Introduction
Force majeure
Impossibility of performance and change in circumstances
Comment
The 2019 novel coronavirus (2019-nCoV or Covid-19), also known as the Wuhan coronavirus, is a contagious virus which causes acute respiratory disease and caught China and the world by surprise. It was first detected in the city of Wuhan, Hubei Province, China, in mid-December 2019 and subsequently spread to all Chinese provinces and more than 24 other countries in Asia, Europe, North America and Oceania, which led the World Health Organisation to designate it as a global health emergency on 30 January 2020. As of 16 February 2020, there were 69,289 confirmed cases of infection, of which 68,509 were within mainland China.(1) Today, the virus is still having a grave effect on the global economy, having essentially brought it to a standstill.
Although Macau has largely been spared of the human toll of the virus to date, the region's economy, which is largely dependent on the inflow of Chinese tourists, will suffer greatly in the short term, with the number of visitors dropping by 80%. Further, the government-imposed two-week closure of casinos and public services is estimated to reduce Macau's 2020 gaming revenue by between 5% and 15% or more, depending on how the situation evolves.(2) The unpredictable nature of the coronavirus outbreak and the important human and economic costs deriving therefrom have led to inevitable questions, such as what kind of legal consequences can this virus entail? Further, if the severe economic downturn affects the fulfilment of contracts, could this be a case of force majeure, and could contracts be rescinded on this basis?
One of the most fundamental principles of civil law is the pacta sunt servanda principle, based on good faith, which determines that all contracts concluded within the limits of the law must be punctually fulfilled.(3) However, there are situations where the strict application of this principle would lead to intolerable results with regard to the good faith general clause and the legal system itself – namely, cases of exceptional circumstances (force majeure) where an unpredictable and irresistible impediment beyond the control of the parties renders the performance of a given contract absolutely impossible. In light of this definition, and in view of the consequences of the virus outbreak (ie, the measures and restrictions taken by the Macau government in conjunction with China regarding travel, work and even assembly rights), the coronavirus outbreak may be considered as case of force majeure.
Recourse to a force majeure clause can take place under a specific contract (depending on whether the parties have inserted a specific clause to that effect) or under the general stipulations of the law, such as Decree-Law 74/99/M (legal regime of public works contracts). In the former case, and provided that the force majeure clause is clearly drafted, the parties must follow the stipulations and remedies of the contract, under the mandatory stipulations of the law. In the latter case, the parties will have to confirm whether the case at hand is a case in which the law provides for the termination of the contract under the force majeure clause.
The mention of force majeure in Macau law is manifold.(4) However, and without prejudice to the specific case of the abovementioned Decree-Law 74/99/M, it does not exist as a general clause for termination under Macau law, which determines that contracts can be terminated based only on the law or an agreement.
Further, except in the referred regime of public works contracts (in which 'force majeure' is defined as the natural fact or situation, unpredictable and irresistible, the effects of which are produced regardless of the will or personal circumstances of the contractor, that affect the contract works, and which expressly includes major epidemics), the law does not provide a general definition of this concept. It must therefore be framed with recourse to the jurisprudence and legal doctrine, which classifies 'force majeure' as an unpredictable and unavoidable fact which renders the execution of a contract absolutely impossible.(5) Hence, if the law (or contract) provides for the termination of the contract in a specific case of force majeure, and if such situation falls under the definition of the law, the agreement may be terminated. Otherwise, it is impossible to use force majeure as a general clause for the termination of contracts.
Impossibility of performance and change in circumstances
However, Macau law does provide a solution in the case of impossibility of performance of a contract and default not attributable to the debtor. As a general rule, when performance becomes impossible for reasons not attributable to the debtor, the obligation will be extinguished.(6) If the performance is only partially impossible, the debtor exonerates itself by providing what is possible, in which case the consideration to which the other party is bound must be proportionally reduced.(7) Finally, if the impossibility is temporary, the debtor is not responsible for the delay in performance.(8)
The applicability of the stipulations above therefore depends on the concrete impossibility of performance. With the exception of specific cases, the impossibility of performance resulting from the consequences of the coronavirus outbreak would more accurately be classified as partial or temporary impossibility, depending on the situation. Notably, under the Civil Code, a creditor which has no justified interest in the partial fulfilment of an obligation may terminate the contract.(9)
Another solution which could be envisaged in light of the consequences of the outbreak would be the termination or modification of a contract due to changing circumstances. If the circumstances on which the parties based the decision to conclude a contract have undergone an abnormal change, the Civil Code stipulates that the injured party has the right to terminate the contract or modify it according to equity judgments, provided that the requirements of the obligations assumed by it severely affect the principle of good faith and are not covered by the risks inherent in the contract.(10)
However, the termination or modification of a contract due to changing circumstances is rarely applied by the Macau courts, since the obligations which ensue from a contract must gravely breach the principle of good faith and must not arise from the normal course of the business at hand.(11) The requisite of grave breach to the principle of good faith has therefore been interpreted by the courts in a narrow sense, meaning that the changing circumstances solution operates only in the absence of legal rules that explicitly prescribe other ways to offset the damages.(12) In practical terms, the modification of a contract (eg, by extending deadlines or offsetting payments) would be the most acceptable way to apply this solution.
The solutions presented above depend on the filing of a legal claim with the Macau courts – the costs and time spent on such legal suits would suggest that the possibility of prior negotiation (and eventual agreement) with the counterparty to any contract would be preferable.
Considering all of the above scenarios, parties to a contract must always strive to maintain to the extent possible the agreed terms and conditions. If this is not possible, and given the tight framing of the law, parties must consider the amicable renegotiation of the terms and conditions.
Failing the above, the solution would be to claim a change in circumstances, which is always difficult to prove in court or arbitration proceedings.
The recourse to force majeure is difficult to consider since it does not exist as an autonomous legal concept under Macau law – except in the referred regime of public works contracts – without prejudice of the definitions that might exist in a specific contract.
For further information on this topic please contact Pedro Cortés or José Filipe Salreta at Rato, Ling, Lei & Cortés Advogados by telephone (+853 2856 2322) or email ([email protected] or [email protected]). The Rato, Ling, Lei & Cortés Advogados website can be accessed at www.lektou.com.
Endnotes
(1) Further information is available here.
(2) Further information is available here.
(3) See Article 400, Paragraph 1 of the Civil Code.
(4) As an example, see Articles 313, 498, 502, 988, 1034 and 1942 of the Civil Code and Articles 51, 117, 587, 739, 770, 771, 813, 844, 1187 and 1259 of the Commercial Code.
(5) Supreme Judicial Court decision of 18 December 2013, File 3186/08.2TBVCT.G1.S1, available here.
(6) See Article 779, Paragraph 1 of the Civil Code.
(7) See Article 782, Paragraph 1 of the Civil Code.
(8) See Article 781, Paragraph 1 of the Civil Code.
(9) See Article 782, Paragraph 2 of the Civil Code.
(10) See Article 431, Paragraph 1 of the Civil Code.
(11) Second Instance Court Decision 699/2013, 25 June 2015, available here.
(12) Second Instance Court Decision 114/2004, 22 July 2004, available here.
