The COVID-19 pandemic has given rise to many questions regarding force majeure and e-signatures. In particular, parties to commercial contracts are keen to know (i) whether they can be released from liabilities by relying on a force majeure clause and (ii) whether they can execute contracts by electronic signatures instead of the traditional "wet ink" signatures which have become almost impossible in the context of the COVID-19 pandemic.
- Force majeure
A force majeure event under Vietnamese law
Vietnamese law defines force majeure in Article 156.1 of the Civil Code as "an event which occurs in an objective manner which is not foreseeable and which is not able to be remedied by all possible necessary and admissible measures being taken".
For contracts that have been entered into prior to the COVID-19 pandemic, affected parties will have to prove that the pandemic satisfies all three components of a force majeure event in order to rely on this statutory right. The first two can be easily met – the corona virus is an objective event that cannot be foreseen. However, the trickiest part for parties would be the last component – whether the party has taken all reasonable measures to prevent the effect of the pandemic on their performance of the contract. This is a subjective test, and will need to be analyzed on a case-by-case basis taking actual facts into account.
- The effect of a force majeure event
The effect of a force majeure event is that the affected party who fails to perform its obligation under a contract will be released from liabilities. The relevant provisions are Article 351.2 of the Civil Code 2015 and Article 294.1 of the Commercial Law 2005 as quoted below:
Article 351.2 of the Civil Code 2015:
Where an obligor fails to perform correctly an obligation due to a force majeure event, it shall not have civil liability unless otherwise agreed or otherwise provided by law.
Article 294.1 of the Commercial Law 2005:
A defaulting party will be exempt from liability upon occurrence of a force majeure event.
The wording of Article 294.1 of the Commercial Law 2005 does not explicitly require a causal link between a force majeure event and the default of the affected party. However, logically speaking, to be released from liabilities, the fault should be caused by a force majeure event. It is also worth noting that according to the Commercial Law 2005, in order to be released from liabilities, the affected party is required to (i) immediately notify the other party in writing of the force majeure event and the potential consequences of such event; and (ii) promptly notify the other party when the force majeure event ceases to exist.
Regarding the possibility to terminate a contract, neither the Civil Code 2015 nor the Commercial Law 2005 allows parties to terminate a contract due to a force majeure event. However, the Commercial Law 2005 allows an extension of the deadline for the performance of a contract, and a refusal to perform a contract in the event of a prolonged event. The affected party who refuses to perform the contract due to a prolonged force majeure event must notify the other party of its refusal to perform the contract within ten days from the expiry date of the extended deadline for performance of the affected party's obligations and before the other party commences to perform its contractual obligations.
- Alternative approaches for affected party due to COVID-19
Besides a force majeure event, an alternative approach for parties to consider in the context of the COVID-19 pandemic is fundamental changes clauses provided by Article 420 of the Civil Code 2015. Article 420 the performance of a contract under a fundamental change of conditions, which is quite similar to hardship clauses in other civil jurisdictions. Specifically, a circumstance is deemed fundamentally changed when the following elements are met:
- The change occurs due to objective reasons after the execution of the contract. The COVID-19 pandemic would seem, prima facie, to satisfy this element;
- At the time of contract execution, the parties could not foresee any change in circumstances. Contracts executed prior to the COVID-19 pandemic would also seem to satisfy this element;
- There is such a fundamental change in circumstances that if the parties had known in advance, they would not have executed the contract, or might have executed it but with completely different content. This element is likely to be satisfied as well;
- The continued performance of the contract without an amendment would cause serious damage to one party. The satisfaction of this element would depend on specific facts of each case; and
- The affected party has taken all necessary measures in its capability in accordance with the nature of the contract but it still cannot prevent, mitigate the impact on its interest. The satisfaction of this element would also depend on specific facts of each case.
A key difference between a force majeure event and a fundamental change, which is also what might make proving the COVID-19 pandemic to be a fundamental change easier than a force majeure event, is that, with respect to the former, affected parties need to prove that the contractual performance is impossible while, for the latter, affected parties only need to prove that the performance of the contract is possible but with substantial disadvantages to the affected party.
In the event of a fundamental change regulated by Article 420, affected parties may request the other party to re-negotiate the contract within a reasonable period of time. Where the parties to the contract cannot agree on amendment to the contract as such, either party may request a court to:
- terminate the contract at a specified time; or
- amend the contract to balance the rights and benefits of the parties;
Of note, the court is only permitted to decide on the amendment to the contract where the termination of such contract would cause loss and damages greater than the costs for the performance of the contract when amended.
- Rewriting force majeure clauses
Proving any pandemic, the COVID-19 as analyzed above for an example, is onerous and requires a lot of efforts from affected parties while the outcome is unpredictable as ever. That is why we have seen plenty of new drafting around force majeure terms expressly referencing to pandemic in general and the COVID-19 in particular, as below for an example, which is highly recommended to be incorporated into contracts to be entered into.
"Force Majeure Event means an event that wholly or partly prevents or delays the performance of obligations and/or the adherence to deadlines or time periods arising under this Agreement and shall include, without limitation, an act of God, explosion, accident, fire, lighting, earthquake, storms, flood or similar cataclysmic occurrence; an act of war , blockade, insurrection, lockouts, or other labor difficulties; restrictions or restraints imposed by law or by rule, regulations or order of any deferral, state or local government, governmental agency or quasi-governmental agency; a pandemic; COVID-19 (Coronavirus)-related events, including, by way of example but not limitation, quarantines, third party vendor shut downs, business shut downs, and travel restrictions; action or failure to act of any federal, state or local government, governmental agency or quasi-governmental agency; and interruption or other loss of utilities due to causes beyond the reasonable control of the Purchaser."
Under the Law on Electronic Transactions 2005, an e-signature is defined as being created in the form of words, script, numerals, symbols, sounds or in other forms by electronic means, logically attached or associated with a data massage, and being capable of identifying the person who has signed the data message, and being capable of identifying the consent of that signatory to the contents of the signed data message.
The law also provides that parties to a transaction have the right to agree to use or not to use an e-signature to execute data messages (e.g. a soft copy of a contract exchanged via emails) unless otherwise regulated by the law. In the context of the COVID-19 pandemic, it is advisable that parties explicitly agree on the e-signatures having the same validity of "wet ink" signatures. Internationally we have seen new drafting around e-signatures as below, for an example:
"The words "execution," "signed," "signature," and words of like import in this Agreement shall be deemed to include electronic signatures which shall be of the same legal effect, validity or enforceability as a manually executed signature, to the extent and as provided for in all applicable law."
Notwithstanding the agreement of the parties on the validity of e-signatures, according to Article 24.1 of the Law on Electronic Transactions, e-signatures must satisfy the following conditions in order to have same legal effect with a "wet ink" signatures:
- The method of creating the e-signatures permit the identification of the signatory and to verify his/her approval of the contents of the data message; and
- Such method is sufficiently reliable and appropriate for the purposes for which the data message was originated and exchanged.
In addition, Article 21.2 of Law on Electronic Transactions also generally requires e-signatures to satisfy the following "safety" conditions:
- The data used to create an e-signature is owned only by the signatory;
- The data used to create an e-signature is under the control of only the signatory at the time of signing;
- All changes to an e-signature after the time of signing is detectable; and
- All changes to the contents of the data message after the time of signing is detectable
As all these conditions are vague and may give rise to uncertainty, a practical solution is to resort to third-party certification service providers. Enterprises/individuals can register their e-signatures with such service providers and will receive a certificate of validity of the respective e-signatures.
All analysis aside however, Vietnam remains an ‘old school' jurisdiction for the time being and, where possible to obtain wet signatures on contracts and contract related documents such as formal notices it remains advisable to do so.
For more information, please contact Giles at GTCooper@duanemorris.com or Dang Ngoc Huyen at HDang@@duanemorris.com or any of the lawyers in our office listing. Giles is Chairman of Duane Morris Vietnam LLC and branch director of Duane Morris' HCMC office.
Originally published 30 April, 2020
Disclaimer: This Alert has been prepared and published for informational purposes only and is not offered, nor should be construed, as legal advice. For more information, please see the firm's full disclaimer.