- The ongoing Coronavirus (COVID-19) contagion is having an unprecedented impact on trade and commerce especially in developing coutr
- businesses may seek to rely on force majeure clauses or other contractual rights for relief from the performance of certain obligations due to the impact of the Coronavirus outbreak.
What we can do
- Review any commercial contracts you have with a connection with industries or countries affected by Coronavirus or the response to the virus, to consider whether you or your counterparty’s rights may be affected.
- If force majeure clauses have been included, consider whether the clauses might be triggered by or against you and seek advice.
The outbreak of Coronavirus is impacting global markets, trade and commerce. Quarantine and travel measures have begun to impact central global industries including manufacturing, and transport, and the supply chains supporting them.
Many organisations doing business with China (or other affected areas), or that are reliant on the operation of businesses in affected areas, are considering whether they (or any counterparties) are able to seek relief from the performance of contractual obligations and whether any relief sought is valid. One common mechanism to seek relief in such a situation is through reliance on a force majeure clause.
Force majeure clauses
Force majeure clauses are commonly included in commercial contracts in case certain defined circumstances prevent performance of contractual obligations. The term force majeure means “superior force”, and may encompass “acts of god” (such as earthquakes or tsunamis) and certain acts of man of a disruptive and unforeseeable nature, such as industrial action.
If one of the events listed in a force majeure clause occurs, the clause will usually prescribe what the parties must do next, e.g. a party claiming force majeure may have to notify its counterparty and take reasonable steps to mitigate the effect of the event impacting performance.
Importantly, in common law jurisdictions, force majeure is not implied as a matter of law, and express clauses are interpreted strictly. No doctrine of force majeure will apply outside of the contractual mechanism.
The position is different in many civil law systems where the substantive governing law of an agreement may allow for implication of force majeure mechanisms.
Certain civil law jurisdictions will also provide – through a doctrine of hardship found in the relevant contract law – for the variation and/or suspension of contractual obligations where performance of the obligation becomes more onerous as a function of unforeseen events outside the control or influence of either party.
Even where a governing law that does not provide for operation of a hardship doctrine has been chosen by the parties to the contract, arguments as to the mandatory application of local law may arise, including under the Rome Convention or Rome I Regulation, where relevant. Such arguments are often run by parties seeking to avoid performance with the aim of relying on a hardship doctrine where it might otherwise be excluded.
The terms of the UN Convention on the International Sale of Goods 1980 (CISG) may also be relevant where the seller and buyer of goods have their place of business in different CISG signatory countries (or if the rules of private international law apply the laws of a signatory country).
Does the force majeure clause in your contract capture the Coronavirus outbreak?
Notwithstanding that a court or tribunal may have sympathy for circumstances which have arisen and may cause disruption to the contractual relationship, the task required in common law jurisdictions is an analysis of which risks it was agreed would be borne by which commercial party. This requires careful consideration of the precise wording in the particular agreement.
Since the virus is a relatively new phenomenon, it is unlikely that any force majeure clauses would explicitly refer to the event of a Coronavirus outbreak. Accordingly, in order to rely on the clause, parties will need to consider the other events included, such as epidemics, actions by government agencies, or work stoppages.
In addition, force majeure clauses that are widely worded will not necessarily capture events such as the Coronavirus outbreak. The party relying on the clause will still likely need to prove that the force majeure event was not “reasonably contemplated” by the parties when making the contract, and that the event is “beyond the reasonable control” of the party seeking relief.
How can you seek / prevent relief for force majeure?
The onus is on the party seeking to rely on the force majeure clause to prove that the force majeure event has prevented, hindered, delayed or affected the performance of the contract (depending on the wording of the relevant clause).
In many common law jurisdictions, the closest possible analysis of the cause of the delay is at the heart of the matter. For example, is the cause of delay contagious disease, or is it subsequent circumstances as society responds such as supervening legislation passed by national legislatures intended to limit the economic impact of the virus, and which (if either) of these is within the scope of the clause? Whether performance under a contract can be suspended under a force majeure clause will always depend on the interpretation of the relevant provision, and should not be assumed.
Generally, if a force majeure event occurs, performance of certain obligations within the contract will be suspended for a specified period of time (for example, until the Coronavirus outbreak is contained or its consequences on the contract parties come to an end). In some cases, a suspension of obligations may not be viable and parties may seek to terminate the contract entirely. Contracts often provide for the parties to have the right to terminate after force majeure has been in place for a defined period of time.
Contracts also commonly outline notice periods and other steps that must be taken in the event that a party seeks to rely on a force majeure clause. Legal advice should be taken on the question of whether notification of the invoking of a force majeure mechanism is a contractual pre-condition or not. There is a wealth of Court of Appeal jurisprudence on this issue in England and Australia.
What if there is no force majeure clause?
The purpose of a force majeure clause is usually to provide for the termination or adaption of a contract if supervening events affect its performance. If there is no force majeure clause, or the impact of the Coronavirus outbreak is outside its scope, the parties may need to consider whether the contract has terminated by operation of law on any other basis, such as upon acceptance of a renunciation or “frustration”.
The doctrine of frustration applies where events occur that result in a situation fundamentally or radically different from what was in the contemplation of the parties when the contract was made. However, the doctrine of frustration is rarely available in practice and is unlikely to apply where performance is merely delayed. This is because courts and tribunals typically require the parties to demonstrate something akin to “impossibility” of performance in order to find that frustration has occurred.
Who has felt the impact?
In addition to the serious personal health concerns, the Coronavirus outbreak has had a severe impact on global trade and commerce. China (the main country impacted by the outbreak) has been hit hardest, with shutdowns and reduced demand for energy. However, other countries and organisations that rely on trade and commerce with China have also suffered.
In particular, the manufacturing and transport industries, and their supporting supply chains may feel the effect of restrictions constraining the movement and supply of goods and services.
All industries reliant upon a supply chain that involves China may face disruption, as will those that rely upon Chinese customers, including not just global tourism but many educational institutions across the Asia-Pacific, the UK and North America.
With insufficient cargo bookings from China, extensive rescheduling of container line shipping voyages make the availability of other routes and services unpredictable too.