From the effects of the outbreak on corporate governance and employment relationships to its impact on arbitral proceedings and procedural deadlines, numerous articles discussing the legal issues raised by the global spread of the new coronavirus (“COVID-19”) have been published over the past few weeks.
One of the main issues that has been raised is whether the recent Coronavirus outbreak and the implementation of a series of governmental restrictions that aim to contain it affect the contractual obligations of the parties.
Here are four issues of contract law raised by Covid-19:
1. IS COVID-19 A FORCE MAJEURE EVENT?
Answer: It depends.
Force majeure is an event that prevents the performance of the obligations of the debtor and that presents 4 characteristics1
- It is an event beyond the control of the debtor2.
- It is an event which could not have been reasonably foreseen at the time of conclusion of the contract3.
- It is an event whose effects could not be avoided by appropriate measures.
- It is an event that renders the performance of the obligations of the debtor impossible and not just more onerous.
Should an event be characterized as Force Majeure in Lebanese law, the debtor ceases to be liable for non-performance of his obligations4
and the contract will either be suspended (if performance is temporarily prevented) or terminated (if performance is permanently prevented)5
Although several government officials have declared that the recent Covid-19 outbreak and the accompanying governmental measures constitute events of Force Majeure, such a characterization does not bind the Courts and these events cannot be automatically
characterized as Force Majeure.
Unless the parties have agreed on a Force Majeure clause and the aforementioned events fall within the scope of this provision6
, the characterization of these events as Force Majeure is established on a case by case basis by the Courts and depending on the circumstances of each case.
Covid-19 and the implemented governmental restrictions can be characterized as a Force Majeure in case it is established that:
- these events were not reasonably foreseeable at the time of conclusion of the contract (which would be the case for the vast majority of contracts concluded prior to the recent outbreaks).
- the debtor could not take any measures to avoid the consequences of these events on the performance of the contract.
- there is a causal link between these events and non-performance of the contract.
This might be the case, for example, where the debtor is prevented from performing a contract that he entered into prior to the recent Covid-19 outbreak because he has been infected by the virus and has been hospitalized or because the governmental confinement orders have prevented the debtor from reaching the place of performance of the contract where his physical presence is required (Ex: contractor cannot access the site of construction).
However, Force Majeure might not be characterized if the contract has been concluded after the recent Covid-19 outbreaks because these events were reasonably foreseeable at the time of conclusion of the contract or if the debtor is a company that provides services remotely and whose employees are accustomed to working from home (Ex: Graphic design company).
2. CAN THE DEBTOR OBTAIN A REVISION OF HIS CONTRACT ON THE GROUNDS THAT PERFORMANCE OF HIS OBLIGATIONS HAS BECOME MORE ONEROUS?
Unless the parties have agreed otherwise, Lebanese courts do not allow revision of the contract if a change of circumstances, that was unforeseeable at the time of the conclusion of the contract, renders performance excessively onerous for a party even if the parties had not accepted the risk of such a change at the time of conclusion of the contract7
The position of Lebanese law on the matter is fundamentally different from the laws of other Arab countries that have authorized courts to revise contractual provisions when such circumstances arise (E.g. Article 147 of the Egyptian Civil Code, Article 148 of the Syrian Civil Code, Article 146 of the Iraqi Civil Code, Article 249 of the Emirati Civil Transactions Law, Article 171 of the Qatari Civil Code).
3. CAN THE DEBTOR BE GRANTED A GRACE PERIOD ON ACCOUNT OF THE RECENT EVENTS?
Three provisions allow courts to grant the debtor a grace period:
The first provision is Article 115 of the Code of Obligations and Contracts. According to this provision, courts can take into account the situation of the debtor in order to grant him a grace period for the performance of his obligations provided that the debtor is acting in good faith.
The second provision is Article 300 of the Code of Obligations and Contracts. According to this provision, courts can grant the debtor who is acting in good faith a grace period for the performance of his obligations and spread the payment of the obligation over a longer of shorter period.
The third provision is Article 241 of the Code of Obligations and Contracts. According to this provision, courts hearing a claim for termination of the contract can refuse the request to terminate the contract and grant the debtor who is acting in good faith a grace period.
In light of the current Covid-19 outbreak, it is likely that a debtor who is acting in good faith will be granted a grace period for the performance of his obligations.
4. CAN THE CREDITOR DISSOLVE THE CONTRACT ON THE GROUNDS THAT HE CAN NO LONGER DRAW ANY BENEFIT FROM THE PERFORMANCE OF THE CONTRACT?
Unless the parties have agreed otherwise, the creditor cannot dissolve the contract on the grounds that the recent Coronavirus outbreak has taken away the benefits that he would have otherwise withdrawn from the performance of the contract.
First, the creditor cannot call upon the theory of Force Majeure to terminate the contract. Force Majeure is characterized when the debtor is prevented from performing his obligations and not when the creditor cannot draw any benefit from the performance of such obligations.
Second, whenever the loss of benefit amounts to a disappearance of the cause of the obligation, it cannot lead to the termination of the contract. The cause of obligation must exist at the time of conclusion of the contract and its disappearance at the time of perfromance does not lead to the termination of the contract unless the parties have agreed that the continuation of the contract is conditioned upon the permanence of the cause of the obligation. It should be noted that the issue of the termination of the contract for the disappearance of the cause of a consecutive obligation -caducité du contrat- does not find a clear answer in Lebanese Law.
Third, whenever the loss of benefit amounts to a disappearance of the cause of the contract, it cannot lead to the termination of the contract. The non-satisfaction of the individual purpose that has motivated the conclusion of the contract does not allow the creditor to dissolve the contract. According to article 200 of the Code of Obligations and Contracts, the cause of the contract does not constitute an integral part of the agreement. Therefore, the creditor cannot, in the absence of contractual provisions to the contrary, invoke the non-realization of the subjective purpose for which he entered into the agreement in order to dissolve the agreement8