The World Health Organisation Director General’s recent declaration that the global outbreak of the coronavirus is a “public health emergency of international concern” is, of course, dominating global headlines. The Chinese government’s response to the outbreak has been to lockdown some of its major cities, with numerous other towns and cities implementing their own quarantine measures. These lockdowns and restrictions have led to disruptions across numerous sectors throughout China, with knock-on effects across the globe. In addition, several nations and airlines have also sought to restrict travel to and from China, seemingly isolating the country and limiting the movement of its citizens.
As a result, it is inevitable that some business contracts will start to suffer interruptions and delays. No more so than in the oil and gas sector, as Chinese LNG importers are seeking to suspend their obligations to take cargoes of LNG under their contracts by implementing the ‘force majeure’ provisions. In addition, a number of oil and gas companies and contractors have invoked travel restrictions for their employees which may have the knock-on effect of causing delays to a project. We are already seeing queries from potentially impacted clients in Asia and the Middle East, in particular as to the scope of the force majeure clauses under their contracts.
Given the global spread of the coronavirus, companies would be well advised to review the provisions of their contracts to determine whether the impact of the outbreak may constitute a force majeure event. Depending on the wording of the contract, an event that amounts to force majeure may excuse one or all parties from performance of, or suspend performance of, their contractual obligations.
In common law jurisdictions, the scope of the force majeure provisions are more likely to depend on the construction and interpretation of the clause in question, although this may be different in civil law jurisdictions, where force majeure is usually afforded a specific legal meaning. Some contracts specifically include wording such as ‘outbreak of disease’, ‘epidemic’ or ‘civil emergency’, or similar in their force majeure clauses. However, if such wording 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.
Other considerations will include:
If the epidemic is not specifically included as a force majeure event, could it nevertheless be covered under other wording of the clause?For example, are there government decisions or actions that might fall within the scope of any political interference or potentially change in law wording?
Whether there are any notice requirements in relation to an event of force majeure. If 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 impact of the force majeure event.
Whether the triggering event must ‘prevent’ performance. Where such wording is used, the English Courts have held that the party seeking to rely on the force majeure clause must be able to demonstrate that performance of the contract is “legally or physically impossible and not just difficult or less profitable”. Alternatively, words like ‘hinder’ or ‘delay’ have a wider scope and will generally be satisfied if it can be shown that performance is significantly more arduous.
By way of example, if ‘key personnel’ are being denied entry to the country in which the project site is based, the affected party may be able to argue that performance of the contract would be physically impossible without such people present. By contrast, if the persons being denied entry are not ‘key personnel’ or similar, establishing a case for force majeure may not be as straightforward. Ultimately, the English Courts will seek to enforce the performance of a contract and therefore a mere increase in the cost of performance will not in itself be enough to trigger the force majeure provisions under a contract, unless expressly provided for.
Whether the affected party can show that it has used its reasonable endeavours 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. Using the same example as above, hiring replacement staff unaffected by travel restrictions brought about by the coronavirus could mitigate the effects of the non-performance, even if at a greater cost.
Whether there are any other factors that may have impacted performance of the contract.The English Courts recently held that, while it will depend on the wording of the clause in question, it is often the case that a force majeure event must be the only effective cause of default by a party seeking to rely on the force majeure provisions. If it can be shown that other factors have prevented performance of the contract, then the non-performing party will not be able to rely on the force majeure provisions under the contract.
If you are able to determine that the impact of the outbreak is an event of force majeure, usually the contract will provide that the affected party’s obligations are suspended for the duration of the force majeure event and once the force majeure event comes to an end, the contract will be ‘re-activated’, unless the parties agree otherwise. In tandem with this, once triggered, the non-performing party’s liability for non-performance or delay is removed, usually for as long as the force majeure event continues. In some instances, force majeure provisions may also provide that the parties may seek to terminate the contract if it becomes unfeasible to resume the contract once the force majeure event has ceased.
Accordingly, whether the outbreak of the coronavirus will be deemed a force majeure event, will very much depend on the wording and scope of the force majeure provision. Parties faced with business interruptions as a consequence of the coronavirus should, therefore, familiarise themselves with the force majeure clauses in their contracts taking note as to whether they include any conditions precedents (i.e. notice requirements) which, if not fulfilled, could prevent reliance on the same.
To read about the impact of the coronavirus on contracts governed by the law of the People’s Republic of China, please follow the link to an article issued by Shanghai office.