COVID-19 now forces domestic and foreign companies to assess if the performance of their ongoing contracts is still possible or cancellation needed, together with the various legal consequences arising therefrom. In this newsflash, we have addressed the following four imminent questions under Japanese law.
Q1: Do I have a cancellation right due to COVID-19 based on my contract?
This first depends on the provision(s) in the contract concerned. Many contracts stipulate cancellation rights of the party ordering goods or services in case of non-performance of a contractual obligation or in case of performance delays by the service provider/supplier. The service provider/supplier, on the other hand, is usually not entitled to cancel the contract in such case and may also be subject to damage compensation obligations vis-à-vis the party that ordered goods or services.
To balance the interests between the parties, international trade contracts often contain so-called force majeure clauses, stipulating that non-performance due to an unforeseeable or uncontrollable external event (sometimes also referred to as “act of god”) may trigger special legal rights and consequences as further defined in the contract. These can range from a one-sided extension of deadlines, or an adjustment of the contract, to liability exclusion or a right of cancellation for both parties of the contract. Depending on the wording of such clause COVID-19 may fall under the scope of force majeure.
Force majeure clauses often include specific examples of unforeseeable or uncontrollable events, such as natural disasters, strikes, riots, war, governmental measures or embargos etc., but often do not mention “infectious diseases” etc. specifically. If not expressly listed in the wording, diseases typically do not constitute a force majeure event, unless being covered by other listed events, such as “governmental measures” taken as a consequence of a disease, e.g. an order for all citizens to stay at home. Only if the force majeure wording includes terms, such as “infectious diseases”, “epidemics” etc., COVID-19 can be deemed to fall under the scope of the force majeure with the legal consequences described in the contract. Please note though that even if the force majeure clause expressly mentions “infectious disease” but does not define the threshold criteria, the legal consequences may not be triggered until the spread of the disease has reached a level that hinders the performance, for example in the case of lack of personnel due to high infection rates. This needs to be reviewed on a case by case basis.
If nothing in particular is stipulated in the contract, the general provisions of the applicable law apply. In this respect, please refer to Q3 below.
Q2: Does it make a difference at what time the contract was concluded?
Yes. Force majeure clauses do not apply to events that have already materialized prior to conclusion of the contract. Therefore, for contracts concluded after January 2020, and in particular after the WHO announcement dated 30 January 2020 declaring COVID-19 as a “Public Health Emergency of International Concern”, the parties may be deemed to have been aware of the risk of COVID-19 and thus concluded the contract deliberately, as the developing situation and the risks were already publicly known. In this case, the parties are in principle not permitted to exercise rights based on a force majeure clause stipulated in the contract unless the incident falls under another category of force majeure.
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