Chinese firms are invoking force majeure clauses to limit the impact of coronavirus on commercial operations, the Economist reports. This “trickle” of mainland suppliers declaring force majeure has the potential to become a tsunami, creating legal chaos for years to come.
Following the coronavirus outbreak, a large area around the city of Wuhan was locked down and restrictions were placed on travel, significantly reducing the number of workers able to return to manufacturing plants. In some cases, output has fallen to just 60% of normal levels, which in turn has disrupted the supply chains of global firms reliant on “just in time” deliveries of stocks.
According to the Financial Times, some Chinese companies are claiming that the outbreak means that they can delay or terminate contracts. The China Counsel for the Promotion of International Trade has already issued 1,600 force majeure certificates, worth an estimated $15 billion, that shield companies in 30 sectors from legal claims.
But what is force majeure? Common in most contracts, the clause is a legal provision that relieves parties from performing their contractual obligations when certain circumstances beyond their control arise – in this case a viral outbreak that restricts the movement of workers, making performance inadvisable. But will force majeure apply here? That depends on a range of factors, not least the detail of the clause on a contract by contract basis.
Without a force majeure clause, parties to a contract are left to the mercy of the narrow common-law contract doctrines of “impracticability” and “frustration of purpose,” which rarely result in excuse of performance. Instead of relying on common law, you can better achieve relief during times of crisis through a carefully negotiated force majeure clause. The following key elements of a force majeure clause should be addressed.
Anticipate and Specify Force Majeure Events
It is essential to determine which types of circumstances will be covered by the force majeure clause. That may seem like an impossible task. However, typical provisions cover natural disasters like hurricanes, floods, earthquakes, and weather disturbances (sometimes referred to as “acts of God”). Other, less commonly covered events may include war, terrorism, civil disorder, labor strikes or disruptions, fire, or disease or medical epidemics or outbreaks.
Courts tend to interpret force majeure clauses narrowly, covering only the events listed and those similar to them. In the case of coronavirus, the expectation is that it would have to be listed in the agreement as a medical epidemic or outbreak to excuse a party’s performance. However, there is precedent from the SARS virus outbreak of 2003, where force majeure was successfully invoked.
Beware Restrictive Language
Typically, contracts include boilerplate force majeure language, limiting the excuse of the parties’ performance obligations only when it would be “impossible” to perform due to unexpected circumstances. Impossibility here is a very high threshold. Many circumstances will make performance inadvisable even if not impossible. Consider instead excusing performance when it would be “inadvisable, commercially impracticable, illegal, or impossible” to perform.
Once you have negotiated a specified list of force majeure events, be sure to carefully read the language that comes before and after the list. For example, adding the words “or any other emergency beyond the parties’ control” to the end of a list of specified force majeure events serves to narrow the scope of triggering events only to “emergencies.” With such language, non-emergency circumstances making it inadvisable to hold a meeting would not be covered.
Consider Excusing Underperformance Due to Force Majeure
Although a force majeure clause should always allow for complete cancellation of your obligations without penalty, cancellation will not always be the counterparty’s preferred course of action. The force majeure clause should be drafted to excuse liability associated not just with nonperformance but also with underperformance, such as not meeting a minimum output.
Since the terror acts of 9/11, there has been a much greater legal focus on force majeure in the US. Our attorneys have extensive experience working with clients to invoke force majeure around the world, ranging from terrorist incidents to the disruption caused by the volcanic ash crisis of 2010.
There is no clear answer to the invocation of force majeure in the case of the outbreak of coronavirus in China (or elsewhere in the world). However, invoking force majeure does not magically bring the contract to an end, and there may still be claims for payment and delivery arising in respect of the performance of the contract prior to the force majeure event. Therefore, it is critical that the entirety of the contract is reviewed to see what rights and obligations (including accrued ones) may still survive the force majeure event.
If you have any questions or would like help reviewing your contracts and revising the force majeure clauses, please get in touch here. We would be delighted to help.