Contracts and commercial litigation: Covid-19 as an unforeseeable event and/or a material adverse change

For contracts governed by Luxembourg law, the parties may wish to consider if the COVID-19 outbreak has rendered the obligation impossible to fulfil and could thus qualify as an event of force majeure within the meaning of the Luxembourg Civil Code. Pursuant to the Luxembourg Civil Code, force majeure is deemed to arise when a contracting party's performance is prevented by an event beyond its control, the effects of which could not have been foreseen at the time the contract was entered into and avoided by appropriate measures.

In this respect, the event hindering performance of the contract should be:

(i)         external (i.e. outside the contracting party’s control),
(ii)        unforeseeable at the time of conclusion of the contract, and
(iii)       unpreventable or unavoidable (through the exercise of reasonable diligence by the contracting party).

While it is debatable whether the current coronavirus outbreak should be considered an unforeseeable event given other outbreaks in the recent past (such as SARS in 2003), it cannot be denied that the scale of the present crisis is unprecedented. The courts will have to assess if the outbreak constitutes a foreseeable contingency for which reasonable measures could have been taken by the affected party. In this regard, they could rely on guidance provided by WHO declarations and national health services.

The COVID-19 outbreak will clearly not be considered an unforeseeable event when it comes to new contracts.  

Furthermore, it should be noted that in order to be considered an event of force majeure, the outbreak must constitute a real obstacle to performance of the agreement.

The above rules apply by default to agreements governed by Luxembourg law and can be supplemented and/or derogated from by specific force majeure and/or material adverse change clauses. Such clauses are even required if the agreement is governed by foreign law, which does not always contain default rules on events of force majeure.

The fact that performance of the contract would simply be more costly or difficult remains insufficient to exempt the breaching party from liability.

In light of the foregoing, the following points should be considered in order to mitigate the contractual risk related to COVID-19 in an international environment:

  • Include express disease/epidemic wording in new contracts (including wording on the impact of delivery failure by third-party suppliers due to a viral outbreak).
  • Review and amend existing contracts, to the extent possible.
  • Consider which contracts could be impacted by closures or delays.
  • Audit suppliers and gather information from customers to assess the impact of the outbreak and prepare for potential disruptions.
  • In case of doubt as to whether an event of force majeure applies to a specific contract, seek legal advice before acting or sending communications.