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February 28 2020

Coronavirus and Force Majeure

Tips & Tricks

Harry Coates

Harry Coates

Coronavirus and Force Majeure

With the outbreak of Coronavirus spreading at a rather alarming rate, the world’s economy is starting to feel the effects as governments take action, impacting on global supply chains and other commercial relationships. Stocks have fallen continuously, in what has been the worst week of trading since the 2008 crisis. However, from a legal perspective it has seen a rise in the use of an oft forgotten but at present vital boilerplate clause, the force majeure.  

What is a Force Majeure Clause?

For those who have done the LPC, they will know this is as one of the suggested boilerplate clauses, something to add in at the end of the contract. But they are a vital contractual term that are made for times like these.

A force majeure clause is a clause that seeks to define the circumstances that are beyond the parties’ control, in which the parties can rely on the term to suspend, defer or release them from their duties to perform their obligations without liability.

There is no standard form for a force majeure clause however most will list a number of events as well as more general wording to act as a catchall. These listed events will constitute a “Force Majeure Event”.

Common events placed on the list includes, floods, snow, war, riot, famine, civil commotion and government action.

If one or more of the specified events occurs then contractual performance will be suspended for a specified period. If the event is still continuing at the end of that period, then the contract will be considered to be terminated.

What has been happening with Force Majeure clauses and Coronavirus?

In the fallout from the spread of the Coronavirus and the measures taken by the Chinese government, China have issued a record number of force majeure certificates. This has been done in an attempt to exempt local exporters who are struggling to fulfil contracts with overseas buyers.

The export sector in China relies heavily on small factories. These factories are still struggling to return to normal production due to the imposed lockdowns taken by local governments. As such the Ministry of Industry and Information Technology have estimated that less than 30% of these small factories have resumed operation.

The China Council for the Promotion of International Trade have issued 3,325 certificates (as of Friday last week) since early February, which relates to contracts worth approximately $38.5 bn.

The outbreak has obviously caused major disruption to China’s supply chain and has presented substantial difficulties for the contracting parties. The legal fallout may take years to sort out.

Coronavirus, Force Majeure and the UK

In the English and Welsh legal system, force majeure is a contractual term, construed in accordance with the principles of contractual interpretation.

The Courts have held that for a party to rely on a force majeure term they must show that:

1) A Force Majeure Event has occurred

2) The parties’ failure to perform was due to circumstances outside its control

3) There was nothing more it could have reasonably done to avoid the Event or mitigate its effects

So will companies be able to rely on this under English law in case of a coronavirus outbreak?

Well, the issue will be determined on a case-by-case basis with reference to the exact wording of the contract. If in the contract the definition/list of Force Majeure Events includes ‘epidemics’, ‘diseases’ or words to that effect it is likely to be triggered.

With large international corporations such as Chevron and Baker McKenzie sending their employees home from their London offices as a precautionary measure, we may well start to see a rise in companies triggering the force majeure clause.

Moving Forward

Much like the spread of the disease, it is difficult to predict the effect that the virus will have.

With sharp rises in numbers of cases around the worldwide, with significant spikes in South Korea and Italy, the longer the crisis lasts and the more it continues to spread the greater the force majeure question will become.


Watch this space!

Sources

Baker McKenzie

Cleary Gottlieb

Financial Times

Financial Times

Law Gazette