Coronavirus outbreak: force majeure and international commercial contracts

by Michał Pochodyła, Stolarek & Partners, and Luca Salerno, Hanover Bond.

After having been first reported in Wuhan, China in December last year, the Covid-19 coronavirus has spread worldwide causing several countries to impose travel bans, quarantine citizens and isolate the infected in an attempt to stop the spread of the virus.

These emergency measures are having a significant impact on the performance on contracts, particularly contracts for the sale and purchase of goods and services, and those involving international shipping and complex supply chains.

This has brought a sharp focus on force majeure and international commercial contracts.
With the draconian measures impacting goods, workers and logistics, several suppliers are reported to be unable to fulfil their contracts within the prescribed time-frame or at all. Invoking force majeure can, however, also be in the interest to buyers who are trying to avoid taking delivery of goods or services at a time of weakened demand in the downstream markets that they supply.

What is force majeure?

The concept of force majeure ("FM") is a Roman law construct  – the French rendition of the Roman law expression “vis cui resisti non potest” or “irresistible force” in English. It has been carried across to several other civil law jurisdictions where FM is contemplated in one form or another by statute, typically the local civil code.
FM is also widely application in common law jurisdictions, the laws of which do not contemplate a remedy in situations where a contract becomes impossible to carry out due to events outside the affected parties’ control. For example, the only remedy afforded by English law – which informs most common law systems – is the doctrine of frustration that only excuses non-performance where performing under the contract becomes impossible in circumstances entirely beyond the remit of the parties. Hence FM must be, and often is, expressly built into contracts that are governed by English law or its derivative laws.

Whether the source of FM rights is legislation or the terms of the contract, the effect of FM regimes is to excuse non-performance by a party of its contractual obligations where non-performance is caused by a defined FM event.
Determining whether an event is a FM event typically involves applying the objective test found in the relevant law or written in the contract.
Statutory and contractual FM regimes often differ in practise. Contractual FM can be, in scope and remedies, either wider or narrower than the more inflexible civil law regimes.

Usually FM in contractual regimes is more formulaic, in that it attaches importance to listing events that constitute force majeure; if an event or category of event is not expressly listed, then the event is not considered to be FM. By contrast, civil law systems are more often informed by a more substantive test that looks at whether the event in question could be avoided or remedied.

In the reality of commercial contracts, the FM regime is often a blend of the formulaic and substantive test, with foreseeability of the event and mitigation of the effects of the event often being the more contentious elements of a FM claim.
If the contract or law provides that a FM event must ‘prevent’ performance, the affected party must generally demonstrate that its performance has become legally or physically impossible and not merely more difficult or more expensive. By contrast, if the provision refers to the event ‘hinderingor delaying’ performance then the threshold will generally be lower, and FM may be satisfied if performance remains possible but has become substantially more onerous.

Until fairly recently, English courts applied a test of unforeseeability to FM events and while there is authority that this is no longer the case, other common law courts may still impose such a requirement. English courts have found that the affected party must also generally have been ‘ready, willing and able’ to perform the contract but for the FM event. English courts have also tended to quash claims that sought to construe economic or market circumstances affecting the profitability of a contract as being a FM event.

Other legal considerations

FM provisions typically contain a notification requirement, which usually operates as a ‘condition precedent’, precluding relief if the relevant notice is not given in the necessary time-frame.
FM provisions also commonly require the claiming party to show that is has taken all reasonable steps to avoid or mitigate the event and its effects.

Recommended actions

If, whether as buyer or supplier of good or services, you are a party to a contract that have or may be affected by the viral outbreak, we recommend the following actions:

  • Review each contract carefully, with particular regard to the governing law and FM provisions, including any time bars or other procedural requirements.

  • Form a preliminary view on whether the outbreak and/or resulting government crisis measures are covered or whether they are excluded.

  • If you cannot positively conclude that the event that is affecting you is FM, consider any potential consequences of invoking FM, for example being held to be in repudiatory breach of the contract.

  • If you are going ahead and invoking FM, consider your obligation to mitigate the effect on non-performance and what steps you can take.

  • If you are at the receiving end of a FM claim that you do not think is valid, there is the issue of enforcement of the contract, particularly if it does not provide for international arbitration.

  • Consider the impact of a FM claim (made or received) on your insurance arrangements.