Introduction

The novel coronavirus (“COVID-19”) outbreak has resulted in robust mitigation and containment measures being taken by countries around the world and is having significant and broadening negative impacts on business activities. From a legal perspective, these negative impacts may make it difficult or impossible for parties to a contract to perform their obligations. However, a great deal depends on the nature of the event and its impact on the specific contract and its performance by the parties.

With the COVID-19 outbreak, the virus and associated actions to contain it are affecting countries and industries differently. The high number of infections in the People’s Republic of China (“PRC”) has caused the government authorities there to take strong measures which have substantially disrupted and decreased economic activity. Travel into and out of the PRC has been restricted, and international supply chains have been disrupted. Similar measures may be taken by an increasing number of countries before the outbreak finally subsides.

What relief may be available to you if your contract is affected by the COVID-19 outbreak?

In such a situation, what relief, if any, may a party to a contract have if it is unable to perform its contractual obligations? On the one hand, a contract which requires something to be done on a particular date in a specific manner may truly be impossible to perform if no one can actually carry it out, irrespective of the cost. The affected party may be completely excused from carrying out the contract. On the other hand, if what the contract requires can be carried out but to do so would be much more expensive and difficult, then the party affected by the negative effects of the COVID-19 outbreak may have no valid legal reason to refuse to perform the contract. Indeed, the refusal by a party to perform a contract during the COVID-19 crisis without a valid legal reason risks substantial liability in damages and potentially termination for breach of contract. In addition, each legal system (common law and civil law), country and contract is likely to provide a different answer to these issues.

The effect of government action and measures

Further, action by countries in response to the COVID-19 outbreak may affect the legal position of parties that have difficulty in performing their contractual obligations. In the PRC, on 10 February 2020, a spokesperson of the Legislative Affairs Commission of the Standing Committee of the National People’s Congress stated that in the face of the COVID-19 outbreak, the government has taken mitigation measures which constitute force majeure to contracting parties that cannot perform a contract because of those measures1. This statement does not establish force majeure in itself but highlights that the measures are likely to be regarded to constitute force majeure by one of the highest legislative bodies of the PRC when it makes the performance of contractual obligations impossible. How the PRC courts will rule in individual cases is beginning to emerge. The Hubei Provincial High Court recently advised its lower courts that the COVID-19 epidemic and related government measures constitute force majeure, and the court may terminate the contract upon application of a party if the contractual purpose of the relevant contract cannot be realised because of the COVID-19 epidemic or related government measures2.

In addition, the China Council for the Promotion of International Trade started to issue force majeure certificates to Chinese companies in early February 2020. The effectiveness of these force majeure certificates in the context of recognised principles of force majeure under PRC law is uncertain and untested. These certificates may help a party to a dispute in the PRC to argue that the COVID-19 outbreak is force majeure, but it will still have to show that the requirements to establish force majeure under PRC law are met. Such certificates are likely to carry less weight with the courts and arbitration tribunals outside the PRC, which are more likely to focus on the effect of the contracts and applicable principles of law against all the available evidence to determine whether an event of force majeure has occurred.

Different legal systems

Although force majeure is widely referred to by businessmen around the world as an unforeseen event that can affect the performance of a contract, it is not as well known that there are substantial differences between the legal basis to establish force majeure in a common law and civil law country or legal system. Under the common law, there is no definition of force majeure; it must be defined and provided for under the contract. Where the contract does not provide for force majeure, a party may only be able to rely on the principle of frustration to avoid performing the contract. The principle of frustration is hard to prove and is rarely used.

In civil law, the general law defines and provides remedies for force majeure, which may be in addition to what is provided for in the contract. So where civil law applies, if the contract does not provide for force majeure, a party that is impeded or unable to perform its contract may still be able to rely on the general law to establish force majeure and obtain relief from the performance of the contract. In this sense, it might be said that the civil law is more helpful to a party that is adversely affected by an event of force majeure. In any event, it underscores the importance of checking the governing law of the contract in question.

What should I do?

Some effects of the COVID-19 outbreak are obvious, such as, travel restrictions, lock-downs, quarantines, and shortages of medical and safety equipment, but their immediate impact on contracts, such as, the ability to pay, deploy resources on time and meet service levels as agreed, and the amount of increased costs may be less so. Careful consideration should be given to contracts that are most affected by the effects of the COVID-19 outbreak. In addition, where there is doubt over a claim for force majeure in contract or under the general law, you should also consider if you may make an insurance claim to cover or reduce losses caused by the COVID-19 outbreak. With this in mind, below are:

  1. questions and answers addressing key questions and issues;
  2. a flowchart to help with the review of contracts;
  3. a table which sets out some of the potential issues and actions to consider for different industry sectors (aviation, construction and engineering, insurance coverage, liquefied natural gas (“LNG”) and technology, media and telecom (“TMT”)); and
  4. some drafting tips to address the COVID-19 outbreak or a similar future event if you are preparing a new contract or revising an existing one.

Q & A

Checking your contract: force majeure

 

Potential impacts on different sectors

 

Drafting Tips

Below are some drafting tips to address COVID-19 or a similar future event.

  1. Make sure your contract has a force majeure clause to cover COVID-19 or a similar future event. Decide if the clause should be open and unqualified or a closed list of force majeure events.
  2. Consider how the governing law of the contract affects the force majeure clause in the contract.
  3. Make sure that there are clear provisions to notify an event of force majeure and state the time within which such notice must be provided.
  4. Provide for rights to suspend and terminate as appropriate, as well as the time period of suspension before the right to terminate can be exercised.
  5. Require the party that claims force majeure to mitigate the effects of the force majeure event.
  6. Consider if all obligations should be suspended during the period of suspension or if specific obligations, such as payment, should continue in any event.
  7. Consider if any matter should be excluded when force majeure is considered by a court or arbitration tribunal, such as severe price spikes or declines.
  8. If an arbitration clause is selected, ensure that the arbitration rules of the relevant arbitration institution provide for emergency arbitration procedure