Thailand: Is your contract affected by the COVID-19 outbreak?

Since the COVID-19 outbreak began in January 2020, precautions have been implemented in many countries to combat the spread of the virus. These include, amongst others, travel bans, social lockdowns, event cancellations and expropriation of healthcare products by a number of governments.

As a result, disruptions to the global supply chain has occurred and the ensuing economic effects are being felt acutely worldwide. Press reports indicate that buyers of certain commodities and goods have already declared force majeure due to the COVID-19 outbreak. More may follow suit.

We have increasingly been asked to advise on the contractual disruption caused by the outbreak. In this briefing, we discuss whether the COVID-19 outbreak may constitute force majeure, the implications of force majeure under Thai law, and how companies can take steps to protect their interests in these uncertain times.

Introduction

A force majeure event is something exceptional and beyond the control of the parties which prevents the performance of obligations. Where a party is put in delay or commits another breach due to a force majeure event, it can be protected from the consequences of that breach.

It is not uncommon to see a force majeure clause in a commercial contract and often it comes with a detailed definition with a non-exhaustive list of what is, and what is not, a force majeure event. Whilst there may be variation in the definitions depending on the contract, in most cases the definition used in commercial contracts is similarly worded.

A typical force majeure definition requires, amongst other things, that the event (1) must be beyond the reasonable control of the party, (2) must not have been reasonably foreseeable and (3) could not reasonably have been avoided. A party seeking to invoke force majeure will generally need to satisfy this threshold test and comply with notice provisions to ensure that the other party is promptly made aware of any force majeure event.

The key issue is whether the performance of the relevant contract has been prevented by a qualifying force majeure event. The outbreak might possibly fall into more than one category of events, in that it is both a health issue (epidemic), and has resulted in government actions and restrictions.

Qualifying force majeure events

The term “epidemic” or “pandemic” is often found in the non-exhaustive list of events described in a force majeure clause. However, most jurisdictions in the world do not provide a clear legal definition for the word “epidemic” or “pandemic”. In particular, there is no clear demarcation as to when an outbreak of a disease becomes an epidemic or pandemic.

In this regard, the classification or advice by an international organisation or a relevant national government may be a good indication as to whether an outbreak falls within either of these categories. On 4 February 2020, the World Health Organisation (WHO) declared the COVID-19 outbreak an epidemic, but that it did not yet constitute a pandemic. On 7 February 2020, the Singapore government raised the country’s disease response level to “Orange”, indicating that the outbreak is deemed to have moderate to high public health impact, but the situation is still under control (whereas “red” signifies an out-of-control pandemic).

As the situation continues to evolve, this is something to keep an eye on. Whilst intergovernmental or national classifications may carry some weight for the court to consider the claim of force majeure, whether an outbreak can be classified as an epidemic or pandemic under a force majeure definition will largely depend on the factual circumstances.

It is important when giving notice of a force majeure event to consider both the effects of the COVID-19 outbreak itself and the consequential government action. In Singapore, government measures such as travel restrictions, mandatory leave of absence or quarantine, and other public health control measures caused by the COVID-19 may indicate a force majeure event if relevant to the performance of the contract. In the PRC, the China Council for the Promotion of International Trade (CCPIT) allows businesses affected by the outbreak to apply for a force majeure certificate from the CCPIT, provided that the affected business can submit an announcement or certificate issued by the local government or organisation, proof of delay or cancellation of transportation and relevant contracts.

If the current events fall within the definition of force majeure, it is important to note that this generally would not discharge the affected party indefinitely from its contractual obligation. It only provides a temporary suspension/ exemption from liability. The affected party would be expected to serve notice to the other party as soon as the force majeure event arises and promptly resume its performance of contractual obligation upon the cessation of the force majeure event.

Notification and burden of proof

The party seeking to declare force majeure must follow the required notice provisions and formalities set out in the contract. Failure to do so may mean that the Force Majeure clause is not properly invoked. The burden of proof is on the party invoking the said clause to show it has been triggered under the terms of the contract. We therefore recommend that parties invoking force majeure maintain an evidence/ audit trail, in case it is required in subsequent litigation or arbitration.

What if there is no force majeure clause in your contract?

In the event that your contract is silent on force majeure, the first thing to do is to look at the governing law of the contract.

Under the common law, the court will not imply a Force Majeure clause into a contract where there is none. Therefore, if parties do not expressly provide for their respective rights and remedies in the event of force majeure, they will be subject to the narrower common law doctrine of frustration of contracts. Generally, proving a contract has been frustrated is far from straightforward.

Under PRC law, force majeure is available as a matter of law pursuant to Article 117 and 118 of the Contract Law of the People’s Republic of China. The affected party is temporarily exempted from the liabilities in the event of force majeure, and is required to serve notice together with evidence to the other party within a reasonable period of time.

Thailand

The concept of force majeure is widely recognised under Thai law. Article 8 of the Civil and Commercial Code, one of the fundamental bodies of law in Thailand, specifically defines the term ‘force majeure’ to mean: “any event the happening or pernicious results of which could not be prevented even though a person against whom it happened or threatened to happen were to take such appropriate care as might be expected from him in his situation and in such condition.”

A force majeure clause can be found in commercial contracts governed by Thai law. Such clause relieves the affected parties from liability to perform contractual obligations when performance is prevented by a force majeure event or circumstance. However, force majeure clauses do not excuse liability where the effects of the force majeure event could reasonably have been anticipated and/or avoided.

The party who wishes to rely on the force majeure clause under Thai law will have the burden of proving that the event falls within the specific terms of the clause. If a party wishes to invoke a force majeure clause on a basis of the COVID-19 outbreak, he or she must prove that the event occurred is qualified as a force majeure event under the contract and that the event has prevented or hindered performance of the contract. It is important that the claiming party is able to demonstrate the causal connection between the force majeure event and the non-performance.

In the past, when Thailand was affected by the bird-flu epidemic in 2005 which prompted the government to order poultry farmers to terminate their livestock, the Supreme Court decided that the government orders in response to the epidemic are qualified as a force majeure event and the affected parties are relieved from contractual obligations.

Conclusion

• Check your contract– this is always the first step to establish what expressly agreed protections are available. The starting point should always be the governing law clause and in the context of current events, the force majeure clause (if any). However, the contract should be reviewed as a whole for other relevant provisions including requirements as to how to serve notice (such as what information you should include in the notice, what are the relevant time limits, etc).
• Proper record keeping – it is important to keep detailed records of the impact of the events. Otherwise it may be difficult to prove your claim.
• Notify your counterparty and keep them up to date – you will be in a much stronger position to recover time and cost if you update your counterparty on an ongoing basis after you have given formal notice, telling them what the problems are and what you are doing to address them.
• Mitigate – regardless of the governing law of the contract, it is advisable to mitigate the impact of force majeure and to record those mitigation efforts. If you can find solutions, you should do so.
• Keep updated – the situation is dynamic and evolving daily. A situation that constitutes force majeure today may not be force majeure tomorrow if the situation changes. We will be keeping a close watch on developments and will provide further briefings as the situation changes.

Should you wish to discuss any of the issues outlined in this article, or any other legal issues that may be relevant to your business, please do not hesitate to contact the authors or your usual Herbert Smith Freehills contacts.