Facing complicated and unpredictable developments of the acute respiratory tract infection caused by a new type of coronavirus (COVID-19), Vietnamese economy in general as well as the operation of domestic enterprises in particular has been seriously affected.
Facing complicated and unpredictable developments of the acute respiratory tract infection caused by a new type of coronavirus (COVID-19), the Vietnamese economy in general as well as the operation of domestic enterprises in particular has been seriously affected. In order to best support corporate activities, Ho Chi Minh City Television (HTV9) interviewed Assoc. Prof, Dr. Do Van Dai - Head of Civil Law Faculty of Ho Chi Minh City University of Law, Arbitrator, Vice President of the Science Council of the Vietnam International Arbitration Center (VIAC) on the effects of the epidemic on Vietnamese enterprises from a legal perspective for useful advice to minimize possible risks.
Assoc. Prof, Dr. Do Van Dai gave comments on the Vietnamese economy prior to the impact of the epidemic. In general, the Covid-19 epidemic negatively affected the entire economy, of which the most affected sectors were tourism, agriculture, industry and services. Currently, there are many businesses being suspended and not being able to produce. Additionally, the epidemic has also had a significant impact on trade exchanges when thousands of cargo trucks are waiting for clearance at the border gates. In contrast, there are also businesses that are dominating this epidemic, such as medical businesses or online businesses. This is also understandable, considering the necessity of medical products as well as the need to limit direct contact activities during the epidemic, such enterprises ought to try to take advantage of the situation to operate effectively and generate incomes.
So in your opinion, legally speaking, is an epidemic like this considered a force majeure in commercial transactions as stipulated in the law?
Force majeure sets out 3 conditions: objective, unforeseeable and impossible to perform. Legally speaking, the epidemic itself is not at first a force majeure event, because one of the factors of force majeure is "impossibility". However, in the current situation, when the epidemic broke out, the public authorities imposed a ban on business operations, which became an event of force majeure.
The ban on business operations is an objective and unforeseeable factor because it is a decision of a state agency in the event of the epidemic and it makes transactions impossible. In this case, we must take heed of the consequences of force majeure stemming from the ban. In the event of any damage, in principle, the party bearing the obligations is not liable. Nevertheless, the law also allows parties to re-negotiate in such cases. Therefore, depending on the relationship between the parties, when damage arising from the ban occurs, the parties can totally share the risk.
In a contractual relationship, when there is a force majeure event resulting from the above ban, we have to assume: if this ban makes the contract permanently impossible to perform, is it necessary to terminate the contract? For example, the parties agree to ship goods on a specific date and time for an event, but the ban does not allow the delivery, hence, the contract must be terminated. However, if the parties choose to transport the goods to a place irrelevant of date and time, which can stretch to 1 or 2 weeks, the contract might not be terminated but prolonged instead. After the ban, the parties can resume the transaction.
Currently, there are many people who are confused between the two concepts in the Civil Code 2015, which are the concept of Force Majeure (Article 156) and Hardship (Article 420). So based on the current epidemic situation, can you please distinguish these two concepts?
The definition of hardship (Article 420 Civil Code 2015) is a new concept in Civil Code 2015.
The greatest difference between these two concepts is that when force majeure occurs, it will be impossible to perform the contract; whereas in the case of hardship, although contract performance is still feasible, the costs are now much higher than initially anticipated.
For example, in many areas businesses are still permitted to access epidemic places / countries on the condition that they take proper precautions. Nonetheless, such precaution is the cost that enterprises must incur, which is not low by any means. Thus, even though the contract is still possible, one party has to suffer huge losses compared to initial anticipation. As a result, the 2015 Civil Code allows the parties to renegotiate the contract, if renegotiation fails, they must refer to litigation or arbitration to resolve. When going to court or arbitration there are only two possibilities: (1) the court or the arbitrator adapts the contract with a view to restoring its equilibrium, or (2) when the contract cannot be adapted, the court or the arbitrator must terminate the contract.
From this, what is your advice for businesses during negotiation to draft and conclude contracts and how to draft the force majeure clause to minimize possible risks during contract performance?
Enterprises need to take heed that from a legal perspective, Vietnam’s Civil Code provides the concept of force majeure based on 3 factors: objective, unforeseeable and impossible to perform. The law does not specify whether the parties have the right to negotiate the events of force majeure. However, as there is no restriction, the parties can absolutely negotiate. The practice of countries around the world also shows that the parties can totally agree on the conditions to invoke the force majeure clause.
At VIAC, we have encountered many contracts providing the events of force majeure such as epidemics, fires, and natural disasters. Besides, the parties have the rights to agree on the consequences of force majeure.
In principle, the party to perform obligations bears no liability, but the law also allows the parties to agree otherwise. Consequently, the parties can agree that the party with obligation is still liable for compensation. In fact, at VIAC there has been a case in which the carrier’s ship sank, which was an objective, unforeseeable event. Although the arbitration council determined this was an event of force majeure, hence, the carrier is not liable; the two sides still agreed that the carrier would pay damages.
Besides, the parties should also specify the obligation to notify when a force majeure event occurs to minimize possible damage.