The recent outbreak of the Influenza A (H1N1) virus (commonly referred to as swine flu) has had a measurable impact on businesses in a number of countries around the world within a short time period.
The recent swine flu outbreak brought back memories of the SARS epidemic, the negative business effects of which are all too well remembered by businesses in Asia. The swine flu outbreak reminds us once again of the vulnerability of businesses and society in general to a virus in an increasingly globalised world.
In a relatively short period of time, the H1N1 virus has spread across continents. As of 23rd May 2009, the WHO ("World Health Organisation") reported that 43 countries had reported a total of 12 022 cases, including 86 deaths. While the WHO has not announced or recommended any travel advisory plans, governments across the world have stepped up vigilance at entry points to curb the spread of the virus. In this context it is timely to review the contractual safeguards which protect businesses that may be affected by such epidemics and outbreaks and when it would be difficult to perform contractual obligations.
This e bulletin discusses whether an epidemic or an outbreak such as the H1N1 flu can justify the termination of obligations or delay the performance of a contract by relying on a force majeure clause or whether the common law doctrine of frustration could be a defence if contractual obligations unfulfilled.
Force Majeure Clauses
Many commercial contracts include standard force majeure clauses which often refer to "epidemics" or "pandemics" as grounds to excuse or suspend performance.
There is, however, no clear legal definition for the word "epidemic" in most jurisdictions across the world. In particular, there is no clear demarcation as to when an outbreak of a disease becomes an epidemic and when it is merely an outbreak. A classification or advice by an international organisation of an outbreak as a pandemic or an epidemic (such as the WHO) may not in itself be sufficient to trigger force majeure clauses either. Depending on the text of the relevant contractual provisions (in the absence of a guiding legal definition), parties are likely to be required to demonstrate that the performance of the contract is not only difficult or unprofitable but legally or physically impossible due to the epidemic. In some cases there may be obvious arguments which support a force majeure case (for example, emergency legislation which would prevent or delay performance). However, in most cases, the question whether an outbreak can be classified as an epidemic in accordance with a force majeure clause will depend on a variety of factors and the individual circumstances.
Frustration as a common law concept arises due to supervening events and is not attributed to the agreement or the will of the parties. A contract is considered to be frustrated if a supervening event results in the performance of the contract being rendered impossible.
Invocation of the force majeure clause and relying on the doctrine of frustration are distinct and separate defences. The force majeure clause is a contractual remedy while frustration is a common law doctrine (which therefore may not apply in all instances, depending on the governing law).
In deciding whether a contract has been frustrated, Courts will (under English law principles) have regard to the construction of the contract, the effect of the changed circumstances on the parties' contractual obligations, the intentions of the parties (which are objectively construed) and the demands of justice. Whether a contract has been frustrated is a question of law, rather than a question of fact based on the intention of the parties.
The doctrine of frustration is interpreted narrowly. To rely on the doctrine, a party usually has to establish that (without the default of either party) there has been a radical change in the obligations to be performed and that, if the terms of the contract were to be enforced in the changed circumstances, performance would involve a fundamental or radical change from the obligations originally undertaken. The general rule is that a contract is considered to be frustrated only if the performance is impossible and not if the performance of the contract is unprofitable. Relying on the doctrine of frustration would bring the contract to an abrupt end as there is no room for suspension of a contract under the doctrine of frustration.
In the absence of a binding recommendation particularly in the context of varying fact situations and commercial urgency it would be prudent and practical to consider the advice and recommendations of the WHO, local and regional governments in assessing the risk to employees in the proposed performance of contractual obligations.
Businesses concerned about their, or their counterparty's, ability to fulfil their contractual obligations due to the H1N1 outbreak should review their contractual terms closely, including force majeure clauses and ascertain the true and correct meanings attributed to them in the context of contractual performance. If the situation is not assessed correctly there is a real possibility of businesses being open to disputes and claims for damages.
Business organisations might also want to put in place a policy framework which can serve as a guideline to staff for actions to be taken in the context of an outbreak or a declared epidemic. Such a document can help to ensure a consistent response and limit the uncertainty caused by any epidemic on the business.