Since the outbreak of the novel coronavirus in January 2020, a series of precautions have been implemented in many countries to combat the spread of the virus, including, amongst others, travel bans imposed by several countries, lockdown of various major cities in China, and expropriation of anti-epidemic products by the Chinese Government. As a result, disruptions to the global supply chain and its economic effects in China and beyond are being felt, though are yet to be accurately quantified.
In this article, we discuss some potential steps companies should take to protect their interests and assess their position under their contracts in the event that their performance of contractual obligations is affected by the outbreak. In particular, we will be looking at whether the coronavirus outbreak and the series of precautions implemented will fall within the force majeure provisions so as to excuse performance.
A force majeure event is something exceptional and beyond the control of the parties which prevents the performance of obligations. Where a party is put in delay or other breach by a force majeure event, it can be protected from the consequences of that breach.
It is not uncommon to see a force majeure clause in a commercial contract and often it comes with a detailed definition with a non-exhaustive list of what is, and what is not, a force majeure event. Whilst there may be variation in the definitions depending on the contract, in most cases the used definition in commercial contracts is similarly worded.
Generally, the used definition would include text requiring, amongst other things, that the event (1) must be beyond the reasonable control of the party, (2) must not have been reasonably foreseeable and (3) could not reasonably have been avoided. A party seeking to invoke force majeure will generally need to satisfy this threshold test and comply with notice provisions to ensure that the other party is promptly made aware of any force majeure event.
The question now is, whether the coronavirus situation falls within the force majeure clause? If yes, what are the options available for the affected party? We discuss below two common definitions that may be found in a typical force majeure clause which may enable you to declare the coronavirus outbreak as a force majeure event.
Epidemic and pandemic
The term “epidemic” or “pandemic” is often found in the non-exhaustive list in a force majeure clause. However, a problem arises as most jurisdictions in the world do not provide a clear legal definition for the word “epidemic” or “pandemic”, in particular there is no clear demarcation as to when an outbreak of a disease becomes an epidemic or pandemic. In this regard, the classification or advice by an international organisation of such outbreak (e.g. the World Health Organization (WHO)) may be a good indication as to whether an outbreak falls within either of these definitions.
On 4 February 2020, WHO stated that the outbreak of the current coronavirus is an epidemic but does not yet constitute a pandemic. However, as the situation continues to evolve, this is something to keep an eye on. Whilst WHO’s statement and definition may carry some weight for the court to consider the claim of force majeure, whether an outbreak can be classified as an epidemic or pandemic under a force majeure definition will largely depend on the factual circumstances.
In the PRC, the China Council for the Promotion of International Trade (CCPIT) allows businesses affected by the outbreak to apply for a force majeure certificate from the CCPIT, provided that the affected business can submit an announcement or certificate issued by the local government or organisation, proof of delay or cancellation of transportation and relevant contracts.
The Chinese government has taken an unprecedented move in locking down various cities to prevent the spread of novel coronavirus. The impacts of such action is huge as it would have materially affected businesses in various industries. For instance, the Chinese government has mobilised labourers for projects inside China (in particular Hubei province) and manufacturers to produce masks to meet domestic needs, cross-province transportation is under strict check and control, and exporting/ importing custom clearance of goods has been prioritised for medical and anti-epidemic use.
It is likely that the outbreak of novel coronavirus will be considered as an epidemic for the purpose of declaring force majeure, however this has to be considered in the specific circumstance of each contract. Failing that, the government action route may also be available. Even if the current events would fall within the definition of force majeure, it is important to note that being able to prove force majeure does not discharge the affected party infinitely from its contractual obligation. It only provides a temporary suspension/ exemption without liabilities. The affected party would be expected to serve notice to the other party as soon as the force majeure event is discovered and promptly resume its performance of contractual obligation upon the cessation of the force majeure event.
What if there is no force majeure clause in your contract?
In the event that your contract is silent on the remedy, the first thing to do is to look at the governing law of the contract.
Under PRC law, force majeure is available as a matter of law pursuant to Article 117 and 118 of the Contract Law of the People’s Republic of China. The affected party is temporarily exempted from the liabilities in the event of force majeure, and is required to serve notice together with evidence to the other party within a reasonable period of time.
On the other hand, under English law, force majeure has not been recognised as a matter of law; it will depend what your contract says. Without a clear definition and provisions that effectively set out the parties' rights and remedies, contracting parties will be at the mercy of the rigid English doctrine of frustration of contracts and the inflexibility of the Law Reform (Frustrated Contracts) Act 1943. Proving a contract has been frustrated is far from straightforward. The position is similar in Malaysia.
Check your contract – this is always the first step to establish what expressly agreed protections are available. The starting point should always be the governing law clause and in the context of current events, the force majeure clause (if any). However, the contract should be reviewed as a whole for other relevant provisions including requirements as to how to serve notice (such as what information you should include in the notice, what are the relevant time limits, etc).
Proper record keeping – it is important to keep detailed records of the impact of the events. Otherwise it may be difficult to prove your claim.
Inform Your counterparty – you will be in a much stronger position to recover time and cost if you update your counterparty on an ongoing basis after you have given formal notice, telling them what the problems are and what you are doing to address them.
Mitigate – regardless of the governing law of the contract, there is always an underlying duty to mitigate, whether high or low, in the event of force majeure. If you can find solutions, you should do so.
Follow the news – the situation is highly dynamic and there may be many developments over the coming weeks. Whether or not events today amount to a force majeure does not mean that they will count the same way tomorrow. We will be keeping a close watch on developments and will provide further briefings as the situation changes.