In the context of the ongoing COVID-19 pandemic and the attendant economic crisis, a number of leading UNIDROIT instruments may be of interest to a wide array of actors (e.g. domestic and international policymakers, legal professionals, development practitioners, etc.) currently facing serious challenges in a number of areas linked to law and development such as the administration of justice, the economy, and how to protect particularly vulnerable populations. The UNIDROIT instruments mentioned below may be particularly useful to address challenges regarding contractual disruptions and may also contribute to rebuild the economy in the post COVID-19 scenario, especially by improving access to credit.
- The UPICC
- The UNIDROIT/FAO/IFAD Legal Guide on Contract Farming
- Cape Town Convention and its Protocols
- The future UNIDROIT/FAO/IFAD Legal Guide on Agricultural Land Investment Contracts
UNIDROIT PRINCIPLES OF INTERNATIONAL COMMERCIAL CONTRACTS (UPICC)
In 1994, UNIDROIT approved and issued a private codification or “restatement” of international contract law entitled “UNIDROIT Principles of International Commercial Contracts” (henceforth, the Principles). Prepared by a group of independent experts from all the major legal systems and geo-political areas of the world, the Principles are now in their fourth edition, adopted in 2016, and have been translated into more than 20 languages. The Principles represent the only global instrument offering a set of comprehensive general rules applicable to different types of commercial contract, as opposed to other transnational law documents which are either geographically limited in origin or materially confined in scope to certain types of contract. One of the flagships of Unidroit, renowned among scholars and practitioners alike, the Principles have influenced national and international legislators and are being applied in practice by parties, arbitrators, and courts in a variety of ways (for extensive reference to case-law and bibliography on the Principles see the data-base Unilex)
In the context of the outbreak of COVID-19 and the resulting public health and economic crises, UNIDROIT has prepared guidance as to how the Principles could help address the main contractual disruptions caused by the pandemic directly as well as by the measures adopted as a consequence thereof (Note of the UNIDROIT Secretariat on the UNIDROIT Principles of International Commercial Contracts and the COVID-19 Health Crisis).
Although the pandemic may interfere with the ordinary execution of commercial contracts in many ways, the most obvious problems concern performance by at least one of the parties. Accordingly, it is necessary to analyse whether parties may invoke COVID-19 as an excuse for non-performance, and if so, based on which concepts and under what conditions; furthermore, the analysis also covers the situation, likely to be common in practice, where performance is still possible, but under the circumstances it has become substantially more difficult and/or onerous.
At the domestic level, such situations are normally discussed according to traditional concepts such as “frustration”, “act of God”, “impossibilité”, “Unmöglichkeit”, “imposibilidad en el cumplimiento”, or of “imprévision”, “Störung der Geschäftsgrundlage”, “rebus sic stantibus”, to mention but a few, and the solutions may vary considerably from country to country. The Unidroit Principles offer parties and adjudicators a modern, flexible and uniform approach, particularly in the provisions on “Force majeure” (Article 7.1.7) and “Hardship” (Articles 6.2.2 – 6.2.4), which have already been enormously influential in the domestic and international contexts.
The document issued by Unidroit aims to guide the reader through the process, leading her to ask appropriate questions and to consider the relevant facts and circumstances of each case. Naturally, solutions will vary according to the particular context of the pandemic in each jurisdiction and there is no one-size-fits-all approach. In particular, the document, considering the different ways the Principles have so far been used in practice, aims to:
- help parties use the Principles when implementing and interpreting their existing contracts or when drafting new ones in the times of the pandemic and its aftermath;
- assist courts and arbitral tribunals or other adjudicating bodies in deciding disputes arising out of such contracts; and
- provide legislators with a tool to modernise their contract law regulations, wherever necessary, or possibly even to adopt special rules for the present emergency situation.
The open nature of the Principles furnishes the parties and interpreters with a much-needed flexibility in such an extreme context, constituting an efficient tool to offer a nuanced solution that can help preserve valuable contracts for the parties. Especially in mid-to-long term contracts, and in view of the – apparently – temporary nature of the impediment, mechanisms that allow for an adequate renegotiation and proportionate allocation of losses could ultimately help preserve the contract and maximise value for the jurisdiction(s) involved.
Arguably, the world of contracts has never suffered such an unforeseeable, global, and intense interference. Extraordinary situations require extraordinary solutions, and there is a global need to ensure the economic value enshrined in commercial exchanges is not destroyed. The Principles offer state-of-the-art, best-practice tools to deal with the problem; a set of rules that result from years of study and analysis, with the participation and consensus of the most prominent academics and practitioners in the field, from civil law and common law traditions. This instrument is useful for everyone and offers a well-established, tested solution in the area of the law and the legal profession and the administration of justice more broadly.
CONTRACT FARMING & COVID-19
The UNIDROIT, the Food and Agriculture Organization of the United Nations (FAO) and the International Fund for Agricultural Development (IFAD) are currently collaborating to prepare a joint document providing guidance on the legal implications of the COVID-19 pandemic on contract farming operations.
Contract farming is a risk management tool based on an agreement between producers and contractors. At the heart of contract farming is an agricultural production contract between the parties: both agree in advance on the terms and conditions for the production (and marketing) of agricultural products. These conditions usually specify in advance the price to be paid to the producer or the way the price is to be determined, the quantity and quality of the product and the obligations related to delivery. The contract may also include more detailed information on how the production will be carried out or if any inputs, such as seeds, fertilizers, and technical advice, will be provided by the contractor.
In 2015, the UNIDROIT/FAO/IFAD Legal Guide on Contract Farming was adopted, providing guidance on the entire relationship, from negotiation to conclusion, including performance and possible breach or termination of the contract. It describes common contract terms and examines legal issues and critical problems that may arise under various practical situations, illustrating how they may be treated under different legal systems.
The COVID-19 pandemic has had both direct and indirect impacts on contract performance. The direct impacts of the pandemic could manifest through the contractor (or their employees) being infected with the virus, or a shortage of components being supplied from an area severely affected by the pandemic. Government measures that can affect contract performance include export bans for particular commodities or shutdown of economic activities. These impacts on contract performance have raised the question of whether contracting parties could invoke the COVID-19 pandemic, or any government measures taken as a result of the pandemic, as an excuse for non-performance or as grounds for requesting to renegotiate their contracts or exercise other remedies.
The document aims at identifying best practices and lessons learnt from laws and practice in order to strengthen the legal framework underpinning contract farming. It will include analysis, based on the UNIDROIT/FAO/IFAD Legal Guide on Contract Farming, on how contract clauses on force majeure, hardship/change of circumstances and remedies would apply in the current situation. It will also provide advice for the design or adaptation of contract farming arrangements to accommodate similar future pandemic situations and on what elements should be taken into consideration in negotiating and drafting such clauses. Guidance will be given on preparing more flexible contracts which consider the need for adjustments and for cooperation in overcoming difficulties in performing the contracts, with a view to promoting a fair balance of risks between the contracting parties.
CONVENTION ON INTERNATIONAL INTERESTS IN MOBILE EQUIPMENT AND ITS PROTOCOLS
The Convention on International Interests in Mobile Equipment (commonly referred to as the Cape Town Convention) is one of the most successful commercial law treaties ever adopted. It facilitates the efficient financing and leasing of mobile equipment by reducing risks for financiers and reduces the cost of credit in States that have ratified the treaty.
The Convention applies to specific categories of mobile equipment through Protocols. This includes the aviation sector (2001 Aircraft Protocol); the rail sector (2007 Luxembourg Rail Protocol); the space sector (2012 Space Protocol); and the mining, agriculture and construction (MAC) sectors (2019 MAC Protocol):
The Cape Town Convention has 81 Contracting States. The International Registry to the Aircraft Protocol has been used by financiers over one million times to register and thereby protect their loans and leases. Studies have shown that the adoption of the Aircraft Protocol by an average country could save it between 7.6 billion and 11.1 billion USD over a twenty-year period. Furthermore, an economic assessment of the recently concluded MAC Protocol estimates that over a ten-year period, the MAC Protocol may increase the stock of MAC equipment in developing countries by 90 billion USD. The MAC Protocol is predicted to have a positive impact of 23 billion USD on GDP in developing countries and of 7 billion USD in developed countries, for a total impact on GDP equivalent to 30 billion USD a year.
The global financial contraction caused by COVID-19 has reduced access to credit in many countries. Access to credit is crucial in times of crisis as it serves as a mechanism for companies to continue their operations and return to profitability. The industries to which the Cape Town Convention and its Protocols apply are central pillars of the economies in most countries and will be critical in lifting the global economy out of recession.
While the Aircraft Protocol has been broadly ratified, the Rail, Space and MAC Protocols are not yet widely used. States should be looking to ratify all Protocols to the Cape Town Convention now in order to facilitate access to credit for their industries during the economic recovery from COVID-19.
The unprecedented economic disruption caused by the COVID-19 pandemic in the Rail Sector is the focus of an article recently published by Mr Howard Rosen, Chairman of the Rail Working Group.
AGRICULTURAL LAND INVESTMENT CONTRACTS (ALIC) & COVID-19
In collaboration with FAO and IFAD, UNIDROIT is preparing a future Legal Guide on Agricultural Land Investment Contracts (ALIC Guide), to cater for the needs of legal counsels working on the leasing of agricultural land from States and local communities.
The ALIC Guide is the second international instrument to be developed under the ongoing partnership in the area of private law and agricultural development. It seeks to raise awareness of alternative investment models beyond the outright purchase of land that are consistent with the international principles and standards laid out in the Voluntary Guidelines on the Responsible Governance of Tenure of Land, Fisheries and Forests in the Context of National Food Security (VGGT), the CFS Principles for Responsible Investment in Agriculture and Food Systems (CFS-RAI Principles) and the UN Guiding Principles on Business and Human Rights. The ALIC Guide will help to ensure that leases of agricultural land are done responsibly, with necessary safeguards to protect human rights, livelihoods, food security, nutrition and the environment, and that stakeholders’ rights, including those of legitimate tenure right holders, are both protected and respected.
The Guide is addressed to parties and legal professionals engaging in the preparation, negotiation, implementation, and review of agricultural land investment contracts. The Guide may also serve as a useful reference for other actors, including legislators, policymakers, government officials, public authorities, judges, arbitrators, mediators, public-interest legal service organisations, community organisations, law societies and international development organisations.
COVID-19 has brought several new challenges while also exacerbating old problems for agricultural investment, including concerns that it will lead to new land grabbing cases, land conflicts, forced evictions and food insecurity. The pandemic may also interfere with the execution of commercial contracts in a number of ways. For example, the performance of contractual obligations adopted under an ALIC may no longer be possible due to illness or because the producer must abide by containment measures to avoid the spread of COVID-19. In these cases, contracting parties may find themselves asking whether they can invoke COVID-19, or any government measure taken in view of the pandemic, as an excuse for non-performance.
In other cases, while contractual performance may still be possible, COVID-19 may lead to circumstances which render contractual compliance excessively difficult and, in these cases, the contracting parties may wonder if it is possible to renegotiate their contractual arrangements. Moreover, an investor may decide to pull out of an agricultural land investment early due to a collapse in the market demand for agricultural products. In this case, what are the remedies for breach? In times of unpredictability, it becomes necessary to rethink traditional legal frameworks and the adaptability of certain traditional contractual concepts, such as “force majeure” and “hardship” clauses. It is therefore important to analyse whether contracting parties may invoke COVID-19 as an excuse for non-performance, and if so, based on which concepts and under what conditions.
The ALIC Guide may also provide guidance on how to adapt consultations with affected communities and legitimate tenure right holders. For instance, regarding the requirement of free, prior, informed consent (FPIC) which is especially important where indigenous peoples are involved, if for some reason it becomes difficult to organise in-person consultations, the ALIC Guide recommends that the investment planning phase should be paused, and governments should suspend procedures for authorising new agricultural land investments. This may occur when governments adopt lockdown measures due to a global or regional pandemic. Under these circumstances, future contracting parties may consider using other means to seek agreement of communities, for example, through digital technology, however, this practice may be controversial due to a lack of internet access or gaps in digital literacy. The safety of the community should prevail in times of health crisis.