Covid-19: Impact on commercial contracts – Luxembourg
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 form 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 Luxembourg, 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?
In accordance with Articles 1147 and 1148 of the Civil Code, a party can be exonerated of its contractual liability if it proves that a breach of the contract was caused by an extraneous event that is not attributable to it, also generally called force majeure.
To be qualified as a force majeure event in the meaning of the Civil Code and to exonerate the debtor, the event has to be of an irresistible, unpredictable and external nature.
- Exteriority of the event implies that the event does not find its origin in the sphere for which the debtor is responsible. The debtor cannot invoke, in order to be exonerated, its own actions or those for which a special regulation makes it responsible.
- Irresistibility of the event is an overwhelming event whose effects cannot be avoided by appropriate measures. The debtor must have taken all necessary measures in order to prevent the realization of the event or its consequences in order to be released from its obligations. A mere difficulty to perform the contract or an excessive cost generated by a change of circumstances does not meet the requirement of irresistibility.
- Unpredictability of the event means that it could not have been reasonably foreseen by the debtor. The debtor does not have to consider any predictable events but only reasonably predictable events that do not necessitate exorbitant measures to avoid them. Predictability of the event is assessed on the day the parties entered into the contract, in accordance with the contractual rule that the debtor obliges itself only to what was foreseeable at the time the contract was concluded.
Legal scholars have held that in case of illness of the debtor’s employees the prerequisites of force majeure are not met. However, a different view might be taken in a situation where the whole country is paralysed by an epidemic. Eventually, Luxembourg courts will assess the situation on a case-by-case-basis.
Burden of proof
The party invoking force majeure shall bear the burden of proof. Force majeure is a legal fact that can be proven, especially in commercial matters, by all means of evidence (written documents, communications, newspapers, testimony etc.).
In contractual matters, the consequences of the application of the concept of force majeure are twofold:
- A temporary or partial impossibility to perform the obligation will not lead to the termination of the contract. Rather, the obligation of the debtor will only be suspended (without leading to damages claims of the creditor).
- A permanent and general impossibility to perform the obligation will rightfully release the debtor from its obligation and the contract will be considered as cancelled (or terminated) automatically. An impossibility to perform during a useful period for the creditor would be considered as a permanent impossibility.
How are force majeure clauses in commercial contracts applied and interpreted in practice?
The parties are free to include force majeure clauses in their contracts as they see fit, within the limits of public order provisions (such as the protection of consumers) and the rules on defect of consent or on avoiding significant imbalance between the parties’ rights.
In practice, when assessing if Covid-19 qualifies as force majeure, the judge will first assess whether the clause expressly mentions pandemics or epidemics as covered events. If not, the judge will determine whether the event still falls within a broader contractual definition of force majeure provided by the parties. Finally, if the contract does not include a definition of force majeure, Luxembourg courts will turn to the statutory definition provided by Articles 1147 and 1148 of the Civil Code.
In the absence of statutory provisions and / or contractual arrangements on force majeure, which instruments are available to avoid the performance of contractual obligations?
What else needs to be considered by clients that are party to a contract which is affected by Covid-19?
Mitigation of loss
Some judgments indicate that the victim is not obliged to limit its damage in the interest of the person responsible (District Court of Luxembourg, 2 June 2010, No 164/10 XVII; District Court of Luxembourg, 9 March 2011, No 88/11 XVII). However, the majority of case law seems to be in favour of the victim's obligation to mitigate its damage (Court of Appeal, 26 February 1997, Pas. 30, p. 207; Court of Appeal, 4 March 2009, Pas. 34, p. 620). Therefore, it is generally recommendable to actively mitigate damages in such situation and not only remain passive. For instance, it is worth considering alternative ways of meeting commitments (e.g., by sourcing from another supplier).
The Civil Code does not provide for specific notification duties. However, as a general principle, both parties have to perform their obligations in good faith in accordance with Article 1134 of the Civil Code. Notification of the impossibility of performance of the contract due to the Covid-19 epidemic should therefore be made as soon as possible.