The Covid-19 pandemic, which has taken place since the end of 2019 until now, has been causing a comprehensive and profound impact on all countries around the world. Since then, the global economy is almost falling into a serious recession, in which Vietnam’s economy is also significantly affected by the Covid-19 pandemic. Accordingly, under the impacts of the Covid-19 pandemic, many business and trade contracts, goods purchase and sale, service provision and labor contracts that were signed before the outbreak of the epidemic were also due to a dispute arose. Among them, the most popular today are premises lease contracts. Specifically, the lessee signed to lease the premises for business purposes, but due to the impact of the Covid-19 epidemic, the Government issued orders for social distancing, forcing businesses to temporarily suspend operations.
This has greatly affected revenue and profits as well as reduced the lessor’s ability to pay under the lease contract. In this case, the parties can proactively negotiate and agree to amend the contract to be more suitable. However, the possibility that the parties can reach agreements seems to be very low. In the most recent typical lawsuit, CJ CGV VIETNAM Co., Ltd. (CGV) sued and requested the People’s Court of District 1, Ho Chi Minh City to terminate the lease contract with International Communications Joint Stock Company (IMC). Accordingly, CGV requested the court to terminate the premises use contract on the grounds that circumstances fundamentally changed during the contract implementation process and neither party was at fault when terminating the contract.
This article will analyze a number of legal issues related to the “fundamentally changed circumstances” regulation and thereby provide some legal assessments on whether CGV can cite the Covid – 19 pandemic as a “fundamental change in circumstances” to request the court to terminate the contract with IMC?
1. When does a fundamental change of circumstances apply?
a. In international law:
Regulations on contract practice when circumstances fundamentally change is an important new point in Vietnamese law, recorded in Article 420 of the 2015 Civil Code, but in international practice and contract law of many countries, this provision has been recognized for a long time and has been cited in many lawsuits regarding contracts for the sale of goods. Specifically, the concept of “hardship” and similar concepts such as “change of circumstances”, “changement de circonstances”, “Wegfall der Geschäftsgrundlage”, “eccessiva onerosità” are recognized in many legal systems, in which, the term “hardship” is the most widely used and accepted.
Accordingly, the regulations on “hardship” are recorded in Section 2, Chapter 6 PICC ((Unidroit Principles on International Commercial Contracts) and “change of circumstances” recorded in Article 6:111 PECL (European Code of Principles on Contracts), Article 62, Vienna Convention 1969. In addition, the French Civil Code also stipulates as follows: “If after entering into a contract, circumstances change fundamentally to level that causes the cost of performing that obligation to increase, but the disadvantaged party cannot bear the risk of this event, they have the right to request a renegotiation of the contract…”
Many disputes have arisen in the course of trade between subjects. Some case laws related to fundamental changes in circumstances can be referred to as follows:
(1) Dispute between Scaforn International BV (Finland) and Lorraine Tubes S.A.S (France): in this case, fluctuations in the steel market caused steel prices to increase by 70% compared to the original price. The Supreme Court of Finland held that the steel price increase was unforeseeable – and this was considered a “change of circumstances”, creating a serious imbalance, making it impossible to continue to fulfill the obligation becomes disadvantageous to the Seller
(2) Dispute between a Spanish advertising company (Plaintiff) and the Valencia City Transport Company (Defendant): The Plaintiff and the Defendant signed a contract agreement on the exploitation of advertising on buses (bus owned by the Defendant), however, due to the economic crisis leading to a decrease in investment in marketing on means of transport, the Plaintiff asked the Defendant to reduce the rental price by 70%.
(3) Dispute (No. 8486) between the Seller, a Dutch company, and the Buyer, a Turkish company, at the International Arbitration Court ICC Zurich: The two parties signed a contract to install a sugar cube production machine. After signing, the Buyer refused to pay according to the contract and cited difficult circumstances due to the sudden decrease in demand for sugar cubes in the market. The two sides negotiated unsuccessfully to amend the contract, the Dutch seller announced the termination of the contract and requested the buyer to compensate for damages. The arbitrator did not recognize the case of hardship and emphasized that termination of the contract based on invocation of the hardship clause is applicable only in extremely rare cases, and that the unique nature of the situation to be considered hardship, it must lead to a fundamental change in the balance of the contract. Therefore, an event that simply increases the cost of performing one party’s obligations is not considered a hardship situation, but rather belongs to the risks that the parties must bear.
b. In Vietnamese law
Pursuant to Clause 1, Article 420, Civil Code 2015, regulations on contract performance when circumstances change. Accordingly, circumstances change fundamentally when all five conditions are met:
– Changes in circumstances due to objective causes occurring after entering into the contract;
– At the time of entering into the contract, the parties could not foresee the change in circumstances;
– The change in circumstances is so great that if the parties had known in advance, the contract would not have been concluded or would have been concluded but with completely different content;
– Continuing to perform the contract without changing the contract content will cause serious damage to one party;
– The party whose interests are affected has applied all necessary measures within its ability, consistent with the nature of the contract, but cannot prevent or minimize the level of impact on its interests.
For the unpredictability of changing circumstances. According to Point b, Clause 1, Article 420 stipulates that “At the time of entering into the contract, the parties cannot foresee a change in circumstances”. Thus, this situation must occur after the contract is concluded, and at the time of conclusion, the party whose interests are affected does not know the possibility of it happening. However, the problem is that the “unforeseen” nature prescribed in Article 420 is still quite general, still creating a relatively large loophole in the application process.
Changed circumstances cause serious damage to one party. According to Point c, Clause 1, Article 420 clearly states that a party will suffer serious damage if it must continue to perform the contract according to the agreed content. So what is considered “Serious Damage” has not been clearly explained. However, according to the spirit of the principle of entering into contracts, serious damage here can be understood as damage that prevents one party from achieving its purpose when entering into the contract. And, the law leaves the determination of seriousness to the parties themselves or to the Court. As for the regulations related to the affected party, all necessary measures have still not been prevented. Like force majeure, in changing circumstances, the law imposes an obligation on the affected party to try to remedy it themselves, to ensure the contract continues to be performed if possible. Only when the affected party can prove that having applied all possible measures still cannot save, can article 420 be invoked.
In summary, according to current law provisions on fundamentally changed circumstances in the 2015 Civil Code, the five conditions mentioned above must be met and the determination and assessment of the conditions of fundamentally changed circumstances need to be consider each specific case of each contract.
2. Analyze and evaluate whether Covid 19 is considered a fundamental change in circumstances, specifically applicable to the cases of CGV and IMC?
Pursuant to the provisions of Clause 1, Article 420 of the 2015 Civil Code:
Firstly, in the case of the Lease Contract between CGV and IMC, COVID-19 occurs globally and in Vietnam, the Ministry of Health has also announced this is a nationwide infectious disease epidemic. The epidemic is completely beyond the subjective will and control of the parties, is an objective cause for the parties in the contract and occurs suddenly. Therefore, COVID-19 fully satisfies the first condition of fundamentally changed circumstances. Pursuant to the provisions in Point a, Clause 1, Article 420 of the 2015 Civil Code.
Second, at the time of entering into the contract, both parties could not foresee the change in circumstances. Because when the contract was signed, the Covid epidemic had not yet appeared, CGV’s business was still going very smoothly. However, when the epidemic occurred and its severe consequences greatly affected CGV’s business situation, the circumstances of contract implementation seemed to have changed greatly. Therefore, Covid-19 can be considered to satisfy the second condition specified in Point b, Clause 1, Article 420 of the 2015 Civil Code on fundamentally changed circumstances.
Third, related to “Circumstances have changed so greatly that if the parties had known in advance, the contract would not have been concluded or would have been concluded but with completely different content”, according to regulation point c, clause 1, Article 420 of the 2015 Civil Code. Accordingly, a change in the circumstances of contract performance makes it impossible for the parties to perform the signed terms. Specifically, all activities in society are placed in a “quarantine state” which is an obvious change compared to the previous situation. Surely, if it were known that the epidemic would have such a serious impact, the subjects would not be able to sign with previous agreements.
Fourth, the provisions in Point d, Clause 1, Article 420 of the 2015 Civil Code provide the condition that “Continuing to perform the contract without a change in the content of the contract will cause serious damage to one party”, this is completely appropriate in this case. The reason, if the two parties continue to perform the contract, CGV will suffer great losses because when the epidemic appears, the city government has issued regulations requiring CGV businesses to temporarily suspend operations due to the epidemic. Therefore, if the lease contract is still implemented, the plaintiff still has to pay the costs of premises and services, while the business operations of the enterprise are suspended, so of course CGV will suffered serious damage.
Fifth, at Point e, Clause 1, Article 420 of the 2015 Civil Code, sets out the condition that “The party whose interests are affected has applied all necessary measures within its allowable capacity, in accordance with the nature of the contract which cannot prevent or minimize the level of impact on benefits.” Clearly, in this context, it is very difficult for CGV to find solutions to prevent and minimize the impact on benefits because of the particularly serious impact of the epidemic, complying with the State’s general policy of “Accept economic losses to prevent epidemics.
According to the above analysis, it can be concluded that CGV’s contract performance circumstances can be considered to satisfy the conditions of fundamentally changed circumstances as prescribed in Clause 1, Article 420 of the 2015 Civil Code. Or in other words, Alternatively, the impacts of Covid-19 can be seen as a fundamental change in circumstances in the case of the lease contract between CGV and IMC. Originating from the principles of civil law of freedom, voluntary commitment and agreement, in addition to the provisions on force majeure events, fundamental changes in circumstances are also one of the very meaningful regulations for businesses, offering additional solutions to solve problems in certain difficult circumstances, especially during the current Covid-19 pandemic. In summary, it can be seen that COVID-19 is a factor that has a profound impact on the implementation of business and commercial contracts. Through the above case, businesses need to learn lessons in the process of entering into and implementing contracts between parties. In addition to paying attention to the terms of the contract, subjects also need to take into account impact factors such as epidemics in order to have more appropriate agreements and regulations to avoid possible disputes born in the future.
𝐋𝐈𝐍𝐂𝐎𝐍 𝐋𝐀𝐖 𝐅𝐈𝐑𝐌 – 𝐒𝐮𝐬𝐭𝐚𝐢𝐧𝐚𝐛𝐥𝐞 𝐜𝐨𝐨𝐩𝐞𝐫𝐚𝐭𝐢𝐨𝐧
- In Hanoi: 5F Golden Tower, 275 Nguyen Trai str., Thanh Xuan Trung ward, Thanh Xuan dist., Hanoi.
- In HCMC: 272 Do Phap Thuan, An Phu ward, Thu Duc city, Ho Chi Minh city.
- Website: http://linconlaw.vn/
- Email: Lawyer@linconlaw.vn
- Facebook: https://www.facebook.com/Linconlawfirmm
- Linkedln: linkedin.com/in/lincon-law-firm-100b96201
- Hotline: +84.987.733.358