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On January 30, the World Health Organisation (WHO) declared a “public health emergency of international concern” following the outbreak, and rapid spread of the 2019 novel coronavirus (now officially known as Covid-19).
WHO has escalated the outbreak to the level of a “pandemic”, namely, the worldwide spread of a new disease. The Chinese government, and several foreign governments, have imposed a number of restrictions, including mandatory office closures, full or partial lock-down of cities, and travel bans to prevent spreading coronavirus.
Similarly, some businesses are partaking in voluntary closures and have implemented travel bans (not only in and out of China but more generally) for their employees. These restrictive measures have resulted in affected parties considering whether coronavirus, as a global health emergency, could be considered a force majeure event so as to delay or absolve a contracting party of its contractual obligations.
A force majeure clause is a civil law concept that aims to ‘keep the contract alive’ in circumstances where “innocent” contracting parties, who are not in default, are prevented from performing their contractual obligations due to disrupting supervening events beyond their control. The inclusion of a force majeure clause allows contracting parties to agree to the occurrence of certain events, which excuse a party’s performance of its contractual obligations and can, accordingly, prevent the contract from becoming frustrated.
As a creature of contract, the scope and effect of any force majeure clause is dependent on its construction and drafting. Typically, force majeure clauses are construed to cover events which: (a) are beyond the reasonable control of the party affected; (b) cause or result in default or delay in the affected party’s performance of its contractual obligations; (c) are without the fault or negligence of the affected party; and (d) the affected party could not reasonably have been expected to prevent, avoid, or overcome, the event by exercising a standard of skill, care and diligence.
Acts of God
In most cases, force majeure events are contemplated to cover acts of God, extreme weather events, riot, war or invasion, government or regulatory action including strikes, terrorism, or the imposition of an embargo.
What are the consequences of declaring force majeure? It is less common to see force majeure clauses that expressly contemplate a global health emergency, pandemic or epidemic as a force majeure event. Contracting parties must, therefore, be cautious in declaring a force majeure event on the basis of the recent coronavirus outbreak and ceasing performance of their obligations.
Incorrectly declaring a force majeure event may result in a contracting party repudiating the contract and may provide the other party with a right to damages.
Interestingly, on January 30, the China Council for the Promotion of International Trade (CCPIT) encouraged businesses which have, as a result of the coronavirus epidemic, failed to perform on time, or failed to fulfill an obligation in an international trade contract, to apply for a “force majeure certificate” excusing their performance.
Exposed to damages
For example, CCPIT issued its first “force majeure certificate” to a manufacturing company in Zhejiang Province to help stem the firm’s losses arising from its inability to meet its contractual obligations with Peugeot’s African plant, potentially exposing it to a damages claim of approximately $4.27 million (Sh437 million).
Of course, whether the outbreak of coronavirus could be considered a force majeure event will be dependent on the drafting contained in your contract. The following points, whilst not constituting legal advice, may provide guidance to companies considering declaring a force majeure event:
Scope: Does your force majeure clause contemplate a global health emergency, pandemic or epidemic as a force majeure event?
Reasonable foreseeability: Arguably, the previous SARS epidemic in 2003 may suggest the effects of the coronavirus were reasonably foreseeable and could have been prevented, avoided or overcome.
Notification: Are you required to notify the other party (ies)?
Obligation to mitigate: Do you have an obligation to mitigate the consequences of a force majeure event, including reasonable expenditure of funds, rescheduling resources, and minimising resulting delay? Can you show you have taken reasonable steps to mitigate/avoid the effects of a force majeure event?
[By Tom Fotheringham, Natalie Caton and Claire Robertson]
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