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27 May 2020

RJ GAITO Transaction and Regulatory News

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Contractual obligations in light of the Corona Pandemic – The Luxembourg angle

Mar 03 2020

Faced with the prospects of a severe global pandemic, we want to draw our clients’ attention to the implications of an inability to perform contractual obligations and consequently finding themselves or counterparties in potential breach of contract situation(s).

Luxembourg contract law position

coronavirus pandemicFreedom of contract is the underlying contractual principle. The parties are free to included and elaborate on force majeure clauses where parties customarily include, inter alia, events such as war, climate disasters and health hazards such as epidemics.

In this context, the Luxembourg courts will apply the clause and any related provisions.

In the event that, the contract is silent on force majeure the parties and the courts will resort to the provisions of the Luxembourg Civil Code. In this respect, article 1148 of the Luxembourg Civil Code shall apply.

For the force majeure event to be applicable, three conditions need to be simultaneously present:

  1. Unforeseeable event; such foreseeability is determined at the date of the contract formation;
  2. Unavoidable; and
  3. External.

In the event of force majeure being applicable to a breach of a contractual obligation(s), no damages will be due in case of breach of contract resulting from such event and the affected party may be excused from performing its contractual obligations. Note that, if the force majeure event is temporary, the contractual obligations are suspended rather than extinguished.

Judicial interpretation

The notion and conditions of force majeure are subject to the discretion of the sovereignty of the presiding judge in the case. Consequently, it is a case by case analysis.

It is therefore our assessment that it is uncertain how a Luxembourg judge will treat this current global pandemic.

The Luxembourg judiciary is likely to look to French case law to analyze any potential situation arguing force majeure. In certain cases, French courts had denied the qualification of force majeure in the cases of H1N1 virus and dengue fever. In the former case they determined that the epidemic was foreseeable and, in the latter, it had not escalated widely enough to constitute a force majeure event.

Given that economic relations are of global nature, we believe that the Luxembourg courts are more likely to take an internationalist view of the situation and consider the cross-border nature of this epidemic.

Recommendations

  • Verify existing agreements to ascertain the existence of force majeure clauses and their adequacy for the existing situation;
  • Ascertain the risk profile of the agreement(s) and potential inability to perform an agreement;
  • In absence of a force majeure clause, any potential inability to perform a contractual obligation due to the epidemic needs to be considered within the framework of the Luxembourg Civil Code’s terms and the relevant case law;
  • Check all insurance arrangements and their terms;
  • Verify any contractual terms with your own suppliers to asses counterparty risk.

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