By Jean Tabet- Managing Partner at Tabet Law Office
And Nour Tabet- Junior Associate and PhD Candidate at the Sorbonne Law School
In addition to the tragic human tragedy that it has caused, the Covid-19 outbreak has caused major disturbances to commercial activity on a global scale, challenging contracting parties' ability to fulfill their legally binding commitments, leaving countless companies and individuals unable to perform their contractual obligations…
The Covid-19 pandemic is leading to a wave of legal disputes. The legal concept of “Force Majeure” is seen as a choice for parties looking for a lawful remedy where, through no fault of their own, they can no longer fulfill their obligations and may be liable for a breach of contract caused by the Covid-19 pandemic, or its related state-enforced sanitary and public health measures.
Since last March, several decisions were rendered by Lebanese Courts ruling that the Covid-19 outbreak could characterize a force majeure event. Moreover, the Lebanese Parliament issued Law 160 on the 8th of May 2020 (and its several extensions) which suspends the legal, judicial and contractual time limits, to relieve the impacts emerging from the failure of the citizens to adequately comply with their legal, procedural and contractual obligations due to Covid-19. However, this Law does not explicitly state that Covid-19 is a force majeure event.
Recently, the Saudi Supreme Court has issued a decision number 45/M in which she sets out principles regarding the Covid-19 outbreak and its legal consequences. The decision considers the Covid-19 "a force majeure event". This decision is important and we believe could influence the Lebanese Judge in the way the Covid-19 pandemic is approached.
I. Covid-19 pandemic: A force majeure event:
A. What is force majeure?
The qualification of an event as a Force Majeure requires the fulfillment of three cumulative conditions. The event must be exterior, unforeseeable and unavoidable.
This means that the event must has been driven by external factors unrelated to the will of the parties and beyond the control of the debtor.
The emergence and spread of Covid-19 and/or subsequent government measures (i.e. travel ban, ban on the sale of certain products, closure of establishments, etc.) could meet this condition, depending on the circumstances.
This means that the event that led to the impossibility of execution was unexpected and could not be reasonably predictable by the parties at the time of the conclusion of the contract.
This condition is likely to be met for all contracts entered into, renewed or extended before January 2020. However, various debates are likely to arise regarding the contracts entered into, renewed or extended after that date.
This means that the event is preventing the execution of contractual obligations and the effects of which cannot be avoided by appropriate measures.
Depending on the circumstances, the appearance of Covid-19 outbreak and the unprecedented series of restrictive measures taken by governments to fight it may have prevented the execution of a contractual obligation.
It should be noted that the Covid-19 pandemic and the measures taken by the governments to stop its spread will not in any case constitute a force majeure event. The conditions of the force majeure shall have to be demonstrated contract by contract, on a case-by-case basis, without making a global assessment.
B. Force majeure in light of the Saudi Supreme Court Ruling.
Beside the three abovementioned conditions, the Saudi Supreme Court has ruled that, under certain conditions, and under very specific circumstances, Covid-19 will be considered a force majeure event. In this regard, the decision mentions five conditions that must be met to characterize a force majeure event:
1. The contract must have been concluded before the measures taken to counter the Covid-19 and its execution must continue afterwards:
We could somehow find the condition of irresistibility mentioned above, even though the condition stated by the Saudi Court does not meet the definition of irresistibility according to the French law and the Lebanese precedents.
We could also notice that the condition of imprevisibility is implied since the contract was concluded before the Covid-19 pandemic; the parties could not have reasonably foreseen it.
However, various debates are likely to arise regarding the contracts entered into, renewed or extended after that date. Indeed, at what point will it be possible to consider that the event could have been reasonably foreseen?
2. The Covid-19 pandemic must have a direct effect on the contract, which the debtor cannot avoid:
We could somewhat find the condition of unforeseeability referred to above.
3. The pandemic shall be the sole and only reason preventing the execution of the contract.
4. The creditor must not have waived or relinquished his rights.
5. The harmful consequences of the pandemic must have not been resolved by a special law or a specific decision of a competent authority.
When all these conditions are met, different contractual consequences may be applied as follows.
II. Contractual consequences:
A. The consequences of Covid-19 regarding the contractual obligations.
In order to be completely exempted from an obligation, legal conditions require that the execution of this obligation becomes completely impossible.
Indeed, if the execution of the said obligation is simply more difficult or more expensive, the force majeure event will not be characterized, since alternative measures could have been implemented. For this reason, force majeure should not normally apply to an obligation subject of payment as obligations that cannot be executed during the crisis could be postponed and be executed as soon as the situation allows it (i.e. when the peak of the pandemic has passed or when the ban has been lifted).
On the other hand, if it appears that it is still possible to execute it (i.e. by replacing the goods, by relocating production to other sites, or by using alternative supply mechanisms) the force majeure event cannot be characterized. The revision of the contract by the Judge must be considered. Therefore, the Saudi Supreme Court ruled that this situation gives the Judge the power to proceed to an amendment of the contract.
This power granted to the Saudi Judge is thus limited to the revision of the lease contract and the contract of service. We could perhaps reproach to the Court of not generalizing this procedure to all contracts that may have been affected by the Covid-19 pandemic. It is perhaps the “mistrust” in such a procedure which would allow the judge to enter into “the matter of the parties to the contract” which could justify this high level of precaution.
In fact, unlike several other jurisdictions, the Lebanese Law does not provide any specific legal framework for contractual issues arising from unforeseen events and does not grant the Judge the power to restore the contractual equilibrium.
The ruling of the Saudi High Court of Justice clearly proves the willingness of the Saudi Judge to intervene in the contract to restore the contractual balance during this crisis. We sincerely hope that the Lebanese Courts follow the movement or be inspired by such decision. Indeed, in light of the international health crisis that the world is facing, which is unfortunately added to the terrible economic crisis Lebanon is going through, it is difficult to imagine how contracts could survive without the intervention of the Lebanese Judge who could intervene when an unforeseen event altering the contractual balance occurs. Of course, the legal concept of the theory of unforeseeability (la théorie de l’imprévision) is not applicable in Lebanon through the application of the now outdated French Precedent- the famous Craponne ruling of 1876 – but the principles of justice and contractual solidarity should be respected today.
Nonetheless, and despite the absence of explicit legal provisions, it is common for the parties to a contract to include a clause that mitigates the consequences of unforeseen events when a substantial change in the value of the contract occurs. Such clauses, which aim to restore the contract’s equilibrium, are valid in Lebanon based on the principle of contractual freedom. Other clauses may as well be included in the contract such as a “force majeure clause” or a “penalty clause”. However, these clauses may be declared void and null- or simply suspended- regarding the sanitary crisis as stated in the Saudi Supreme Court decision.
B. The consequences of Covid-19 regarding the contractual stipulations.
Parties may have provided for clauses that govern the occurrence of unforeseeable events that could affect the contract.
Indeed, the force majeure rules are not of public order. Therefore, parties may include in their contract a clause that:
– Restricts or extends the legal definition of the force majeure (by stating that the condition of unforeseeability is not required for example) ;
– Provides for a list of events that would automatically be considered as an event of force majeure. Parties may have, for example, included or excluded epidemics or pandemics from the events that could characterize force majeure;
– Modifies the effects of the force majeure, by introducing an obligation to renegotiate the contract.
These clauses shall be interpreted in order to determine whether the Covid-19 outbreak and/or the measures taken by the public authorities may constitute a force majeure event within the terms of the contract.
However, the Saudi Supreme Court decision considers that the force majeure clause (or non-responsibility clause) as well as the penalty clause would be deemed void and null, and “have no effect”.
This movement to exclude such clauses has been seen in some jurisdictions, notably in France, where the government, by an Ordinance of the 26th of March 2020, has established a "legally protected period". During this period, and in order to take into account the difficulties that may result from the current sanitary crisis, the text provides that certain contractual clauses would be "paralyzed" in order to "sanction the non-execution of an obligation within a specified period", namely resolutory clauses, penalty clauses and force majeure clauses. The text also provides a mechanism deferring legal and judicial terms and deadlines.
The Lebanese Parliament followed the movement and issued a Law (number 160) that was extended multiple times, by which he suspended the legal, judicial and contractual time limits. Could Lebanese Courts or Lawmakers follow the movement regarding the exclusion of such clauses?
Could contractual freedom be reduced and the will of the parties be nullified in times of crisis? Does the autonomy of the will make no sense in times of crisis? Shall we go against what the parties have voluntarily foreseen?
Despite these few reproaches, in our opinion, the decision of the Saudi Supreme Court is extremely important. The Lebanese Courts and/or lawmakers should follow the movement and start resolving the various and multitude issues raised today by the Covid-19 pandemic.
محكمة" – الأربعاء في 2021/1/27"