order to balance the interests of both parties. This is a solution that the affected party should consider if its case does not meet the conditions for force majeure.

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