GV Lawyers would like to introduce the article of Lawyer Hoang Thi Hoai Thu and Lawyer Ho Thi Tram with the title “Is Covid-19 A Fundamental Contextual Change in Law?” published on Saigon Economic Times on 16 April, 2020, No. 16.2020 (1,531).
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Recently, enterprises have been treating Covid-19 as a force majeure event which is expected to be exempted from liability in terms of such aspects as labour, employment, tax, economic relations, etc. Besides the force majeure event, there is another solution applicable by enterprises to any fundamentally changing situation that the parties cannot anticipate at the time of signing the contract in accordance with Article 420 of the 2015 Civil Code.
IN WHAT CASE IS THE FUNDAMENTAL CHANGE APPLIED?
When signing the contract, the Covid-19 epidemic has to yet appear, the production and business develops normally. When the epidemic occurred with its drastic consequences, the circumstances of contract performance seemed to change greatly. However, from a legal perspective, the determination of any “fundamental change” of circumstances must be based on very strict criteria. This must meet five conditions ([1]):
- A change in circumstances due to an objective cause occurs after the contract conclusion;
- At the time of entering into a contract, the parties cannot foresee a change in circumstances;
- The circumstances change so much that if the parties had known in advance the contract would not have been concluded or entered into with completely different content;
- Continued performance of the contract without changing the contract subject matter will cause serious damage to one party; and
- The affected party has taken all necessary measures within the possible capacity and in accordance with the nature of the contract but cannot prevent and minimize the extent of affecting the benefits.
An example can be used to illustrate: Company A and Company B enter into an economic contract in which Company A orders goods of Company B but requires the raw materials to produce the goods must be originated from Country H. If Company C fails to use the raw materials originated from Country H, Company B will be fined 10-fold the contract value; if the goods are delayed by delivery, they shall be subject to a 10% interest, regardless of any force majeure event. However, after signing the contract, the epidemic spreads around the world, including Country H. The policy of Country H is to close the border, all export activities come to a standstill, so Company B cannot purchase all raw materials from Country H as stipulated in the contract. Meanwhile, many employees of Company B take unpaid leave to avoid the epidemic, some of them are put under concentrated isolation. Despite only part of the materials purchased from Country H prior to the epidemic, Company B further wants to continue contracting with Company A provided that the two parties negotiate and amend/adjust some such contractual terms as materials, penalties, product unit price adjustments or delivery deadline.
The questions in the said example are “does the scenario in which Company B performs the contract meets the conditions of fundamentally changed circumstances, which factors to evaluate? Covid-19 epidemic event? Border closure? Employees taking unpaid leave? Employees being put under quarantine?
The spreading epidemic outbreak is of an objective nature, beyond subjective intention and control of Company B before signing the contract. This event can be seen as an objective reason that causes the contract performing circumstances to change much more differently from what happened before the two parties conclude the contract. The epidemic has caused Country H to close its border, forcing Company B’s employees to take unpaid leave and having some others quarantined. If Company B is aware of this situation, Company B will negotiate with company A about the use of domestic materials or may not sign contract with company A. Continued contract performance without any change in the contract subject matter will cause serious damage to Company B because the improper raw materials are originated from Country H and the delivery time may not be met due to labor shortage. Meanwhile, the contract stipulates that Company B must be punished, even in case of any force majeure event. Obviously, Company B is in “dire straits” without knowing and foreseeing it at the time of signing the contract.
IMPLEMENTING A CONTRACT IN CASE OF ANY FUNDAMENTAL CONTEXTUAL CHANGE
Article 420.2 of the 2015 Civil Code provides that in the event of fundamental contextual changes, the affected party has the right to request the other party to renegotiate the contract within a reasonable time. The right to request the other party to renegotiate a contract may open the door for Company B discussing again the performance of the contract in order to solve the situation that Company B is facing. The Civil Code also foresees that if the parties cannot reach any agreement on a contract amendment within a reasonable period, either party may ask the court ([2]): (i) to judge the contract as terminated at a specified time or (ii) amend the contract to balance the rights and legitimate interests of the parties due to fundamental contextual changes. And businesses should note that the court can only decide to amend the contract if the termination of the contract is likely to cause greater damage than the cost to execute the contract (if amended).
Especially, in the process of negotiating, amending and terminating contracts and during the court’s case resolution, the parties still have to continue to perform their obligations under the contract, unless otherwise agreed ([3]). Of course, upon choosing a negotiating solution or requesting a court to resolve it, businesses requesting a contract amendment are be obligated to actively collect, produce evidences and prove that their request is grounded and legal ([4]).
Thus, in addition to force majeure events, the provisions on fundamental contextual changes are very meaningful for businesses, creating more solutions to problems in certain difficult circumstances. Concurrently given that the principle of civil law is characterized by freedom, voluntary commitment, agreement, the parties should attach importance to the provisions on contract performance upon any fundamental contextual change. Accordingly, to make it easier for the parties to resolve the dispute, the parties to the contract should clearly define the (i) fundamental contextual changes, (ii) enumerate objective and subjective reasons, (iii) specify the responsibilities for the parties to perform in case of any fundamental change, the rights and obligations of the parties in such circumstances. At that time, the settlement of disputes, whether through contract amendment negotiation or settlement at the competent jurisdiction, will be much more facilitated.
[1] Article 420.1 of the 2015 Civil Code
[2] Article 420.3 of the 2015 Civil Code
[3] Article 420.4 of the 2015 Civil Code.
[4] Article 6.1 of the 2015 Civil Procedure Code.
