Coronavirus: force majeure, supply chains and contractual performance
Published on 17th Feb 2020
The coronavirus is having a substantial economic impact, disrupting production, supply chains and travel. Businesses need to consider the legal risks that arise and what they can do to protect themselves.
On 30 January 2020, the World Health Organisation declared the outbreak of the coronavirus a public health emergency. Widespread disruption has been caused as a result of the unprecedented measures taken: workplace shutdowns and disruption of production, port closures, and suspension of air travel. In such circumstances, force majeure claims may arise.
Parties have limited remedies under English common law when a contract becomes impossible to perform. Express force majeure clauses address this. The term 'force majeure' has no recognised meaning in English law. It must be expressly included and properly defined in the contract. (In the absence of an express clause, the common law doctrine of 'frustration' may apply: where, after formation of the contract, an unexpected event occurs beyond the control of the parties, which renders performance physically or commercially impossible. However, this is rarely applied).
A force majeure clause operates to delay or absolve one or both parties to a contract of all or part performance of their obligations on the occurrence of certain events which are outside their control. These may include acts of God, natural disasters, epidemics or pandemics, war, strikes and acts taken by governments. Whether or not the coronavirus will constitute a force majeure event will depend on the relevant contractual wording and interpretation.
The China Council for the Promotion of International Trade announced on 30 January 2020 that it would issue force majeure certificates. This will assist in legitimising any claims for force majeure, but ultimately the burden is on the party seeking to claim force majeure to prove that coronavirus falls within the contract wording and that non-performance was a result of the outbreak. It must also show there were no alternative means for performing its obligations and that it has taken all reasonable steps.
Consequences of invoking a 'force majeure' clause
The consequences of invoking a force majeure clause depend on the wording of the clause. Common consequences include:
- suspension of contractual obligations;
- extensions of time to fulfil obligations;
- renegotiation of terms;
- obligation to mitigate losses; and
- the right to terminate the contract.
What to do now?
As the coronavirus disruption is set to continue, companies should now:
- review all contracts in which force majeure (or frustration) may be a factor – whether used by or against you;
- if you are able to invoke a force majeure clause, consider time limits and notice for doing so;
- consider if there are any alternative ways of performing contractual obligations and take appropriate mitigation steps (whether by you or your counterparty);
- retain all evidence of disruption, including documents proving delay / cancellation;
- if entering into new contracts, draft clauses sufficiently clearly to cover eventualities such as the coronavirus outbreak; and
- consider whether insurance cover applies – do you need to notify?