While Vietnam is coming out of the Covid-19 epidemic, force majeure in Vietnam and elsewhere remains a major issue for investors both domestic and international. Cross-border flows of goods and people remain restricted, but internally, Vietnam is resuming business as usual to the extent possible.
As the world locked down over the last few months, many firms cited the force majeure clause in their contracts to escape performance when it seemed impossible to provide promised goods and services. Countless articles discussed the implications of force majeure clauses and how they might affect businesses, deliverables, and services.
But what happens next?
This article will discuss force majeure, what it is, the law in Vietnam, and the consequences of triggering it, but it will also discuss what happens when the force majeure event is over and the parties to a contract look at their relationship moving forward.
WHAT IS FORCE MAJEURE?
According to Wikipedia,
Force majeure is a common clause in contracts that essentially frees both parties from liability or obligation when an extraordinary event or circumstance beyond the control of the parties, such as a war, strike, riot, crime, epidemic or an event described by the legal term act of God, prevents one or both parties from fulfilling their obligations under the contract.
In essence, then, force majeure is a pre-arranged agreement between two parties to a contract, the purchaser and the provider, to suspend or annul a contract in case something so big and so unforeseen happens as to interrupt either party’s ability to perform their duties under the contract.
Force majeure is the backstop against which performance is played (to use a baseball metaphor). It originated in the Napoleonic Code back in the early Nineteenth Century and is common in former French colonies who adopted in large measure the legal system from their colonizer. It has been largely adopted in international trade, especially in shipping and logistics, and has even been adapted into common law countries.
I remember reading one article on the subject early in the Western exposure to Covid-19 that referred to force majeure as an esoteric clause rarely used. This is certainly not the case. Force majeure is a common and important element of contracts and should be understood by businesses and investors who wish to protect themselves against non-performance due to extreme events.
I was first exposed to the concept of force majeure in International Trade Law, a class I took in law school. It was explained in the shipping context. One party buys a shipload of coal from the coal-mining regions of Virginia to be delivered to the Sudan in North Africa. The agreement is signed and shipment initiated. But a hurricane prevents the ship from traveling directly across the Atlantic and is unable to deliver the goods according to the agreed upon delivery schedule. The failure to perform according to the contract, however, is not that fault of either party. It was an act of god that caused the delay, therefore the delay in delivery triggers an examination of the force majeure clause of the contract.
There are two sides to this story and each side will argue its rights. The shipping company will argue that the hurricane was an act of god and unforeseeable, that it could not have avoided it and that it should not be held responsible for the delay in delivery. The purchaser, however, who relied upon the delivery date in selling the coal on to consumers, is at a loss, and does not want the force majeure clause to apply. He therefore argues that hurricane season happens every year and that it is foreseeable that there may be a delay or the need to reroute around the storm. He argues that the hurricane was foreseeable and therefore not an event of force majeure.
I won’t go into the international decisions because I’m not well versed in them, but to make the point, events of force majeure are arguable and may or may not, in fact, trigger a contract clause sufficient to cancel performance.
FORCE MAJEURE IN VIETNAM GENERALLY
To begin, Vietnam was colonized by France and though there has been over sixty-five years passed since France lost its control over the country, its law remains largely influenced by the Civil Law system of the Napoleonic Code. It has a legislatively defined concept of force majeure which allows for the escape of performance of certain responsibilities.
Under the Civil Code 2015, an event of force majeure prevents a party who would have a right to take civil action against a non-performing party unable to do so. It invalidates the right and prevents civil actions–from terminating a contract to seeking damages. An event of force majeure is defined as:
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 admissible measures being taken.
There are a few things to unpack here. First, the event must occur in “an objective manner.” That means that it must “not be able to be remedied” objectively. One party cannot simply claim an event of force majeure without proving it objectively. Second, it must not be foreseen. See the above discussion of hurricanes. Also consider acts of war.
During the 1970s when the United States was going hog wild in the Middle East for oil, there was increasing turmoil in Iran. The current leader was fighting revolution and uprisings, there were noises that major upheavals were about to take place. Despite these warnings several companies continued to contract for oil fields and oil exploitation. When the revolution eventually came, it was deemed an event of force majeure by the companies who were out their oil, but it could also be argued that such an event was foreseeable and thus not force majeure. Reasonable minds may disagree.
Third, the definition requires that the event cannot be remedied. This is easier to prove. It is simply necessary to show that because of the event in question, there is no way for the party to perform its obligations under the contract. The hurricane prevented the ship from proceeding upon its direct route and thus–ignoring the foreseeable issue–there was no way it could have arrived on time. The oil in Iran was no longer accessible by the local contract parties and thus unavailable to the purchasers. Because of the politics of the time, there was no way for them to deliver the oil. Thus it was unable to be remedied.
Fourth, one must consider the efforts made by the excused party in remedying the consequences of an event of force majeure. Did they take “all possible necessary and admissible measures”? In Vietnam these terms are undefined, but it can be reasoned that a court, in applying the law of force majeure to a situation, would look to see whether the party seeking to escape performance tried to remedy the situation. Did the ship steer as close to the hurricane as possible to limit the delay? Were there alternative sources of oil available? Could the contracts be reassigned to new political parties?
All four of these elements must be satisfied before an event will be considered force majeure in Vietnam.
FORCE MAJEURE IN VIETNAM CONTRACTUALLY
The above discussion is from the legislation. As most lawyers will tell you, in general, legislation is the default. You can contract stricter or different terms between the parties. The courts, even in Vietnam, tend to uphold the concept of freedom of contract and thus it is definitely in the parties’ interests to negotiate their force majeure clause.
As a brief example, let’s look at the force majeure clause from my consulting contract with Indochine Counsel.
Neither Party shall be liable to the other for any delay or failure in the performance of its obligations under this Agreement if any to the extent such delay or failure in performance arises from any cause or causes beyond the reasonable control of the Party affected (the “Force Majeure”), including, but not limited to, act of God, acts of government authorities, compliance with law, regulation or orders, fire, storm, flood or earthquake, rebellion, revolution, riots, strike or lockouts.
At first glance there are some differences here. I am less familiar with Common Law force majeure, but I suspect that this clause was lifted from a Common Law contract. It does not reflect Vietnam’s legislated force majeure very well and isn’t very good. It sacrifices the foreseeability requirement of the Vietnamese concept and provides an illustrative list of specific events that are considered force majeure. It muddies the waters even further by adding the Common Law concept of “reasonableness.”
Here is an admission. Most lawyers, at least in Vietnam–I have seen this from several firms–treat the force majeure clause as simply boiler plate language. Rarely do they modify their clauses and rarely do they adapt them appropriately for the actual relationship between the parties. There is also a tendency–and this is true across several different areas of contract–for Vietanmese lawyers to pick up language from Common Law lawyers under whom they’ve worked despite the fact that such language is not contemplated under Vietnamese law.
You can see that in this example. It is, therefore, important generally to ask two questions of your lawyer when considering force majeure: 1. Is this compliant with Vietnam’s legal code? and 2. Is this appropriate to my needs?
CONSEQUENCES OF FORCE MAJEURE
Now that we understand what force majeure is, and more specifically what it is in Vietnam and that it can be modified by contract to meet the anticipated needs of either party, what happens when a force majeure clause is triggered?
In general, the party claiming force majeure as an excuse for non-performance will notify the other party to the contract that they are unable to perform and such inability triggers force majeure. Depending on the circumstances–and the specific contract language–the non-performing party has the option to accept such notice and live with the likely losses that will accrue because of the non-performance or challenge the other party’s interpretation of the event in question as force majeure.
Such a challenge would normally take the form of a lawsuit filed by the disadvantaged party. The courts would then be responsible for determining whether the event was truly an event of force majeure and rule in favor of one party or the other. If the event was deemed to be one of force majeure, then the court will apply the language of the contract. If not, then the court will award the disadvantaged party remedies of either forced performance or damages in the form of compensation for the non-performance.
In general, unless the event of force majeure continues for an extended period of time, force majeure clauses do not terminate the contract but only excuse performance for the duration of the event of force majeure. This is most recently demonstrated by Covid-19 and the supply chain.
Many foreign companies have manufacturing facilities in Vietnam. Raw materials are sometimes shipped from other countries into Vietnam, assembled or modified, and then shipped again to another country for sale to consumers. When Covid-19 began to spread, the government took several actions to minimize the spread of the virus and to prevent a major catastrophe within Vietnam’s borders. They stopped international travel, closed non-necessary activities–often including manufacturing–and limited cross-border shipments of goods. This resulted in an interruption of the supply chain. Raw materials from China couldn’t cross the border into Vietnam, thus stockpiles were depleted and manufacturing unable to continue. The factories in Vietnam, therefore, couldn’t manufacture goods and couldn’t ship them out of Vietnam to the foreign consumers.
Most people–except for United States President Trump–would agree that Covid-19 is possibly an act of god. While “pandemics” may or may not be included in the language of a contract, it was unforeseen and because of external factors outside the control of manufacturers, unable to be remedied. The factories had to claim force majeure events and plead out of their contractual obligations of performance.
In another example, businesses affected by Covid-19 often sought reductions or forgiveness of rent because they were not making any money during the lockdown. They had no revenue coming in and couldn’t afford to pay rent. This, too, they considered the consequence of a force majeure event.
In both cases, the event of force majeure acts to temporarily affect performance. Once the supply chain is restored, once restaurants and bars open up again, the inputs necessary for performance will resume and the parties will be able to continue performance. Thus, the cessation is generally temporary and the parties remain in a continuing contractual relationship. This brings us to the question of what happens after a force majeure event is ended.
AFTER FORCE MAJEURE
When a force majeure event ends, when the hurricane passes, when the government stabilizes, when the pandemic is over, the parties are left to pick up the pieces. What are they allowed to do to recover their losses or to resume operations to hopefully begin to rebuild their relationship.
Contractually, a lot depends on the langauge of the clause in question. As an example, look at the second part of the force majeure clause in my consulting contract.
The Party affected by Force Majeure as mentioned above shall declare the Force Majeure by notifying in writing of the circumstances within seven (7) days of becoming aware thereof. If the circumstances constituting Force Majeure continue for a period longer than thirty (30) days, either Party may terminated this Agreement upon ten (10) days prior written notice to the other Party.
This contract, then, allows only for a temporary cessation of performance. If, after thirty days from declaring a force majeure event, the event itself has not ended, then the contract may be terminated. In the case of Covid-19, had one of us notified the other of non-performance because of the pandemic, the contract may be terminated now that more than 30 days have passed. Luckily, neither of us was forced to cease performance–though there were some adjustments made–and neither party claimed force majeure.
In Vietnam, the law does not provide for automatic termination because of force majeure. That has to be negotiated and included in the contract. The parties, then, are normally considered to remain in their contract and must continue to perform despite the temporary cessation of performance caused by the event of force majeure.
As discussed above, the buyer can choose to take the seller to court and argue that the event was not an event of force majeure. This will result in either a decision upholding the force majeure interpretation of the seller, or in damages to the buyer. If the court deems the event force majeure, then the parties will–unless termination is provided in the contract–remain in cooperation with each other. If the court deems the event not to have been one of force majeure, then the buyer could claim non-performance by the seller and terminate the contract.
If the event of force majeure lasts too long or the court denies the claim of force majeure then the parties may part ways, but if the court upholds the claim of an event of force majeure as excuse for non-performance and the contract does not allow for termination of the contract, the parties are forced to continue working together.
After an event of force majeure clause is triggered, inevitably one of the parties is left in a bad way. The coal buyer was out the coal and thus lost profits from re-sale in Sudan. The American oil companies were out the oil from Iran and thus unable to sell the oil to consumers around the world and subequently lost millions of dollars in profits. Nike is unable to receive finished shoes from its factories in Vietnam and thus unable to meet demand for sneakers in California, profits plummet. The buyer is usually the party left at a loss, and the party with the most power to affect the relationship moving forward.
The first, and most obvious, possibility is to restart the clock and act as if, otherwise, the event of force majeure never happened. This means that the buyer must swallow any loss caused by the non-performance that arose. Sure, both parties may have suspended performance, thus the buyer didn’t have to pay for the goods or services during the event of force majeure, but as already noted, there are knock-on effects that cause losses beyond the basic exchange of cash for goods.
Here is where the objected malleability of contracts in Asia, and in Vietnam specifically, is an advantage.
Vietnam is a country where Face is important. It is a place where staying true to one’s word and helping those in trouble is important to maintain one’s reputation. it is a place where a relationship is more important sometimes than a disadvantage. This means that oftentimes, to preserve a relationship, Vietnamese will enter into accommodations to ensure that they retain the goodwill of their counterparty.
While not 100% assured, this is a point at which a buyer may be able to negotiate a change in a contract to compensate for the event of force majeure. To come to some new arrangement that allows for both parties to ease into a post-event normal. Here in Vietnam the economy runs in large measure through foreign investment. The leverage of South Korea, or Japanese, or American, or European money is large and to ease the flow of such monies into the country, Vietnamese will often seek to ameliorate conflict, or losses, and seek out new terms more beneficial to both parties.
VIETNAM AFTER COVID-19
Vietnam has so far weathered Covid-19 admirably and is poised to stand among the leaders of the region and the world economically coming out of the pandemic. This gives the Vietnamese leverage in dealing with Covid-19 as a force majeure event, because they know they did well and that they are attractive to investors. Despite the amiableness of the people, they are also justifiably proud. Do not assume that they will bow to unilateral requests, but know that they will be willing to work with respect towards a mutually beneficial solution.
Covid-19 has caused uncountable interruptions in the global economy. Vietnam has posted one of the few positive GDP numbers in Q1 2020. The country is ready to resume its race forward to grow and to expand. It is ready for resuming and increasing its role as an alternative to China and to attract investors from around the world. It is a prime destination for investors with a long history of legislation allowing for the excuse of performance for events of force majeure.
Take Covid-19 as a lesson, then, and be aware of force majeure moving forward. The possibility for catastrophic and unforeseen events remains. China is pushing its claims in the East Sea (or as China calls it, the South China Sea), sea-level rising is seriously affecting the Mekong Delta, China’s dams on the Mekong are stealing water, and who knows what else might cause a future event that could interfere with the performance of a contract.
Ask the right questions of your lawyers and insist that the language of your contract reflect not only the legislation of Vietnam but the needs of your investment. Take the time to discuss the clause with your lawyers and figure out how best to draft it to ensure continuity of performance or, in the case of necessity, termination when it makes sense. Ultimately, while events of force majeure are unforeseeable, the possibility for their occurrence is foreseeable and you should be ready with a properly negotiated and drafted force majeure clause.