The world braces for the effects of the outbreak on global supply chains.
Roughly three weeks after the World Health Organization declared the coronavirus to be a “public health emergency of international concern,” the outbreak has begun to disrupt global supply chains severely. The virus, now officially named “Covid-19,” remains first and foremost a public health emergency. Since the first cases were reported in December 2019, it has sickened more than 72,000 people, killed nearly 2,000, and spread to every province and region in China—and from there to 26 other countries.
Chinese authorities have taken a number of steps to contain the coronavirus, and the Chinese economy is feeling the effects. China has completely quarantined a number of cities including Wuhan—the epicenter of the outbreak and the country’s industrial and manufacturing heartland. Varying degrees of domestic travel restrictions now affect an estimated 780 million people; they have kept many workers confined to their homes and halted the movement of goods. Many factories have ceased operations as a result. Ports in the Hubei province, in which the city of Wuhan is located, have also been shut in a bid to contain the virus.
As the coronavirus crisis worsens in the coming months, the effects on the global supply chain and demand for energy, goods, and materials are expected to intensify.
In these circumstances, companies should be aware that many Chinese parties are considering force majeure declarations as potential relief from their contractual obligations. The purpose of a force majeure clause is to temporarily or permanently excuse the parties from performance of their contractual obligations upon the occurrence of an event beyond their control that has prevented or impeded contract performance. While force majeure is a recognized concept in most legal systems, it usually does not have a precise legal definition. As a result, most contracts include a definition of force majeure and a non-exhaustive list of both illustrative force majeure events and events that do not constitute force majeure. Much will turn on how the event of force majeure is characterized—for example, whether the relevant impediment to performance is characterized as the outbreak of disease itself, as an act of public authorities in an effort to contain the outbreak of disease (e.g., an order mandating the closure of a buyer’s facilities), or as a situation in which performance is economically unreasonable in contracts governed by the Convention on the International Sale of Goods. Significant questions may thus arise as to whether the alleged force majeure is covered under the contract, as well as whether a sufficient causal link exists between the alleged force majeure and the claiming party’s non-performance. Assuming that the declaration of force majeure is validly given, parties may have different views as to the period of time in which performance should be excused and the time at which the force majeure has ceased to exist.
The Chinese body in charge of foreign trade and investment, the China Council for the Promotion of International Trade (CCPIT), has begun issuing force majeure certificates to Chinese companies. As of mid-February, CCPIT has issued 1,615 of these certificates to companies in over 30 sectors, covering a total contract value of about US$15.1 billion. It remains unclear what legal effect these certificates have as force majeure is a contractual issue, and the CCPIT is not a party to the contracts in question. But it is expected that Chinese parties may seek to rely on them in supporting force majeure claims in future disputes.
Some sectors are already seeing force majeure declarations based on the coronavirus outbreak, and these initial cases are providing valuable insight. For example, in the liquefied natural gas (LNG) market, the China National Offshore Oil Corp., which operates nearly half of China’s LNG import terminals, invoked the force majeure clauses in multiple long-term contracts with overseas suppliers. In the mining sector, Guangxi Nanguo Copper, a copper smelter in Southwest China, also declared force majeure on deliveries of copper concentrate. Other Chinese companies in both sectors are still considering whether to invoke force majeure, and some have sought to suspend or delay their contractual obligations.
Parties who have contracts with Chinese companies must carefully weigh the legal and business consequences of accepting or rejecting a force majeure declaration based on the coronavirus outbreak. Some parties appear to have accepted force majeure declarations, while others have rejected them. Others are actively working with Chinese companies to avoid a force majeure declaration altogether by affording the Chinese party certain accommodations, such as extra time to perform.
King & Spalding’s International Arbitration and Litigation group is uniquely positioned to guide companies through the coronavirus crisis, including potential force majeure declarations. We are the only firm worldwide to be ranked in Band 1 for International Arbitration in each of Chambers Global, Chambers USA, Chambers Asia-Pacific (Singapore), Chambers Latin America and The Legal 500 US. We are highly experienced in handling cases before all major arbitral institutions, including the ICC, LCIA, AAA/ICDR, SIAC, HKIAC and ICSID, as well as under the UNCITRAL and other ad hoc rules. Our representations have involved projects and parties across the Americas, Asia, Africa, Europe and the Middle East.