The COVID-19 pandemic presents severe and unprecedented challenges to the global economy across all industry sectors. Given the number of countries that have, or are, introducing countermeasures and restrictions to tackle the COVID-19 pandemic, more and more businesses may find that they, or their counterparties, are prevented from fulfilling their contractual obligations. This client alert takes a closer look at:
- the key elements of force majeure provisions that could be triggered by COVID-19-related events;
- the interpretation and application of force majeure provisions in respect of COVID-19 under US law, English law, PRC law and UAE law (including ADGM and DIFC); and
- various practical legal and/or commercial considerations for our clients in the context of the COVID-19 pandemic.
1. Force Majeure Provisions
Typically, a force majeure event is defined as an event that is beyond the reasonable control of the affected party, as a result of which such party’s performance of its obligations under the contract is prevented or rendered impossible. Consequently, a force majeure provision provides that such non-performance is excused (e.g. the affected party is not liable for a breach of contract that it is otherwise liable for), or certain reliefs may become available (e.g. extension of time for performance or discounted price for goods). In certain cases, to the extent the force majeure event continues for a given period of time, the affected party and/or the non-affected party, may also have the right to terminate the contract in its entirety.
By way of example, a typical force majeure provision could be drafted as:
- “Neither party shall be in breach of this agreement nor liable for delay in performing, or failure to perform, any of its obligations under this agreement if such delay or failure results from events, circumstances or causes beyond its reasonable control including (without limitation) acts of God or natural disaster, epidemic or pandemic, chemical or biological contamination, wars, strikes, riots, or acts of domestic or international terrorism. In such circumstances the time for performance shall be extended by a period equal to the period during which performance of the obligation has been delayed or failed to be performed. If the period of delay or non-performance continues for four weeks, the party not affected may terminate this agreement by giving ten days' written notice to the affected party.”
For the affected party to invoke the force majeure provision, the contract may also require such party to provide prompt and timely notice to the other party along with supporting documentation evidencing the occurrence of the force majeure event, or even exercise reasonable care in mitigating the adverse effect of the force majeure event.
Discussed below are the key elements of force majeure that are typically seen in commercial contracts: (1) beyond the reasonable control; (2) inability to perform; and (3) duty to mitigate.
- Beyond the Reasonable Control
As per the sample force majeure provision illustrated above, a contract usually provides a list of events that are force majeure events (e.g. acts of God or natural disaster, epidemic or pandemic, chemical or biological contamination, wars, strikes, riots, or acts of domestic or international terrorism) and, in less common cases, the contract may also provide a separate list of events that shall not constitute as force majeure.
In addition, the force majeure provision may include a more general category of events beyond the reasonable control of the affected party, such that the performance of the affected obligation could not have been overcome by reasonable foresight or preparation by that party.
Consequently, subject to the specific language of the contract, the affected party might have different basis in claiming COVID-19 as a force majeure event (e.g. a contract may stipulate that commercial impracticability does not constitute a force majeure event).
- Inability to Perform
This element typically requires the affected party’s inability to perform its obligations under the contract to “result from” the force majeure event. The causal link between the event itself and the affected party’s inability to perform needs to be established. With respect to the inability to perform itself, the contract may include different degrees of impairment of such inability – the contract language may specify that a party’s performance must be impossible, which is different from just impracticable or economically difficult: the use of words such as “prevented” suggests a higher standard than “impeded, hindered or delayed”.
The factual question to be considered, therefore, is whether the COVID-19 pandemic is the cause of a business’s being prevented (or, if used, impeded, hindered or delayed) from performing its obligations, for example, to deliver goods under a supply agreement. It should be noted that many contracts expressly provide that a force majeure provision may not be invoked to justify non-payment.
- Duty to Mitigate
Finally, once the affected party has shown that its performance failure results from a force majeure event, it may also be required to fulfill certain obligations outlined in the contract or under the law (in certain jurisdictions), such as the obligations to use reasonable endeavours to mitigate the force majeure event and its impact. The inclusion of such language in the contract introduces an additional test that the affected party must meet to claim force majeure, and provides incentives for the affected party (or all the parties) to endeavour to continue to perform the contract. To the extent that such a mitigation obligation is imposed, the contract may provide for different standards for such effort (e.g. “all reasonable measures”, “commercially reasonable efforts” or “good faith efforts”).
What mitigation measure would meet the applicable standard in the contract is ultimately a fact-specific issue which has to be dealt with on a case-by-case basis, but that standard of what constitutes the required mitigation measure may also change and evolve as spread, along with containment efforts, of COVID-19 continues to impact the business activities around the globe.
2. Force Majeure Triggering Events in Respect of COVID-19
As mentioned above, the contractual force majeure provision may set out a list of specific triggering events that are force majeure events. Certain events, if listed in a force majeure provision, may implicate COVID-19 itself and/or certain events or consequences related thereto as force majeure events.
First, COVID-19 has been declared by the World Health Organization as a pandemic. To the extent words like epidemic, pandemic, or infectious or communicable disease outbreaks are specifically enumerated as a force majeure event will give the affected party a stronger position to invoke the force majeure provision.
Second, in response to COVID-19, many governmental entities at various levels around the world have imposed various containment strategies and measures (e.g. travel restrictions and bans, border controls, shelter-in-place orders, prohibition of large gatherings or the closing of non-essential business). To the extent the contract in question has language that deals with risks related to legal or governmental requirements (e.g. changes in law or regulations, regulatory or governmental act, action or order), such language could potentially be invoked as the basis for claiming the occurrence of a force majeure event in connection with COVID-19. Accordingly, clients should continue to monitor closely actions implemented in response to COVID-19 by governments of applicable jurisdictions over their businesses and any potential impact they may have on their contractual performance.
Third, the COVID-19 pandemic itself or governmental containment measures discussed above may also lead to various disruptions to the normal commercial and business activities of the parties. Any language referring to “disruptions” in the force majeure provision may implicate another alternative resort for the affected party to make a force majeure claim. Depending on the contract in question, the enumerated “disruptive” events may include disruption of supply chain (including lack of, or inability to obtain, fuel, power or materials), disruption of transportation systems, disruption of labour force or workforce (which can have resulted from individuals’ sickness or governmental quarantine measures) or third parties’ performance failure due to a force majeure event.
Finally, if the underlying contract does not set out a specific list of deemed or qualifying force majeure events or such a list does not cover any of the specific categories discussed immediately above, the affected party may have to rely on the general definition of force majeure that is used in the contracts (e.g. events beyond a party’s reasonable control and that render such party’s performance impossible) or a general catch-all clause at the end of the list of enumerated force majeure events (e.g. any “other” events beyond a party’s reasonable control and that render such party’s performance impossible).
3. Jurisdictional Comparison of Force Majeure
- US Law
Unlike some of the civil law jurisdictions, the United States (US) does not have any codified force majeure provisions in its statutes. Therefore, the potential application of force majeure will be dictated by the specific context and facts and controlled by the specific language in the underlying contract, as negotiated by the parties, including what constitutes a force majeure event; what conditions or obligations, if any, must be met or performed by the declaring party; and what remedies are available or what consequences may apply upon the occurrence of an event of force majeure.
The party invoking the force majeure provision with respect to its delay or failure of performance bears the burden of proving the existence of force majeure, and that such party has met any contractual conditions to making the claim, such as the duty to provide notice or mitigate, as discussed above. To the extent there is a dispute among the parties on the potential application of the force majeure provision, and such dispute is brought into the US courts, generally speaking, the practices among various states in the US are relatively consistent such that the contractual force majeure provisions are construed strictly, but the applicable legal standards do vary from state to state.
Further, whilst there are limited precedents on the impact of pandemics or communicable disease outbreaks on force majeure provisions, it is probably fair to predict that taking into account the relatively recent occurrence of COVID-19, as well as the continued and growing impact thereof, the application of force majeure provisions in the context of COVID-19 in the near term could potentially lead to different interpretations by various US courts, which are likely to be mindful of the broader implications of upholding or rejecting any force majeure claim, thus making it even more challenging for parties on both sides of the issue in dealing with force majeure provision.
If, however, the underlying contract does not expressly provide for force majeure, the parties conducting their business subjecting to the US jurisdictions may resort to alternative mechanisms to excuse their delays or failures of performing contractual obligations. For example, contracts for the sale of goods are subject to Section 2.615 of the Uniform Commercial Code (UCC) (or the counterpart thereof adopted by the particular state). Unless otherwise specifically disclaimed in the underlying contract, this section is generally available to the buying party of goods (but not services) in most states in the US, and the same provides that “[d]elay in delivery or non-delivery in whole or in part by a seller…is not a breach of his duty under a contract for sale if performance as agreed has been made impracticable by the occurrence of a contingency the non-occurrence of which was a basic assumption on which the contract was made…”.
- English law
There is no statutory or common law definition of force majeure under English law. Consequently, the parties are free to agree what will amount to a force majeure event for the purposes of their contract, and what the consequences will be if such an event occurs. Accordingly, the English courts will consider the specific wording of a force majeure provision, and whether the force majeure event entitles the affected party to rely on such provision. In Costal (Bermuda) Petroleum Ltd v VTT Vulcan Petroleum SA (The Marine Star)  2 Lloyd’s Rep 383, the English court held that the proper approach to a force majeure provision is to interpret it by reference to the actual words used by the parties in the underlying contract, not the general intention of the parties.
First, where a force majeure provision contains a non-exclusive list of force majeure events, followed by a sweep-up phase such as “any other event beyond the party’s control”, the English courts have found that for an event to fit within this general wording, it must be of a similar nature to the specific force majeure events listed. In Tandrin Aviation Holdings Ltd v Aero Toy Store LLC and other  EWHC 40, the affected party argued that the economic collapse of the financial markets triggered the force majeure clause and prevented such party from purchasing an aircraft. The English court held that the relevant sweep-up phase “any other cause beyond the Seller’s reasonable control” had to be read in the context of the entire force majeure clause, and the judge noted that none of the listed force majeure events was remotely connected with economic downturn. Accordingly, the force majeure provision could not be invoked by the affected party.
Second, a force majeure provision typically requires that the force majeure event must “prevent” the affected party from performing its obligations. In Tennants (Lancashire) Ltd v G.S. Wilson & Co. Ltd  AC 495, the English court held that the relevant force majeure triggering event must “prevent” performance, and the affected party must demonstrate that such performance is legally and physically impossible, not just difficult or unprofitable. By contrast, some contracts use certain less onerous words such as “impede”, “hinder” and “delay” and, therefore, the same will have a wider scope and generally be satisfied if performance is substantially more onerous. However, a mere increase in the cost of performing a contract affected by COVID-19 may still not be sufficient to trigger a force majeure with wording of this kind.
Third, the English courts will then need to consider whether the force majeure event relied upon is the sole cause of the affected party’s inability to perform its obligations. If not, and there are other causes, English case law suggests that the force majeure provision may not necessarily be relied upon. In Seadrill Ghana Operations Ltd v Tullow Ghana Ltd  EWHC 1640, the English court found that the affected party’s failure to provide oil drilling instructions to other party was caused by two events: one was a force majeure event under the contract, and the other was not. Consequently, the English court held that the force majeure event was not the sole cause, and the affected party could not rely on force majeure and had to bear the consequences. This judgment serves as a good reminder that it is often very difficult for a party to avoid contractual obligations it has freely entered into.
Consequently, the affected party seeking to rely on a force majeure event must establish that its inability to perform the contract in fact resulted from a listed force majeure event. This requirement of causation is likely to be the key dispute in COVID-19 force majeure cases in the coming months, and the focus in any eventual mediation, arbitration or litigation will likely to focus on whether any mandatory lockdown requirements, social distancing measures, travel restrictions, quarantines imposed and consequential lack of available materials and/or employees prevented an affected party from performing its obligations under the contract in question.
The effects of exercising force majeure rights under English law will depend on the specific wording of the provision but, generally, the same will enable the affected party to suspend performance of its contractual obligations without being in breach of contract. The contract will determine whether such suspension is for a particular period of time or indefinitely, whether there is an obligation on the affected party to mitigate the consequences of the force majeure event, and what the other options are for the parties (e.g. the right of one or both parties to terminate the contract if the force majeure event has continued for a specified period of time). The aim is that, where possible, the contract can be resurrected when the force majeure event is over, and both parties can then perform their respective contractual obligations as they originally intended.
- PRC law
Whilst the law of the People’s Republic of China (PRC) implies a concept of force majeure into commercial contracts, PRC law also respects the principle of freedom of contract and, therefore, it is very common for contracting parties to agree to a contractual definition of force majeure. If there is no agreed contractual definition of force majeure, it is possible to apply the definition and/or principle relating to force majeure under PRC law.
Force majeure is codified in Article 180 of the PRC General Rules of the Civil Law (PRC Civil Law) and Article 117 of the PRC Contract Law being “the objective circumstances that are unforeseeable, unavoidable and insurmountable”. In particular, the PRC Civil Law expressly provides that if the failure to fulfill civil obligations is caused by force majeure, no civil liability shall be borne and, in addition, under the PRC Contract Law, it expressly provides that if the purpose of the contract is rendered impossible to achieve due to force majeure, then the contract may be rescinded. Consequently, the liabilities shall be exempted in part or in whole due to the effects of the force majeure.
In the event that the force majeure cannot be established under the contractual clauses or the statutory provisions, the affected party may seek an order from the PRC courts to vary the contract based on the principle of fairness and the principle of circumstance change (a principle under PRC law which is similar to the doctrine of frustration in common law) where it is considered unfair for such party to continue performing its obligation, or the underlying contract purpose cannot be realised due to occurrence of any material change of circumstances that is unforeseeable and not caused by force majeure or a commercial risk after the execution of the contract. In such case, Article 26 of the Interpretation of the Supreme People’s Court on Certain Issues Concerning the Application of the Contract Law of the PRC (II) expressly provides the PRC courts may determine, on a case-by-case basis, whether the contract should be modified or terminated according to the principle of fairness.
The following recent legal and commercial developments in respect of COVID-19 and force majeure are noteworthy:
- the PRC courts have issued judicial guiding notices in relation to the COVID-19 pandemic, and the same provide some guidelines for the application of force majeure and its relevant rules in specific circumstances caused by, or related to, the COVID-19 pandemic (PRC Guiding Opinions). Based on the PRC Guiding Opinions, even if the COVID-19 pandemic or the relevant measures taken by the Chinese government constitute objective circumstances that are unforeseeable, unavoidable and insurmountable, force majeure will not be established automatically. Instead, the PRC courts will need to consider other factors, such as how and/or whether the COVID-19 pandemic effects the performance of the contract, the specific frustration situation of the contractual performance and nature of the contracts;
- the China Council for the Promotion of International Trade has been issuing force majeure certificates to companies that claim they are unable to meet their contractual obligations due to the COVID-19 pandemic. Whilst these certificates may provide some evidentiary support to the affected party for a force majeure claim, the same will not automatically satisfy the “test” for force majeure for a contract, and the specific requirements of the force majeure under PRC law must still be satisfied; and
- on 16 April 2020, the Supreme People's Court of PRC issued the Guiding Opinions on several issues concerning proper trial of civil cases relating to COVID-19 epidemic (Opinions). Amongst other key issues, the appropriate application of force majeure is emphasised in the Opinions, and the Chinese courts are required to provide legal certainty and guarantee and apply the force majeure rules accurately and, accordingly, review and assess cases relating to contractual disputes in an appropriate manner pursuant to PRC law. Specifically, the Opinions are intended to clarify the rules for the application of PRC law relating to force majeure.
- UAE – General
In the United Arab Emirates (UAE), the concept of force majeure is addressed under the UAE Civil Transactions Law (Federal Law No. 5 of 1985) (UAE Civil Code). In essence, Article 273 of the UAE Civil Code provides:
- if a force majeure event makes the performance of the underlying contract completely and permanently impossible, then the corresponding obligation shall cease, and such contract shall be automatically cancelled; and
- in the case of partial, or temporary, impossibility, the relevant provision of the contract which is partially, or temporarily, impossible shall be extinguished. In addition, it shall be permissible for the affect party to seek a cancellation of the contract provided that the other party is so aware.
In addition, Article 249 of the UAE Civil Code permits the UAE courts to vary contractual obligations to a “reasonable level” in exceptional circumstances (i.e. force majeure events). Consequently, the difference between the effect of Articles 273 and 249 of the UAE Civil Code is that application of Article 273 results in termination of the obligation, whilst application of Article 249 allows the contractual obligations to be modified.
Whilst UAE Civil Code does not provide for an exhaustive list of force majeure events, it is generally accepted that force majeure may be established on the grounds of either a physical impossibility (e.g. a natural disaster) or a legal impossibility (e.g. a change of law). However, an event of a mere hardship or uneconomic balance between the parties to a contract would not be qualified as a force majeure under UAE law.
Similar to other legal frameworks, the starting point for any analysis of whether COVID-19 may constitute a force majeure event or exceptional circumstances is the underlying contract in question and, in particular, whether there is any wording, or list of events, under the force majeure provision that could encompass an epidemic or pandemic scenario. If the underlying contract is silent or unclear, then it will be for the UAE courts to determine whether the existence and effects of an epidemic or pandemic constitute force majeure or exceptional circumstances in the context of the UAE Civil Code.
- UAE – ADGM and DIFC
It is noteworthy that the legal outcome under the laws of the Abu Dhabi Global Market (ADGM) and the Dubai International Financial Centre (DIFC), two prominent financial free zones of the UAE, is likely to be the same as the English common law position mentioned above. Under the ADGM Application of English law Regulations 2015, English law applies in ADGM on an ‘evergreen’ basis, such that legal precedents in England will inform the position under ADGM law and, therefore, bring greater certainty to contracts governed by the laws of that jurisdiction. The position in the DIFC is largely the same as the ADGM.
Consequently, the affected party relying on a force majeure provision in a contract governed by ADGM or DIFC law will need to demonstrate its application to the facts by carefully reviewing the specific wording of the force majeure provision, noting any express carve-outs and/or notification requirements. The ordinary English law principles of contractual interpretation will apply and, similar to the English courts, the ADGM and DIFC courts are likely to interpret force majeure provisions restrictively.
4. Practical Considerations
Affected parties seeking to rely on a force majeure provision should bear in mind the following legal and/or commercial considerations:
- carefully consider the precise wording of the force majeure provision, the underlying contract as a whole and the related circumstances that have arisen. In particular, evaluate the list of non-exhaustive force majeure events which is often included, and the consequences of triggering a force majeure event;
- explore alternative means of performing its contractual obligations, minimising delay and/or mitigating any loss to the other party;
- be conscious of “opportunism” from unscrupulous counterparties that use the COVID-19 pandemic as an excuse to terminate an unfavourable contract;
- check whether a notice is required and, if so, serve the requisite notices as soon as possible in accordance with the relevant provisions of the underlying contract informing the other party of the applicable force majeure event;
- keep detailed records of why and how the performance of its contractual obligations was impossible, delayed or hindered (as the case may be), as well as the relevant steps taken to find other ways to perform its contractual obligations and mitigate loss;
- review any applicable insurance policies that might provide coverage for business interruption and/or contingency business disruption;
- explore other practical ways to resolve the force majeure situation amicably with the other party (e.g. variation or modification of the underlying contract based on mutual agreement);
- if force majeure is unavailable in the underlying contract, seek legal advice to consider other potential contractual remedies due to the COVID-19 pandemic (e.g. price adjustment clauses, limitation or exclusion clauses, change of law clauses, and/or material adverse change (MAC) / material adverse effect (MAE) clauses);
- if other contractual remedies are unavailable, and subject to the governing law of the underlying contract, seek legal advice to consider the application of potential statutory remedies (e.g. doctrine of impossibility, doctrine of frustration and/or Article 79 of the UN Convention on Contracts for the International Sale of Goods 1980); and
- going forward, given the COVID-19 pandemic and the related issues are no longer unforeseen events and will be under the contemplation of the parties under any new contractual arrangements, and subject to the parties’ respective negotiation powers, consider carving-out “national emergency, epidemic, pandemic, quarantines, disruption of supply of labour, disruption of supply chains and/or transportation systems” under the force majeure provision in future contracts.