Force majeure clauses

Introduction

The outbreak of COVID-19 in Wuhan, China was first reported to the WHO Country Office in China, on 31 December 2019. Within three months, COVID-19 has affected 65 countries and been characterised as a pandemic by the WHO.

As the virus prolongs and spreads, it will have a far reaching impact on the global economy and international trade. Companies will need to be prepared for circumstances where the outbreak brings an adverse impact, particularly on their supply chain contracts.  In particular, companies should consider whether they are entitled to call force majeure under their contracts, and thereby defer the performance of contractual obligations without penalty.

The Government of India issued a notice on 19 February 2020 that, under its Manual for Procurement of Goods 2017,  COVID-19 "should be considered as a case of natural calamity" meaning that force majeure clauses in contracts can be invoked.

The China Council for the Promotion of International Trade (CCPIT), a quasi-governmental body, announced on 26 February 2020 that it had issued more than 1600 force majeure certificates covering contracts worth tens of billions of yuan.

Force Majeure under English law

Under English law, the applicability of force majeure is purely contractual. There is no generalised doctrine of force majeure and it is entirely up to the parties to define the events and the parties’ rights and obligations upon the occurrence of such events. Careful examination of the precise wording of the contract is therefore required.

A valid claim under a force majeure clause due to COVID-19  is likely to depend on the following considerations, and a company should be prepared with clear evidence to support their claim:

1. Is the factual event defined as force majeure in the contract?
2. Did the occurrence of the event impact the company's performance of its contractual obligations?
3. Has the company used all reasonable endeavours to mitigate the effects of the event?
4. Have the notice requirements been satisfied?

The burden of proof is on the party seeking to rely upon the force majeure provisions, and the provisions are usually construed narrowly against that party. In particular, the English courts have been reluctant to interpret such provisions so as to excuse non-performance where there is evidence of negligence or a breach of duty by the party affected.

Occurrence of force majeure event

Standard form contracts typically define a range of events as force majeure events. In the context of the COVID-19 outbreak, the relevant event may be a shortage of labour or materials as a result of an event which is beyond the reasonable control of the party claiming force majeure.

The WHO has declared the outbreak as a Public Health Emergency of International Concern and that it is treating COVID-19 as a pandemic. Further, many governments are taking unprecedented measures in order to control the spread of COVID-19 in their countries. The Chinese Government, for example, has ordered a mandatory lockdown of certain cities, quarantine of labour and a production ban.

Nonetheless, expert opinion may be required to support a claim that COVID-19 falls within the terms of a particular contract. 

Causal link between the force majeure event and the delay

In order to establish that a force majeure event has occurred, a party is likely to be required to show that the force majeure event has impacted the performance of its contractual obligations. Where there are competing events (one is a force majeure event and the other is not), the authorities have indicated that the party in default may still be entitled to relief for the period of delay caused by the force majeure event, despite the concurrent effect of the other event.

Notice

The notice provisions should be closely followed. There are often strict time limits within which claims for force majeure relief must be made. In giving notice, parties are usually required to notify in writing the date when the delay to performance of the contractual obligations commenced, the cause of the delay, and an estimated duration for the delay. Contracts often contain express wording to the effect that, unless the notice is served within the required time, the party making the claim will lose its rights under the clause.

Counterparties usually then have an opportunity to respond to such notices within a set timeline, and failure to do so would be deemed to be a waiver of their right to object to such postponement of the contract performance.

The party claiming force majeure is also usually required to give further notice once the delay has ended, notifying the other party in writing of the date such delay ended.

Mitigation

Even if it is established that there is a causal link between the force majeure event and delay, parties are likely to have to show that they have taken all reasonable endeavours to circumvent the force majeure event. For example, if the delay in delivery of materials has caused a delay in a party's performance of the contract, it may have to show that it has taken reasonable efforts to avoid the force majeure event by, for example, considering other options such as obtaining the materials from alternative suppliers.

Another issue might arise if the performance of obligations under several contracts is only partially prevented: for example, a seller's available supplies may be reduced so that it can only fulfil some of its orders. The seller may then have to demonstrate that it has acted reasonably, such as by apportioning supplies on a pro rata basis.

Practical Steps

Against this background, when considering claims for force majeure, companies should:

1. Review and consider the precise wording of the relevant force majeure clauses of each contract and check any time limits.
2. Ensure strict compliance with the notice provisions of such a clause.
3. Monitor closely the development of COVID-19 and collect documentary evidence in support of the occurrence of any force majeure event listed in the contract.
4. Obtain evidence as to how the epidemic (or other force majeure event) has caused the critical delay, by reference to a critical path analysis, contract schedule, employment records, etc.
5. Formulate and document any emergency plans to mitigate the effect of such force majeure events, and gather evidence to demonstrate that they have acted reasonably in the circumstances.
6. Obtain legal advice at an early stage to assess the relevant contractual provisions if their meaning is unclear and, if necessary, seek assistance on drafting timely notices to comply with the force majeure provisions.