Is The 2019 Novel Coronavirus A Case Of Force Majeure Under Macau Law?

19 March, 2020

 

1. Introduction

 

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. Its proliferation was first detected in the city of Wuhan, Hubei Province, China, in mid-December 2019, and the virus subsequently spread to all provinces of China and to more than two dozen other countries in Asia, Europe, North America, and Oceania, which led to its designation on 30 January 2020 as a global health emergency by the World Health Organization. It has caused (as of 16 February 2020) 69,289 confirmed cases of infection, of which 68,509 were within mainland China[1], and is gravely affecting the global economy, essentially bringing the world’s second economy to a standstill.

 

Although Macau has been largely spared (for the time being) of the human toll of the virus, its economy, largely dependent on the inflow of Chinese tourists, will suffer greatly in the short term, with a visits drop of 80% and an estimate that the government-imposed two-week closure of casinos and public services could reduce Macau’s gaming revenue 5 to 15 percent this year[2] or more depending on how the situation evolves. The unpredictable nature of such outbreak and the important human and economic costs deriving from it inevitably leads to the question: what kind of legal consequences can this virus entail? If the severe economic downturn affect the fulfillment of contracts, could this be a case of force majeure, and could contracts be rescinded on this basis?

 

2. Force Majeure

 

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 vis-à-vis the good faith general clause and to the legal system itself – it would be the case of exceptional circumstances (called force majeure cases) where an unpredictable and irresistible impediment beyond the control of the parties renders the performance of a given contract absolutely impossible or, in Latin, vis major est cui humana infirmitas resistire non potest. In light of this definition vis-à-vis the consequences of the virus outbreak (namely the measures and restrictions taken by the Macau Government in articulation with the PRC regarding travel, work, and even assembly rights), the coronavirus outbreak may be considered as a case of force majeure.

 

The recourse to the 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 clear in its drafting, the parties shall 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 if the case at hand is a case in which the law provides for the termination of the contract under the force majeure clause.

 

Indeed, 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 only contract termination based on the law or on an agreement is allowed.

 

Furthermore, 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 the contract absolutely impossible[5]. Hence, if the law (or the contract) provides for the termination of a 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 not possible to use force majeure as a general clause for the termination contracts.

 

3. Impossibility of performance and change in the circumstances

 

The Macau law does provide, however, a solution in the case of impossibility of performance of the contract and default not attributable to the debtor – as a general rule, when the performance becomes impossible for reasons not attributable to the debtor, the obligation shall 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 very 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. It should be noted that, under the Civil Code, the creditor who has no justified interest in the partial fulfillment of the 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 the contract due to changing circumstances – if the circumstances in 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 to modify it according to equity judgments, provided that the requirements of the obligations assumed by it severely affects the principles good faith and is not covered by the risks inherent in the contract[10].

 

It should be noted, however, that the termination or modification of the contract due to changing circumstances is rarely applied by court decisions in Macau, since the obligations which ensue from the 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 only operates in the absence of legal rules that explicitly prescribe other ways to offset the damages[12]. In practical terms, the modification of the contract – e.g. by extending deadlines or offsetting payments – would be the most acceptable way to apply this solution.

 

It should be noted that the solutions presented above depend on the filing of a legal claim with the Macau courts – the associated costs and time spent with such legal suits would suggest that the possibility of prior negotiation (and eventual agreement) with the counterparty to any contract would be preferable.

 

4. Conclusion

 

Considering all the above scenarios, parties to a contract shall always strive to maintain to the extent possible the agreed terms and conditions.

 

If it is not possible, and given the tight framing of the law, parties shall consider the amicable renegotiation of the terms and conditions.

 

Failing the above, the solution would be to claim change in the circumstances, which is always difficult to prove in court or arbitration proceedings.

 

In our view, the recourse to force majeure is very difficult to consider since it does not exist as an autonomous legal concept – – except in the referred regime of public works contracts –under Macau law, without prejudice of the definitions that might exist in a specific contract.