In just a few years, the world has been struck by various forms of chaos. The COVID-19 pandemic hit in 2020, forcing many countries to take unprecedented measures, such as establishing quarantine and immigration restrictions. The Russia-Ukraine war earlier this year has had a significant impact on the economic activities of countries related to Russia due to the rapid rise of raw material and oil prices, raising concerns that the war might lead to a global economic depression.
In particular, out of international commercial contracts, contracts for the cross-border sale of international goods were affected by changes in the international politics. For example, the EU's economic sanctions caused by the Russia-Ukraine war were implemented in the form of a ban on imports and exports with Russia, a ban on transactions, trade restrictions with tariffs and other measures, and a ban on operating aircraft and ships in areas affected by the sanctions. Numerous disputes have resulted from the inevitable failure of those affected by the sanctions to perform their obligations, and are in the process of being resolved.
It is highly improbable that debtors will willingly bear default responsibility if the difficulties of performing obligations were due to such economic sanctions. In this situation, the first grounds for immunity that a debtor can think of is "force majeure." Force majeure means unforeseeable reasons beyond the control of parties to agreements, such as pandemics, war, etc. Although countries may stipulate the matter in different degrees, most countries generally give contracting parties room for exemption from obligations if force majeure is recognized.
The maritime section of the Commercial Act of Korea also stipulates reasons for a carrier's exemption due to force majeure. Article 796 Subparagraph 2 of the Commercial Act stipulates "force majeure" as one of the reasons that a carrier may be exempted from damages related to shipment. Then the key questions are whether the EU's economic sanctions against Russia fall under force majeure under the Commercial Act of Korea, which enables the contracting parties to claim exemption, and how contracting parties should prepare for these risks in cases where the applicable law for maritime transport contracts is stipulated as the Korean law.
1. Force Majeure and the Stance of Supreme Court of Korea
The Supreme Court of Korea rendered judgement that "force majeure is recognized only when the cause of the party's failure to fulfill its obligation occurs outside the control of the party and that it should be recognized that such cause was not foreseeable and preventable with every means." In light of this ruling, it can be said that for force majeure to be recognized by the courts of Korea, (i) the cause must occur out of the control of a party and, (ii) there shall not be foreseeability and preventability.
2. Element 1: The Cause Must Be Out of the Control of the Party
According to Element 1, for force majeure to be recognized, the cause of a party's failure to perform obligations must be due to the occurrence of an exceptional situation beyond the control of the affected party.
In this regard, although the Supreme Court of Korea does recognize the possibility of excusing construction contract parties from penalties for the delay in performance in the event of force majeure, such as natural disasters and sudden changes equivalent to natural disasters, it ruled that the "Court does not recognize the foreign exchange crisis and subsequent issues, such as the delay and defects in the supply of materials, as force majeure events. With the exception of extraordinary situations on a similar scale to natural disasters, the party in question may not be relieved from the penalty for the delay in performance (Supreme Court Decision 2001Da1386 rendered on September 4, 2002)."
In addition, in a case where the plaintiff signed an officetel distribution contract, but wanted to terminate the contract after experiencing occupancy delays, the defendant argued that the delay in construction was caused by a strike at the material supplier—an event out of the defendant's control. However, the court ruled that such circumstances cannot be recognized as force majeure as both the supply and management of materials are part of the construction operator's responsibilities, and the defendant is obligated to search for a substitute (Seoul Central District Court Decision 2018Gahap529238 rendered on May 22, 2019).
In other words, Korean courts presuppose the contracting party to have the responsibility to fulfill their obligations despite difficulties caused by external factors such as the IMF crisis and a third party's strike. Therefore, the courts have not easily recognized causes for the failure to fulfill obligations as a circumstance outside the control of the contracting party.
On the other hand, in a case where the defendant held the plaintiff responsible for breach of the contract when the plaintiff, who imports anthracite from a Chinese company, notified the defendant of the impossibility of performance due to force majeure after experiencing difficulties fulfilling the contract due to the North Korean government's ban on anthracite exports, one of the lower courts ruled that the "North Korea maintains a specific political system which makes it easy for trades to be suspended due to unpredictable and uncontrollable reasons. As this is out the plaintiff's control, the plaintiff is not liable to pay compensation for the delay." (Refer to the Uijeongbu District Court Decision 2010Gahap4018 rendered on October 14, 2010.)
3. Element 2: Foreseeability & Preventability
Element 2 stipulates that for force majeure to be recognized, the cause of a party's failure to perform an obligation must be an event or situation that is unpredictable at the time that the agreement is signed and that the party cannot avoid or overcome the impact of the event.
With regard to the said element, in a case regarding a typhoon-induced ship drifting, the Supreme Court of Korea denied relief due to force majeure on grounds that "the party could have predicted that the ship's anchor cables, etc., could be twined around the ship's screws due to strong winds and waves and could flow toward farms after losing its mobility." (Supreme Court of Korea Decision 90Da 12588 rendered on January 29, 1991)
In addition, in a case where a business entity subject to a mask supply contract failed to fulfil its obligation due to mask scarcity and insisted that their failure to perform was caused by a force majeure event, the court denied immunity due to force majeure by recognizing the foreseeability of the event, as the mask supplier could have fully predicted the increase in mask demand (Seoul Central Court Decision rendered on June 16, 2010, 2009Gahap145966).
4. Conclusion
South Korean courts have provided relief of the performance of obligations under the force majeure clause in a reserved manner. Even in unexceptional situations such as bad weather, or the outbreak of a pandemic, the courts do not acknowledge force majeure events if a party can perform its agreement by taking a different route or if there were any indicators that signaled the coming of such situations.
Although there may be differences depending on the specific details of cases, when considering the court's previous stance on force majeure, one can expect the courts to be very limited recognizing force majeure events and excusing carriers from their default due to sanctions against Russia. Although the carrier will not be able to use the routes determined in the agreement due to economic sanctions, the courts of South Korea may render that the carrier has an obligation to fulfill its obligation by drawing up alternative plans immediately after the event.
Amid the strengthened sanctions against Russia since the Russia-Ukraine war, the parties to the marine shipment agreements might face various types of risks, including sudden restrictions on the use of terminals, refusal of transshipment approval, etc., which could not be expected at the time of signing the contracts. In order to prepare for these unpredictable risks, each party needs to consider preemptively constituting force majeure clauses in its favor. Parties to an agreement should determine details to meet each party's needs, such as how to define force majeure events and whether to stipulate force majeure clauses as restricted enumeration clauses or simple exemplary clauses before drawing up an agreement.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
