The Legal Setting – Force majeure clauses, Sphere of control and § 36 Swedish Contracts Act

Applying the contract

The fundamental principle under Swedish law is that agreements shall be honored. As such, a contracting party can only in exceptional cases be relieved from its responsibility to perform under the contract.

Contracts commonly contain so-called “force majeure” clauses, pursuant to which a contracting party, at least temporarily, may be relieved from his duties to perform under the contract due to an occurrence/circumstance beyond his sphere of control, which neither could have been foreseen when the contract was entered into, nor can it be overcome by the party with reasonable measures.

It is important to keep in mind that this is so-called dispositive law. That means that contracting parties may decide in their contract if and when force majeure relief shall apply. Hence, the parties can e.g. describe in the force majeure clause specific circumstances which shall constitute a force majeure event. It is common to specify war, natural disasters and union blockades. Less common is specifying general public sickness, epidemics or pandemics, even though it does exist (see e.g. the ICC Force Majeure Clause of 2003, and the widely used Swedish standard construction contracts AB 04 and ABT 06, Chapter 4 § 3, item 3). Consequently, a lot depends on how the force majeure clause is drafted in the individual case.

If and when an extraordinary event occurs which affects/hinders a party’s ability to perform under its contract, the party should aim to as soon as possible inform his contracting party about the situation. Often enough contracts contain provisions on notifications and how messages shall be sent, which need to be complied with in order to avoid losing the right to invoke force majeure. One should also keep in mind that force majeure relief is, for the most part, only temporary. Consequently, as soon as the situation improves, and there no longer is anything preventing performance under the contract, the ground for force majeure relief also ceases. If a contracting party waits with starting back up, that may be considered an unfounded withholding of performance, i.e. a contractual breach. Considering this, a party needs to continuously assess what options that are available to overcome, or at least mitigate, the negative effects of the unforeseen event for as long as it exists.

Dispositive legal provisions

In the absence of force majeure clauses, it is more uncertain to what degree dispositive legal provisions will supplement the parties’ contract. The Swedish Sale of Goods Act (SFS 1990:931) (“SGA“) has certain provisions containing grounds for relief similar to force majeure (e.g. § 23 SGA concerning the seller’s relief from performance, § 27 SGA concerning the seller’s relief from liability for delay, § 40 SGA concerning the seller’s relief from liability for defective goods, §§ 50 and 53 SGA concerning the purchaser’s relief from its obligation to facilitate the transaction, and § 57 SGA concerning the purchaser’s relief from liability due to delay with payment). The provisions function in a somewhat different manner and serve somewhat different purposes. That said, what characterizes all of them is that it is a matter of fairly extraordinary situations beyond the sphere of control of the party.

In order to avoid liability for damages due to delay, (a) there needs to be a hindrance, (b) the hindrance shall be beyond the party’s sphere of control, (c) the party must be able to show that it could not have foreseen the hindrance, and (d) the party must be able to show that it could not have overcome or avoid the hindrance, or mitigate its effects. Looking to the Convention on the International Sale of Goods (CISG), it contains a similar provision in Article 79. The threshold in order to avoid liability for damages is thus set high.

The modification of contracts pursuant to § 36 the Swedish Contracts Act

In addition to the above mentioned grounds for relief of performance, one may also consider the possibility to modify unconscionable contractual provisions pursuant to § 36 of the Swedish Contracts Act (SFS 1915:218) which may come into play due to “later occurrences” (cf. similarities in Chapter 2 § 25 of the Partnership and Non-registered partnership Act (SFS 1980:1102), § 35 in the Commissions Act (SFS 2009:865) and § 26 in the Commercial Agency Act (SFS 1991:351)). The provision in § 36 of the Contracts Act has been perceived as non-applicable in commercial relationships, but this is not a universal legal truth. Much like grounds for force majeure relief, its applicability presupposes the existence of fairly extraordinary circumstances, and as an outset professional parties are presumed to have considered certain risks when entering into a contract. This notwithstanding, commercial contracts can no doubt be subject to modifications. Circumstances which may be relevant in the assessment of whether grounds exist for the modification of a contractual provision (e.g. the obligation to deliver or pay) are e.g. the relative strength of the parties, the term of the contract (whereas long-term contracts may potentially be less difficult to modify than short-term contracts), the foreseeability of the later occurrence, the possibility to obtain an insurance to cover the effects of the occurrence, the possibility to mitigate effects of the occurrence, how burdensome a fulfilment of the contract would be in relation to the counterparty’s interest in obtaining the contractual performance, and what is a reasonable allocation of risk between the parties in order to equalize a severe imbalance that has arisen between the parties.

Again, it is an assessment of all circumstances at hand, especially with consideration of how the contractual provision (which the party wishes to have modified) in practice hit the party as a result of the later occurrence. In this respect, one must also consider to what extent other provisions in the parties’ contract already regulate changed circumstances (e.g. indexation and exchange rate fluctuations). Essentially, as is the case for force majeure grounds, the parties are free to contract on how future (unknown) circumstances shall be handled by and between the parties, whereby the applicability of § 36 of the Contracts Act may be further limited.

Concluding remarks – Covid-19

Even though Covid-19 no doubt has had and will continue to have negative effects on industry and commerce and society as a whole, it is not certain that it presently can qualify as a force majeure event in itself. If a force majeure clause contains reference to epidemics or pandemics, force majeure relief may potentially apply, provided that the Covid-19 outbreak has caused an actual hindrance of the performance under the contract. If no reference is made to epidemics or pandemics, or if the contract does not at all include a force majeure clause, it is more uncertain whether the party has grounds for relief of performance.

Regardless of whether one refers to force majeure grounds or modifications pursuant to § 36 of the Contracts Act, it boils down to (i) identifying what the contractual obligation consists of, (ii) determining whether the effects of Covid-19 (e.g. government issued orders) prevents or significantly impedes that performance, (iii) assess whether this could have been foreseen by the contractual party, and (iv) assess whether the party could have and can overcome the hindrance or mitigate its effects in any way.

An assessment needs to be made in the individual case, with consideration of the contract, all other circumstances, and the party’s actual situation and its conditions. After that, one can determine what courses of action that are available.

Get in touch with us in order to get legal advice relevant for your situation, and together we can identify your options in order to deal with a strenuous situation in the best manner possible.