Covid-19: Impact on commercial contracts – Belgium
How is the applicable law determined by the courts in case of commercial contracts?
In international cases, the governing law is determined in accordance with the EU Regulation No 593/2008 on the law applicable to contractual obligations (“Rome I”). Under Rome I, the general rule for B2B international contracts is that parties can choose the governing law even if it has no connection with the contract. The validity of choice-of-law clauses is governed by Articles 10, 11 and 13 Rome I, which set out the formal requirements for choice-of-law clauses.
The choice of law is limited in the following cases:
- Domestic contracts: If the parties choose a foreign law as applicable to the contract, whilst all of them and all other elements pertaining to the contract are located in Belgium, Article 3 Rome I specifies that their choice shall not prejudice the application of those provisions of the domestic law which cannot be derogated from by agreement.
- Intra-EU contracts: Similarly, in contracts where all elements other than the choice of law are related to one or more EU Member States, the parties’ choice of law will not prejudice the application of provisions of EU law which cannot be derogated from by agreement.
Further restrictions apply to consumer, insurance and employment contracts.
In the absence of an express choice-of-law clause, Article 4 Rome I provides default rules which aim at designating the law which bears the closest connection to the contract at issue.
Are there any statutory provisions relating to force majeure?
The legal base of the force majeure concept under Belgian law can be found in the Belgian Civil Code (“BCC”):
- Article 1147 BCC: “The debtor is, if there is a ground thereto, ordered to pay damages, either because of the non-performance of the obligation, or because of delay in performance, if he does not prove that the non-performance is the consequence of an extraneous event for which he cannot be held accountable (…).”
- Article 1148 BCC: “No damages are due, if the debtor has become hampered through force majeure or fortuity to give or do that to what he had committed himself, or has done that which was prohibited.”
There is no exhaustive list of events that may qualify as an extraneous event for the purposes of Articles 1147 and 1148 BCC. Rather, the application of force majeure always depends on a case-by-case analysis. For an extraneous event to be a ground for release from contractual obligations, case law and legal scholarship generally put forward two conditions that need to be fulfilled:
- Firstly, the occurrence of the invoked extraneous event must have the consequence of making the performance of the contractual obligation impossible. In other words, the invoked extraneous event must constitute an insurmountable impediment to the performance of the contractual obligation.
Recently, however, the case law, supported by the majority of legal scholars, has adopted a broader interpretation of the impossibility requirement. According to the proponents of this approach, a normal, practical or reasonable impossibility would suffice to fulfil the impossibility requirement. It is however not sufficient that the occurrence of the extraneous event has rendered the performance of the contractual obligation only more difficult or costlier.
While the force majeure concept under Belgian law in principle also applies to a contractual obligation to provide or pay an amount of money, the performance thereof will in general not easily be deemed to be (permanently) insurmountable.
- Secondly, the occurrence of the invoked extraneous event or the ensuing impossibility of contractual performance may not be due to or related to a fault of the debtor. Moreover, the extraneous event (and its consequences) must be unforeseeable, i.e. the debtor could not have taken the extraneous event into account upon conclusion of the contract. It also has to be inevitable, i.e. the debtor was not reasonably able to prevent or avoid the event (or its consequences).
This requirement also implies that the debtor has not yet been put on notice to perform his contractual obligation. However, even if already put on notice, the debtor may still benefit from release if it is established that the object of the contractual obligation would have nevertheless perished upon timely compliance.
Belgian courts frequently review whether the occurrence of an unexpected disease is an event of force majeure for the debtor affected by such disease. Scholars also mention the occurrence of an epidemic as a typical example of force majeure, even for the debtors who are not ill themselves. However, there is barely any published case law.
In cases where the person is directly affected by the disease, the key criterion adopted by the courts is whether the possibility of occurrence of the disease was foreseeable before the conclusion of the agreement. In the affirmative, the diseased person bears the risks. If the event becomes foreseeable after the conclusion of the agreement, then the key criterion will be to assess whether the event renders the performance of the debtor’s obligations impossible, even if the debtor has taken all reasonable measures they could have taken once the occurrence of the event appeared possible. In the affirmative, the debtor may be discharged of their obligations.
For the novel coronavirus situation, debtors are thus likely to be able to invoke force majeure if (i) the performance of their obligation became impossible because of the epidemic (and/or related governmental measures), (ii) they concluded the relevant agreement before the outbreak of the epidemic and (iii) they took all reasonable measures to ensure the performance of their obligations after the outbreak became known.
Burden of proof
In accordance with Article 870 of the Judicial Code and Article 1315 BCC, the debtor who claims to be released from their contractual obligation by virtue of an extraneous event needs to deliver proof thereof. It is accepted that such proof may be delivered in an indirect manner, i.e. by demonstrating that neither the debtor, nor the people for which he is responsible, have any part in the non-fulfilment of the contractual obligation.
Book 8 of the new Civil Code, devoted to evidence, has enshrined new rules regarding the burden of proof. In case of extraordinary circumstances, the court may determine who bears the burden of proof if the application of the general rules would be manifestly unreasonable (Article 8.4, al.5). The standard of proof for positive facts can be lowered if the specific nature of the facts at stake makes it impossible or unreasonable to prove them according to normal standards (Article 8.6, al.2). These rules will enter into force in November 2020, and are likely to apply to cases ongoing at this date.
The extraneous event will have the consequence of releasing the debtor from their contractual obligation and liability, if the two aforementioned conditions are fulfilled. The debtor will also not have to pay any damages for non-compliance with the obligation.
- If the extraneous event constitutes a temporary impediment for the performance of the debtor’s contractual obligation, said performance will be merely suspended for the duration of the extraneous event. Performance of the contractual obligation will have to be resumed upon termination of the occurrence of the extraneous event, unless such performance would no longer be of use to the other party.
- If the extraneous event makes it permanently impossible for the debtor to perform his contractual obligation, this will result in a definitive release for the debtor.
If the contractual obligation affected by the extraneous event ensues from a reciprocal contract, a permanent impossibility will also result in the release of the other party’s obligation. For this mutual release to take place, it is required that the obligation in question is inextricably linked to the other obligations of the contract.
Articles 1147 and 1148 BCC constitute non-mandatory default rules and indifferently apply to all categories of contracts, subject to more specific legislation. It is not required that the contract at issue contains a provision in respect of a force majeure event for a party to the contract to be able to invoke force majeure. However, force majeure clauses are quite common.
How are force majeure clauses in commercial contracts applied and interpreted in practice?
It is not unusual in the Belgian market to incorporate force majeure clauses in commercial contracts. However, their drafting, scope and remedies differ widely:
- They may limit the scope of the force majeure concept to an exhaustive (limited) list of events or expand the scope of the force majeure concept to events that would generally not constitute an insurmountable impediment to perform the contractual obligation.
- They can also detail the consequences of the occurrence of an extraneous event, e.g. providing for a unilateral or bilateral release from contractual obligations or a temporary suspension followed by the termination of the contract if the suspension exceeds a certain period.
- Finally, they can exclude the possibility of invoking an extraneous event, such as pandemics, to obtain release from a contractual obligation.
The application and interpretation of a force majeure clause will always depend on a case-by-case analysis.
In the absence of statutory provisions and / or contractual arrangements on force majeure, which instruments are available to avoid the performance of contractual obligations?
Belgian courts have traditionally rejected the doctrine of hardship, pursuant to which contracts should be adapted where unforeseen circumstances render their performance more onerous (rather than impossible, as is the case for force majeure). However, in the framework of an envisioned reform of the Civil Code, a bill has been submitted to the federal parliament in order to introduce the doctrine of hardship into statutory law (Article 5.77 of the envisioned Civil Code). Following the 2019 federal elections, and in the absence of formation of a federal government since then, the parliamentary works on this bill have been suspended and the status of the reform is currently uncertain. This draft provision will therefore not apply to the current coronavirus situation.
In the absence of legal recognition of hardship, some courts have attempted to use related concepts to move towards an application of this doctrine:
- Under the abuse of rights theory, parties are prohibited from exercising their rights in a manner that clearly exceeds the limits of a normal exercise by a prudent and diligent person. For example, in a decision of 2014, the Court of Appeal of Ghent considered that the enforcement of a provision in a transport contract was abusive (3 February 2014, NjW 2015, 202). Under the contractual provision, a textile company was required to use the services of a transport company a minimal number of times per period. However, due to a crisis in the textile sector, it became hardly feasible for the textile company to meet this minimum set in the contract. In view of the facts of the case, the court considered that requiring a party to comply with its contractual obligation during this crisis constituted an abuse of rights. According to this case law, refusing to modify a contract can qualify as an abuse of rights in certain circumstances, such as the outbreak of a crisis. Debtors may try to argue that the same could apply for the coronavirus situation.
- Several courts have also admitted the adjustment of a contract following a change of circumstances during its execution via the concept of good faith. However, the Belgian Supreme Court generally dismisses this type of reasoning.