What was first thought to be a cluster of pneumonia cases in the city of Wuhan, Hubei region in China turned out to be the start of a new strand of coronavirus (2019-nCoV). On 30 January 2020, the World Health Organization (WHO) declared that the coronavirus epidemic constitutes a public health emergency of international concern and declared that it is a pandemic on 11 March 2020. This led to several States, such as the United States, Australia and Russia to take measures restricting travel. In addition to the health crisis, both the domestic emergency measures in China and the increasing international measures have caused disruption across global supply and transport chains. Such disruptions have already had and shall continue to have economic, sociological, legal and other impacts across multiple industries and sectors including on the execution of international commercial contracts.
1. What is Force Majeure
Force Majeure is an event which is beyond the control of either party entering into a contract. Force Majeure may include natural disasters such as a storm or hurricane, a major political event including war, or a serious health crisis such as a general epidemic.
In the world of project finance, contracts usually include very detailed Force Majeure clauses which identify specified events and specific consequences which can arise upon the occurrence of a stipulated event such as (a) holding all parties safe from liability from non-performance due to the specified Force Majeure event, (b) an obligation to mitigate, (c) a notification obligation, (d) an extension of target dates, (e) payment of compensation in certain circumstances and (f) right to terminate after a fixed period of time.
If a French law governed contract does not include or specify Force Majeure events, French courts will apply Article 1218 of the French Civil Code (Code civil) and look at whether or not (i) the relevant event is beyond the applicable party’s control, (ii) the relevant event could reasonably have been foreseen at the time the contract was entered into and (iii) the effects of such event could be avoided by appropriate measures.
If the impediment is temporary, performance of the obligation is suspended, unless the resulting delay justifies the termination of the contract.
If the impediment is permanent, the contract is terminated by operation of law and the parties are discharged from their respective obligations under the conditions set out in articles 1351 and 1351-1 of the French Civil Code (Code civil)1.
In any event, the fact that a party incurs any inconvenience or additional costs in performing an obligation is not in itself sufficient to constitute a Force Majeure. One would also have to determine whether or not the event was foreseeable and therefore whether or not appropriate steps could have been taken in advance or upon the occurrence of the relevant event. The relevant event must render execution of the contract impossible and not simply more onerous to be considered a Force Majeure.
2. Coronavirus equals Force Majeure?
Can the non-performance of obligations under a contract due to the outbreak of the Coronavirus epidemic constitute Force Majeure?
In cases where there is a Force Majeure clause, one would obviously have to first look at the specific language in the applicable contract to see whether or not epidemics, governmental restrictions or other relevant event or actions are explicitly covered. One would also have to specifically look at whether there are any carve-outs in the applicable clause. Finally, the scope of the clause will depend on its interpretation by the French courts and in particular what threshold the French courts would apply to the inability to perform due to Coronavirus (i.e. was performance rendered impossible or just more difficult?).
If there is no explicit Force Majeure clause in the applicable contract, then Article 1218 of the French Civil Code (Code civil) as described above and as further described below will apply.
(i) Is the relevant event beyond the affected contracting party’s control?
The relevant event must not be attributable to the affected contracting party. Given the nature of the outbreak of the Coronavirus epidemic which is an exterior event it can be considered to be outside the affected contracting party’s control.
(ii) Was the relevant event not reasonably foreseeable at the time the contract was entered into by the affected contracting party?
One has to look at the foreseeability of the Coronavirus epidemic at the time the contract was entered into. If the contracting party could have reasonably foreseen the epidemic at the time the contract was concluded then the affected contracting party is considered to have accepted the risk of such epidemic.
Outbreaks would probably not normally be considered as unforeseeable given the many recent outbreaks of flu and viruses including the SARS epidemic. Furthermore, French courts have been reluctant to qualify past epidemics as Force Majeure.2
However, there do exist arguments in favour of the new Coronavirus epidemic possibly constituting a Force Majeure which include (a) the scale of lockdowns taken on both a global scale and domestic scale which can be considered as far more severe compared to the SARS outbreak and other outbreaks of diseases of a similar nature, (b) the WHO declaring the outbreak as a global health emergency on 30 January 2020 and then declaring that it is a pandemic on 11 March 2020 (c) the China Council for the Promotion of International Trade (CCPIT) awarding the first Force Majeure certificate for the new coronavirus (2019-nCoV) to a supplier on 2 February 20203 which could potentially be the first of many such certificates awarded.
(iii) Can the effects of such event be avoided by the affected contracting party taking appropriate measures?
The fact that the appropriate measures which can be taken by a contracting party render the obligations more onerous does not suffice to establish Force Majeure unless the affected contract party is expressly forbidden from taking such measures in the contract itself. Inconvenience as an argument would not stand in court. The affected party will have to demonstrate that there are no alternative means for performing its obligations due to the outbreak of the Coronavirus epidemic and that it has taken all reasonable steps to mitigate the effects of such outbreak in order to establish that the epidemic constitutes a Force Majeure.
In any event, prior to invoking a Force Majeure it would be highly advisable to seek legal advice to avoid any potential claims for abusive breach of contract.
3. Hardship (Imprévision)
In accordance with Article 1195 of the French Civil Code (Code civil), hardship refers to the situation where a contract becomes unbalanced due to a change in circumstances that was not foreseeable at the time of its conclusion. The party suffering from such imbalance can then request its counterparty to renegotiate the contract. The parties must nevertheless continue to comply with and perform their respective obligations under the contract during the renegotiation period.
If the renegotiation fails, the parties may decide to terminate the contract or refer the matter to a judge so that it can be revised or terminated.
A court will qualify a situation as hardship if the following conditions are satisfied: (a) the change in circumstances was unforeseeable at the time of conclusion of the contract, (b) none of the parties have expressly contractually accepted to assume the risk of hardship and (c) the execution of the contract has become excessively expensive.
With respect to the third condition referred to above, the French Supreme Court (Cour de cassation) has held that, despite evidence being provided showing that suppliers had increased their prices by 4% to 16 % which then resulted in a 58 % decrease in the gross margin of the affected contracting party who went on to invoke Article 1195 of the French Civil Code (Code Civil), there was no hardship as this decrease in gross margin did not "fundamentally" alter the balance of benefits4. This illustrates that invoking hardship is no easy task.
4. Coronavirus equals Hardship?
Under a French law governed contract, the first item to check is whether the contract expressly excludes the provisions of article 1195 of the French Civil Code (Code Civil) and we would recommend that the relevant clause in the contract expressly refers to and excludes both paragraphs (alinéas) of article 1195 of the French Civil Code (Code Civil). If not expressly excluded, then one would look to determine whether or not the conditions mentioned in paragraph 3 above have been satisfied.
Once again, arguably, the unprecedented measures taken both domestically and internationally could be used to support the unforeseeability condition. One would then have to look at the specific impact the epidemic has had on the financial conditions of the parties to the contract to justify the economic imbalance and determine whether or not it would be considered excessive enough to qualify as hardship.
5. Coronavirus – Other Legal Tools
The terms of a contract will have to be considered carefully. In addition to Force Majeure and Hardship, one should also check for other relevant provisions such as Change in Law clauses (even though this is often limited to changes in law in the host country where the contract is being performed) and Material Adverse Change clauses. It goes without saying that the wording of each clause will have to be looked at carefully to ensure all conditions have in fact been satisfied together with a careful analysis of the facts at hand.
Should the contract be governed by a law other than French law, then one will have to seek advice in the appropriate jurisdiction and look at the remedies available in that jurisdiction.
Furthermore, with respect to any future contracts, it would be advisable to consider inserting express language ensuring that epidemics such as the Coronavirus epidemic are contractually qualified as a Force Majeure. We have always insisted on the express inclusion of pandemics as a Force Majeure prior to the Coronavirus outbreak and now recommend that this be included in a broader all-encompassing manner.
Legal advice in the appropriate jurisdiction should be sought early enough in order to quickly find solutions should there be difficulties arising in performing contracts which unfortunately seems inevitable in the current Coronavirus environment.