Covid-19 and Force Majeure Defense under Korean Law
Posted on March 20, 2020
In the midst of the wide spread of the novel coronavirus (“Covid-19”), global businesses are being profoundly affected in unprecedented ways. Disruptive events such as customers cancelling orders, suppliers/contractors failing to fulfil contracts, and employers forced to lay off workforce are among those occurring in this time of the pandemic of Covid-19. In this article, a force majeure defense is discussed under Korean laws with key insights on contractual issues involving impossibility of performance, release from contractual obligations, and damage claims in the current Covid-19 environment.
While the term force majeure is used throughout the Civil Code of Korea (“Civil Code”), it does not necessarily have the same concept as used in other civil law countries such as France where the requirements to invoke a force majeure defense are expressly stated in the law (i.e., externality, unpredictability, and irresistibility). However, the Civil Code provides the following provisions under which a contractual party may still resort to its force majeure argument despite absences of a force majeure clause in a contract:
(1) In the event where a contractual party is prevented from performing its obligation due to such cause not attributable to both contractual parties, such party’s obligation will be released or discharged, and consequently the other party’s obligation will be released or discharged as well. That is, a contractual party may bring a force majeure defense by presenting the outbreak of Covid-19 and/or the resulting countermeasures/circumstances as the cause beyond the contractual parties’ control, and therefore attempt to be released from its obligation while such party may not seek the other party’s performance of obligation (for example, while a seller may be released from its obligation to deliver a product, it would be also barred from claiming for the buyer’s payment for the product); and,
(2) A contractual party may not claim for damages arising from the other party’s non-performance of a contractual obligation if such non-performance was not attributable to the other party’s willful act or negligence. In other words, a party invoking a force majeure defense may argue that its non-performance of contractual obligations is due to the outbreak of Covid-19 and/or the resulting countermeasures/circumstances beyond its reasonable control and therefore is not responsible for any damage caused by its non-performance.
These statutory rules, however, can be circumvented by way of a force majeure clause agreed by contractual parties. As such, if a contract contains a force majeure and other related clauses, such clauses should be carefully reviewed to determine the scope and the extent to which a force majeure may be claimed. Also, please note that employment contracts are subject to a different set of rules that would apply to a force majeure or other Act of God situations.
There are rare court cases in Korea that dealt with such force majeure issues in connection with a epidemic, and an uncertainty prevails as to how Korean courts will apply the statutory laws to actual Covid-19 cases. However, a reference can be made to a recent advisory issued by the Korean Ministry of Land, Infrastructure, and Transport (“MOLIT”). MOLIT has confirmed its interpretation of a standard form contract prepared by the government and widely used in the construction industry in Korea, in that the circumstances in response to the outbreak of Covid-19 not only constitute as a force majeure event not attributable to a contractor but also cause the contractor’s substantial hardship for its performance, which would justify the contractor’s request for extension of time (EOT) under the standard form contract.
If a contract includes a force majeure clause, that would be a basis for negotiation and possible resolution over those issues caused by Covid-19. Please be aware that even if no force majeure clause is in place in a contract governed by Korean laws, a contractual party grieved by Covid-19 may still be entitled to bring a force majeure defense under the statutory laws. In light of the MOLIT’s interpretation as discussed above, the government appears to be on the side of supporting those negatively affected by Covid-19. The courts may follow the same suit while each case will be considered with respect to different facts and contexts.
If you have any questions about the foregoing or any related matters, please complete and send the form below: