Guide to Contractual Conduct Within Covid-19 Pandemic

Guide to Contractual Conduct Within Covid-19 Pandemic

One of causes may lead to temporary relief from fulfilling contractual obligations (on the first step), which may result in permanent relief (at the end of waiting period and voluntary termination or spontaneous termination of the contract), is the occurrence of "force majeure" event. In general, the performance of contractual obligations is suspended from the time of occurrence of force majeure event, and as long as force majeure continues, it will not impose any obligation on contracting parties (except minor obligation). Of course, in addition to the possibility that an event may be considered as an obstacle to the fulfilment of contractual obligations, it can also be a proof for the occurrence of difficulties or increasing in costs in implementation of contract, which is called as "hardship".
Infectious diseases and their consequent epidemics are generally cited as a ground for occurrence of force majeure or hardship events in contracts. However, it should be considered that incidence of epidemics is not, absolutely and once it occurs, a sufficient basis for citing either of these two events. Unfortunately, the lack of legislation in providing a definition and requirements of force majeure and hardship in Iranian law has caused many disputes in contractual relationships. It is obvious that without understanding the basis of force majeure and hardship, the basic conditions which can be cited for recognition of either of these two institutions cannot be achieved.

The present document has been prepared as a guide based on contract custom and practice to be used by contract drafters in position of drafting contract and by contracting parties as a reference to the purported provisions of the concluded contract.

The grounds for invoking force majeure and hardship are as follows:

A)    Force Majeure:

 (1) Unforeseeable: It is applicable to contracts entered into before the occurrence, unless either this criterion is deviated, in the contract or the title of the Coronavirus epidemic is explicitly classified as force majeure event.
(2) Unavoidable: As a rule, if the incidence of disease and epidemics and their consequences can be prevented by observing the health guidelines (Such as the guideline for combating the prevalence of Coronavirus in construction project workshops, approved by Planning and Budget Organization of Iran), then occurrence of force majeure cannot be confirmed.
(3) Insuperable and Uncontrollable: This condition is certainly achieved as to Coronavirus, provided that a definitive or controlled treatment method is not discovered and this treatment method is not available to the contracting party or general treatment is not performed at its project site. Of course, it may contain unreasonable cost to remove the obstacle, which entail making compensation by non-affected party, unless the contract provides otherwise.
(4) Effective and definite obstacle: Considering objective standard, there is no doubt about the effect and certainty of obstacle due to Coronavirus on performance of the contract, but the personal standard must first be considered as a criterion. The party who is willing to rely on force majeure must prove these two factors regarding its obligations, and if the subject of the contract is to provide a service that can be performed, despite the epidemic of the Coronavirus, the force majeure cannot be invoked; or if something happens that makes it difficult to perform contractual obligations or increases costs, it is still not possible to adapt to force majeure. Also, it is important to note that Coronavirus disease is whether subject to epidemic or pandemic regulations, affects recognition of force majeure and contractual obligations.
(5) Non-attributable to an action, omission or fault of the contracting party: It is natural that the epidemic of the Coronavirus is not attributed to the contracting party, so the occurrence of this criterion is definite.
(6) Reliance on probative evidence and non-assertive merely: it is definitive for Coronavirus.
(7) Application of Personal - Objective Standard: The above six items must be measured by three standards, two of which are under the personal standard and one is objective. The first type of personal standard is how the text of force majeure article is stipulated in the contract, and the second one is based on the fact that the conditions stipulated in the contract are personally applied to the contracting party, and the objective standard is also based on whether this event can be considered force majeure from a view point of custom and practice. Of course, in case of conflict between these standards, priority is given to personal standard.
(8) Notice to non-affected party: If the affected party does not notify the non-affected party of the occurrence of force majeure, he cannot release himself from liability, as the non-affected party may be able to remedy the conditions of force majeure or take the necessary measures to prevent suffering further damages or control of the circumstances resulting from force majeure. In other words, such a notice is important from two points of view, one based on the removal of obstacle so that the non-affected party can resume the performance of contractual obligations, and the other based on ensuring that the non-affected party is protected from further damages caused by force majeure.

B)    Hardship:

The measure of the impact factor of an event on the performance of contractual obligations does not necessarily lead to force majeure. It should be to the extent that it prevents fulfilment of obligations; otherwise, it can result in hardship, provided that it is stipulated in the contract, apart from force majeure clause. In other words, hardship refers to the general circumstances that does not make it impossible to fulfill the contractual obligations but faces difficulties or burdens the costs of performing work for the affected party. The basics that are commonly cited in the occurrence of hardship are the same as those mentioned in force majeure, but some of the events which can lead to hardship include the following:
(1) Change in laws and regulations: If change in laws and regulations arising from the epidemic conditions occurs in such a way that the circumstances governing the fulfillment of the obligation be altered. For example, enacting regulations prohibiting suburban commuting and restricting intra-city commuting can render performance more onerous.
(2) Sudden rise in prices: In cases where rates rise due to an epidemic, so that it makes rise the cost of fulfilling contractual obligations, unreasonably. Of course, this increase in cost should be such that have caused a fundamental change in contract prices in custom and practice or, according to the provisions of the contract, be considered as a fundamental change.
(3) International Sanctions: This criterion will not apply to Coronavirus event.

Conclusion:

In terms of the abovementioned definitions and conditions, the Covid-19 virus, may contain either of these two institutions. In cases where, depending on the subject matter of obligation, the occurrence of an epidemic is unpredictable, unavoidable, insurable and uncontrollable, and also has a direct impact on the performance of the obligation that is required during the epidemic period and generally make it impossible to fulfill the obligation, it is possible, after notifying non-affected party of circumstances, to postpone the fulfillment of this obligation temporary by invoking the status of the force majeure and there is no liability to perform obligation and remedy damage. However, if the change in the terms of fulfillment of the obligation is in such a way that prevent performing the obligation and the destructive effects of this virus can be minimized and controlled under health standards, or the provision of standards and health equipment, includes exorbitant and unreasonable costs for the affected party, it can be paid by non-affected party in accordance with hardship clause, while fulfilling the obligation within the period of validity of the contract, otherwise the contract may be suspended or terminated by the affected party or be referred to the third party to make decision on escalation of the contract terms (as the case may be incorporated in the contract).

However, it should be perused all the above conditions and its related requirements and be compared to each project circumstances in order to be able to invoke force major or hardship correctly, as affected party or reject allegation of force majeure or hardship event, as non-affected party.