ADR

COVID-19, Force Majeure & Arbitration

In the wake of the COVID-19 pandemic, the concept of force majeure has gained increasing recognition in arbitration. Typically, Arbitral Tribunals are reluctant to accept force majeure provisions to excuse a party from performing their contractual obligations. Arbitrators tend to favor the pacta sunt servanda principle which is related to the correct behavior of the parties in a commercial relationship and the concept of bona fide. However, if a party is able to demonstrate certain conditions during the arbitration, arbitral tribunals might accept their defense of force majeure as a valid justification for the suspension of contractual obligations.

For the purpose of this document, we will assume that Ecuadorian law is the substantive law applicable to the merits of the dispute. Under Ecuadorian law, force majeure is an unforeseen event that cannot be resisted, such as a shipwreck, an earthquake, the imprisonment of enemies, the acts of authority exercised by a public official, etc. In light of this, the COVID-19 pandemic is considered as a force majeure event according to the civil code. It is worth nothing, that this pandemic has an impact worldwide and affects all kind of industries. Hence, using force majeure clauses is not straightforward and it is advisable to look at some conditions in order to assess how these clauses might be applicable.

First, the party invoking force majeure as a defense shall prove to the arbitral tribunal the concept of “unforeseeability”. If the party entered the contract after the COVID-19 pandemic, then it would be difficult to argue that this event was unforeseeable. If the contract was entered before the crisis, then the party invoking force majeure can demonstrate that the pandemic was unforeseeable, but still needs to prove other aspects.

Second, the defaulting party needs to prove that the event is irresistible, which means that said party has taken all the appropriate measures with a view to performing the contract (duty to mitigate), but the obligations became impossible to perform. Please note that is not sufficient if an obligation became more onerous or difficult to perform, the key aspect here is the impossibility.

Third, there is not much jurisprudence in the country regarding the application of international doctrines such as frustration, hardship or imprevision. Local courts’ approach is that when a party assumes an obligation, then they must perform it or provide a remedy for breach. In common law jurisdictions, hardship clauses refer to a change in the economic circumstances which prevents a party from performing their obligations and results in contractual disequilibrium. On the other hand, frustration refers to an unexpected event that modifies the obligations in a contract and changes parties’ initial intention for entering the contract. The doctrine of imprevision, which is most common in civil law jurisdictions such as France, refers to an unforeseeable event whose effects could not be resisted by the parties. In Ecuador, there are a couple of judgements in which local courts have applied the hardship and imprevision doctrines in disputes related to natural resources. In such a fashion, this crisis might be a good time for arbitration tribunals to analyze deeper the concept of force majeure and its application under Ecuadorian legislation.

In conclusion, force majeure requires a case by case analysis and it is not a one-size-fits-all solution because it depends on the provisions of the contract, the construction of the clause, the behavior of the parties, the facts of the case, the evidence produced during the arbitration proceedings and other aspects that will be carefully analyzed by the arbitration tribunals before reaching a decision.

Disclaimer: This document is informative and does not, and is not intended to, constitute legal advice.