FORCE MAJEURE AND CORONAVIRUS (I)

Companies are advised to review the provisions of their contracts to determine whether the impact of the coronavirus may constitute a force majeure event. Should the affected enterprises be liable for breach of contract? Is delayed performance or contract termination allowed? Our attorneys look at this situation and offer some recommendations in this and coming articles.

These measures are causing enormous concerns to enterprises operating in and with China. Under such situation, many companies may face severe disruptions in the production, logistics (both inbound and outbound shipments), international services, and other aspects of their operations resulting in delays or failure to fulfill contractual obligations.Consequently, unplanned and heavy financial burdens affect all companies, although SMEs suffer the most.

CCPIT offers force majeure certificates

China Council for the Promotion of International Trade (“CCPIT”) announced on 30 January 2020 that it would offer force majeure certificates to help companies dealing with disputes with foreign trading partners arising from epidemic control measures. The first coronavirus pneumonia force majeure certificate was issued to an auto parts manufacturer in Huzhou city, Zhejiang province, on February 2, 2020. The force majeure certificate can be applied online (Visit website www.rzccpit.com).

Based on international practice, most international contracts contain a force majeure clause, which is a clause that relieves a party from its obligations to perform the contract in certain extreme circumstances. Some contracts specifically include wording such as “outbreak of disease”, “earthquake”, “civil emergency” or similar in their force majeure clauses. However, if the specific event is not explicitly provided for in the contract, the party seeking to rely on the force majeure provision will need to consider the wording of the clause carefully to determine whether any disruptions as a result of the coronavirus might be considered a force majeure event.

If the contract does not provide force majeure protection, the law governing the contract will dictate what constitutes force majeure. Obviously, this may vary across each jurisdiction.

Does coronavirus constitute force majeure?

A force majeure clause generally provides for what happens in case of specified events or incidents beyond the control of either party after entering into the contract. This generally applies to radical and external events that are not due to the fault of either party, such as natural disasters, outbreaks of war and strikes.

A force majeure clause can provide for different consequences upon a stipulated event in addition to the contract termination, such as an extension of time for performance, or variation to the contract.

Whether or not the outbreak of coronavirus will constitute force majeure in a contract, some key questions must be considered:

(i) Firstly, it is necessary to check if the event (in the case under consideration, the event would be the outbreak of an epidemic) is specifically mentioned as a force majeure event in the contract. Even if so, it may still need to satisfy other requirements to constitute force majeure. If not, it may nevertheless be covered under other wording of the clause.

(ii) Foreseeability: Most contracts exclude events that could have reasonably been avoided or overcome.

In general, the outbreak of epidemics may not be seen as an unforeseeable event, but with regard to the coronavirus case, the resulting and unprecedented government restrictions could differentiate the coronavirus from other epidemics. In fact, it is likely that the courts would accept that this outbreak and the response took to such does not constitute a foreseeable contingency so that reasonable steps could have been taken by the party affected by it.

Besides that, the recognition by the said WHO's declaration of the virus outbreak as a Public Health Emergency of International Concern is appropriate to show the severity and unforeseeable nature of this event.

(iii) Causation :  It is central to check if coronavirus in fact "caused" the non-performance. The party seeking to rely on force majeure must then usually establish that the event has prevented or hindered them from the performance of the contract. Depending on the exact words used in the contract, the affected party must demonstrate that performance is legally or practically impossible, not just difficult or more costly.

(iv) Mitigation duties : The party claiming force majeure relief is usually under a duty to show that it has used its reasonable endeavors to prevent, or at least mitigate, the effects of the force majeure event.  Force majeure relief will not often be available to assist the impact of events that could have been avoided or mitigated.

(v) Notice requirements : Almost all force majeure clauses require that notice be given of the force majeure event. If a notice of force majeure is to be given, it should be issued in line with the provisions of the contract. Failure to do so may result in the affected party not being able to rely on the force majeure clause or claim relief from the impact of the force majeure event.

(vi)Consequences : The effect of a force majeure clause may differ from contract to contract. Some clauses operate to suspend obligations during the period of the applicable event, some others give rise to a right to terminate and some others may relieve the non-performing party of liability.