The novel coronavirus (COVID-19) and force majeure
3 April 2020
The World Health Organisation (WHO) has declared the outbreak of COVID-19 as a “global health emergency” with it having already overtaken the total number of cases of SARS, with new cases being reported daily.
WHO has appealed for $675,000,000 to boost the international measures to counter COVID-19 through better prevention measures and speedier diagnosis. The majority of cases have been reported in China where an estimated 45,000,000 people have been placed in lockdown. Notwithstanding the current concentration of COVID-19 cases in China, it is having a worldwide impact having spread to at least 24 countries so far.
Clearly, the scale and urgency of the disaster calls for decisive action. What is unclear though is the effect on businesses and how it may impact upon commercial agreements.
COVID-19 may cause a business to breach its contractual obligations or suffer loss because others cannot meet their contractual obligations. Clearly, the outbreak will have substantial business impact (for example, travel restrictions imposed to and from China and major ports are being locked down). Where contracts are not fulfilled, the affected party could bring a potential claim (for damages for breach of contract). However, such a claim may be defeated by the inclusion of an appropriate force majeure clause.
Consequently, it is important that businesses which might be affected by COVID-19, especially those that operate in China, carefully review all material commercial agreements and evaluate their risk profiles in connection with COVID-19. It has been reported that a liquefied natural gas buyer based in China has already tried to terminate their contract with Total by serving a force majeure notice on Total (which Total has rejected). This will undoubtedly be one of many attempts by businesses seeking to rely on force majeure clauses in their contracts.
What is force majeure?
Force majeure has no recognised meaning in English law. It is a matter of contract whether a force majeure clause is triggered will depend on how that clause is interpreted. Chinese law, rather generally, defines force majeure as “objective circumstances which are unforeseeable, unavoidable and insurmountable”. This is likely to include epidemics and governmental measures.
When looking at force majeure provisions, the first step is to look at how the force majeure event is defined. Usually this will be a long list, including: acts of God, flood, drought, earthquake or other natural disaster; nuclear, chemical or biological contamination; terrorist attack, civil war, civil commotion or riots; and action taken by a government or public authority. Sometimes it may also include non-performance by suppliers or subcontractors as well as interruption or failure of utility services.
In light of COVID-19, businesses need to know if the force majeure definition includes ‘epidemic or pandemic or other civil emergency’ (or any other analogous phrase). In the absence of this, it may be the case that a business can rely on action taken by a government or public authority (for example, a government announcement on curtailment of travel may prevent a business from fulfilling its contractual obligations). The unprecedented lockdown taking place across China may be sufficient to amount to a force majeure event, but this would be subject to contractual interpretation.
Foreseeability and control
Some commercial agreements expressly exclude events that that were in existence or in contemplation at the time the contract was entered into. Other commercial agreements require that the force majeure event must be unforeseeable. This may be of specific concern if a contract was entered into at the outset of the COVID-19 outbreak. In this scenario, if a contract was entered into without consideration of the impact of COVID-19, it could be argued that the party seeking to rely on the force majeure event should have made contingency plans.
Prevent, hinder and delay
The importance of the wording of the force majeure clause cannot be overstated. If it refers to performance being “delayed” or “hindered”, it means that a party can rely on a force majeure event if performance is substantially more onerous (although a mere increase in the cost of performing the contract is unlikely to be enough). However, if the clause requires the force majeure event to “prevent” performance, it usually means that a party will need to demonstrate that performance is legally or physically impossible, not just difficult or unprofitable. In each case, the level of disruption required to secure relief will depend on the wording of the commercial contract.
Force majeure certificate
Some contracts may require that a force majeure certificate is obtained before the clause can be relied upon (these are often obtained from chambers of commerce and industry). With this in mind it is notable that on 30 January 2020, the China Council for the Prevention of International Trade (CCPIT) introduced an online platform where local Chinese companies can apply for a force majeure certificate if they are unable to fulfil their obligations under international contracts. As you would expect, even where a certificate is not required, it would assist in any dispute by showing that the outbreak of COVID-19 is likely a force majeure event from a factual perspective.
To ensure that contractual rights are protected, notice of the force majeure event and resulting potential non-performance should be served on the other party as soon as practicable. Some commercial agreements may include specific requirements on the party trying to rely on the force majeure in terms of timing.
Some clauses will also allow a party to terminate the contract if force majeure events continue for a prescribed period of time. This type of clause seeks to prevent valuable assets and personnel being tied up for long periods without generating revenue.
As the burden of proof rests with the contractual party who is seeking to rely on the force majeure clause, it is important that the notice makes it clear that non-performance was due to the force majeure event in question (and that sufficient evidence is available to defend the position if it is contested). Having a force majeure certificate may assist with proving that a force majeure event has occurred.
It is also important not to rely on insurance without checking the relevant policy. Whilst some insurance policies may pay out, business interruption insurance may exclude or limit liability if the COVID-19 outbreak becomes a pandemic. It is common for insurance policies to have exclusions around pandemics and epidemics due to the prevalence of flu-type outbreaks in the last ten years. Businesses should check their cover as soon as possible.
When considering whether a force majeure event has occurred, the governing law clause in the contract must be checked. Whilst the concept of force majeure is not recognised in English law, other jurisdictions do not follow the same approach and this may have an impact on whether a force majeure event has occurred even if it is not covered by the contract. For example, in the Netherlands there is a recognised principle of force majeure which is contained in the Dutch Civil Code.
Although the UK is currently considered by the National Health Service to be at moderate risk from COVID-19, businesses operating in China, or where they have suppliers or customers based in China (or any other high risk areas affected by COVID-19), should ensure they have robust business continuity plans in place should the COVID-19 crisis affect them. Businesses should ensure that the following main areas are addressed adequately in their business continuity plan:
a) health and safety policies and procedures including those that relate to contagious diseases;
b) dealing with staff absence – this may be difficult if a large proportion of the workforce are specifically skilled and are hard to replace in the short term;
c) the possible suspension of “normal working practices” and the effect this will have on employment contracts; and
d) if suppliers or customers are affected, how easy will it be to replace the supply chain or income stream.
Employers should review their sickness absence policies and amend them if necessary. Employers should also ensure that they have effective and reliable systems for communicating current health risks to staff both inside and outside of working hours. Issues such as home working, recruitment of temporary staff and travel bans should be considered as possible options to deal with any affects if necessary.
Although the UK is considered a moderate risk, thought should be given to staff who are travelling to and from high risk areas either on business or leisure or staff that come into contact with those who have recently been around individuals that have been in high risk areas.
In addition to the general issues that businesses need to think about, there may be sector specific issues that would need to be addressed. In particular, businesses in the food, travel, medical, pharmaceutical, financial services and logistics industries will need to pay particular attention to how they will cope if affected. This is particularly relevant with COVID-19 as, at the date of publication, it is not clear how it is spread.
At the date of publication, there is no immediate prospect of the COVID-19 crisis coming to an end. Our advice is that businesses take prompt steps to evaluate and reduce the risks in all commercial contracts.
The content of this article is for general information only. It is not, and should not be taken as, legal advice. If you require any further information in relation to this article please contact the author in the first instance. Law covered as at April 2020.