Covid-19 & E-Commerce Contracts: A Force Majeure Event?
The COVID-19 virus is a modern-day first, with most of the world going home and staying home to prevent the outbreak of the virus. Given the unprecedented and fast-moving circumstances, guidance from governments has been changing frequently.
This is a global pandemic affecting businesses all over the world. The retail sector has been hit particularly by the lockdown measures imposed by most governments in the world however, one sector which may be adaptable to the Covid-19 pandemic is the e-commerce industry. The online sale of goods and services enable the social distancing needed to beat the pandemic, and a number of e-commerce companies have experienced rising demand during these days of confinement. The freezing of the world economy means that overall e-commerce demand has gone down since the outbreak of the virus, but it is nonetheless coping better than the traditional retail industry.
That being said, the pandemic is having an impact on all businesses including those in the e-commerce industry and we are now debating what the legal and contractual consequences of this pandemic might be. Many e-commerce companies will not be able to perform their contractual obligations under the pandemic, some parties will claim damages for lacking or non-performance- can they argue that the pandemic is a force majeure event?
Just as different countries have different approaches to controlling the virus, these jurisdictions also look at contracts differently. As a law firm operating on a global scale, we consider the possibility of force majeure around the world in Europe- the UK and France - and the United States.
Force Majeure in E-Commerce
English law has no general duty of good faith implied into contracts which means that it is difficult to excuse non-performance since this should be literal and absolute. In France, an explicit duty of good faith presumes a contracting party will not destroy the right of the other parties, so it is again difficult to justify non-performance. In the US, and globally, it is a general rule that parties should carry out their obligations. Force majeure is the exception which sets out when an event will be considered to be so serious that the obligations under the contract cannot be carried out by parties anymore, and what will happen if this is the case.
48 states across the US have declared the Coronavirus to be a national emergency. The UK has announced new “emergency powers” but has not declared a state of emergency and has given no guidance on commercial and e-commerce contracts. The French Parliament voted for a state of public health emergency and specific measures were implemented at the end of that month, however the special measures relating to French contracts were directed at public procurement contracts.
Worldwide, the COVID-19 measures remain silent on other contractual relationships which include the majority of contracts in the e-commerce industry, including between manufacturers, distributors, sellers, customers, software and analytics providers and delivery companies. This has everyone wondering- could this virus, and emergency situation, be a force majeure event for e-commerce contracts?
Does Your Contract Include Force Majeure?
In English law there is no general rule of force majeure, so if it is not included in a contract it will not apply. The same goes for US laws generally. Article 1218 of the French Civil Code sets out that a force majeure event can apply in a contract even if the contract does not include a force majeure clause. Conversely, this means that even if pandemics were included in the description of a French force majeure clause, the requirements stipulated by the French civil code would need to be satisfied.
So, Is Coronavirus a Force Majeure Event for E-Commerce Contracts?
In English law and US law, there is no legal definition of force majeure and it has been a matter of interpretation for courts. Some clauses will include specific wording that an event will be an “epidemic or pandemic” or because of “government action”. Other contracts will not define specific circumstances and will instead simply call for an event which is out of the control of the parties which renders performance impossible or makes it too onerous.
In France, force majeure is defined in the French Civil Code as an event which is beyond the control of the parties, which was not foreseeable at the time of the conclusion of the contract, and which is unavoidable. French courts have a history of examining the measures that have been taken by the party relying on force majeure, and whether the event really did make performance impossible of if there were alternative measures that could have been put in place. Despite there being a French legal definition, the wording in French contracts is important too, since contractual terms are allowed to modify the basic definition.
Since it offers a more concrete definition, the French civil code is a good basic starting point when considering any global contract:
1. Out with the control of parties: COVID-19 arguably fits in here.
2. Unpredictability: the timeline of the relationship between the parties and the dates on which agreements have been concluded will be important. For example, the requirement of unpredictability cannot be fulfilled if the contract was concluded after national states of emergency have been declared.
3. Irresistibility: in e-commerce relationships especially, this might be difficult to prove. In the UK, US and France there has been closure of public places which are not essential. However, online trading has not been banned. The irresistibility criteria therefore seems more uncertain, especially considering the health guidelines around the delivery of “contactless” packages and in the context of home delivery.
Courts are normally restrictive in their interpretations; however, these are unprecedented circumstances that are affecting the way we work. Because of this, Courts might be more generous in their interpretations if disputes were to arise.
What if Force Majeure Doesn’t Apply?
Therefore, the possibility of force-majeure in the e-commerce context is questionable given the requirement of impossibility and the fact that so many of these contracts are performed remotely. Are there other options if this clause does not apply?
In England…
If force majeure isn’t included in your English contract, the doctrine of frustration might help. This allows parties to set aside contracts that have been made impossible or which no longer have a purpose. However, the UK doctrine is extremely narrow.
It has only been accepted in the past for events such as a law being passed to make the purpose of the contract illegal which that the foreseeability arguments considered above would apply more strictly. It also means that a party would need to show that performance was totally impossible which could be a problem considering the irresistibility arguments considered above.
In frustration, there is arguably less flexibility than there is under force majeure.
In France…
As well as defining force majeure and reading it into every contract, the French Civil Code recognises “imprévision” or hardship. This allows a party to ask another party to a contract to renegotiate if there is a change in circumstances which renders performance particularly onerous. The requirements are that the change is unforeseen, the contract is particularly onerous for one party, and this party has not already contractually accepted to bear the risks of such a change in circumstances. If the other party refuses to negotiate or if negotiations fail, the parties can decide to terminate the contract on conditions that they agree between one another, or they can ask a judge to change the contract so that it is suitable in the new circumstances.
This clause could be extremely useful for online retailers during COVID-19. While the government has not banned this commerce, it has suggested that only essential items be sold.
An example of an argument that has been presented is that e-commerce actors affected by the current economic climate cannot rely on their insurance for financial relief as other actors might be able to, for example in the flight industry.
This could allow online retailers in France to argue that an imprévision event has occurred, and as such renegotiate or ultimately terminate the contract.
In the US…
The Uniform Commercial Code might be able to help when it comes to the sale of goods since this code can apply to e-commerce.
Under the UCC, if a government order prevents the performance of the contract i.e. selling the goods, parties might be allowed to delay the contract and might not be found to be in breach. If not, the issue would fall to State Law around the doctrine of “frustration of purpose”.
Application can differ, but in general it releases a party from its contractual obligations if those obligations have become impossible to perform. For this to apply, the frustration must be so severe that the basic purpose of the contract is destroyed, unforeseen, not a risk assumed under the contract, and experienced by both parties (rather than one party being able to invoke force majeure). Arguably, the Coronavirus could fulfil these requirements.
Conclusion
These are uncertain times and, unfortunately, guidance will likely come once the pandemic is over which means that for now, we wait.
The considerations in this article are a matter for interpretation and it is therefore important to analyse each issue in an e-commerce contract and take into account your own jurisdiction and circumstances. Above all, the most important thing is to look after yourself- your business, and your health. So, stay safe and keep a record of all the measures that you are taking to ensure that business goes on as normal.
If you have any questions about what legal measures you can take to protect yourself during COVID-19, or any other legal matters, please don’t hesitate to get in touch!
Article by Lily Morrison @ Gerrish Legal, first published on Medium in April 2020