Legal Implications of Coronavirus: Can Force Majeure Be Relied Upon

Legal Implications of Coronavirus: Can Force Majeure Be Relied Upon

A force majeure provision will only arise in contracts where the parties have specifically agreed to it and on the terms that they have negotiated. If a contract included a force majeure provision or FM clause excusing the performance of parties’ obligations for lack of demand of products resulting from the outbreak of a disease or virus in China, it would likely be invoked in the current circumstance of the outbreak of coronavirus. However, if the FM clause excused performance because of a natural disaster, flood, war, act of god or even an epidemic generally, it would be less clear whether the outbreak would fall within the intended use of the FM clause. A party must bring itself clearly within the wording of the FM clause before it can claim force majeure. A party will not be relieved of its obligations merely due to the performance of the contract becoming more difficult or harsh than initially intended: this is the cost of bargain a party is stuck with.

In order to be invoked eventually, most force majeure clauses require that the event is unforeseeable at the time the contract has been entered into. So the first requirement is that the event has to be unforeseeable and unavoidable. A trend emerged whereby most contracts entered into after the outbreak of the Severe Acute Respiratory Syndrome (SARS) in China contained the term ‘epidemic’ in the FM clause. However, it will only be fair to grant relief where causal connection can be established between the outbreak of the virus and the inability to fulfil contractual obligations. Therefore, the second requirement is proving causal connection. To be able to utilize the FM clause, a party needs to show that:

  1. it is the outbreak of coronavirus that is causing the party to be unable to fulfil its obligations; and
  2. the party trying to invoke the clause has made reasonable efforts to avoid the effects of force majeure to the extent possible through the exercise of diligence and reasonable care; but
  3. non-performance has resulted from circumstances beyond its control.

Therefore, the third requirement is to prove that there had been no reasonable steps that a party could have taken to avoid the event or its consequences from coming in the way of performance of the contract.

Taking a real life example of the FM clause as used by a public body in Pakistan, the Private Power and Infrastructure Board (PPIB) of Pakistan in its definition of a force majeure event has included an “epidemic” as one of the events which is beyond the reasonable control of a party and can qualify as a force majeure event. By reading the basic definition of an epidemic, which is “a widespread occurrence of an infectious disease in a community”, one can establish that coronavirus is an epidemic.

Nevertheless, it is arguable that the outbreak of coronavirus is covered within the term ‘epidemic’. The World Health Organization (WHO) has declared that the outbreak of coronavirus is a ‘public health emergency of international concern’ but not a globally recognized epidemic. Having said that, the WHO Director General’s remarks at a mission briefing on coronavirus stressed upon the “rapidly evolving nature of the epidemic”, which may be interpreted as portraying a potential force majeure event in the making. It remains to be seen whether the courts in various jurisdictions including Pakistan independently embark on the journey to decide whether coronavirus is an epidemic or do they follow the WHO or the stance of their respective governments thereon.

Towards the end of January 2020, the China Council for the Promotion of International Trade (CCPIT) confirmed that China would offer force majeure certificates to local companies which had not been able to fulfil contractual obligations because of the outbreak of coronavirus as a means of evidencing their inability to perform their contracts. The application for this certificate is relatively straightforward. An affected party can apply for such a certificate online with supporting documents evidencing the delays caused by the outbreak. This leads to the analysis that coronavirus is a force majeure event and such a certificate will be very useful where the force majeure clause is not wide enough to cater to the circumstances at hand. However, is the CCPIT force majeure certificate sufficient to prove that a force majeure event has occurred and does it allow the party seeking to rely on the relevant force majeure clause to do so successfully? Under the Chinese jurisdiction, the answer is probably yes, but in other jurisdictions such a certificate would only be useful to the extent of being one of the factors in establishing the existence of a force majeure event.

So, the burden of proof is entirely on the party seeking to rely on force majeure. The required evidence for this purpose will be fact-specific and will depend on the contract and prevailing circumstances. The FM clause and surrounding circumstances will need to be evaluated on a case-by-case basis.

If coronavirus can be established as a force majeure event, then a secondary question arises: what are the legal implications of the coronavirus outbreak?

If coronavirus triggers the FM clause, then the legal implication thereof will be no different from that of any other force majeure event and the affected party will be excused from performing, wholly or partly, such part of the contract as has been directly affected from the outbreak of the virus. Both parties will be left to bear their own losses.

Below is an illustration of how widespread this virus has been. It has spread to more than 100 countries since its emergence in the city of Wuhan, Hubei province, China in December 2019. Over 30,000 cases outside China have emerged as per World Health Organization’s figures. This image can be relied upon to substantiate the stance that coronavirus is an epidemic due to its global occurrence as it has emerged in every continent except Antarctica.

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Below is a satellite image, using data collected from NASA and European State Agency Satellites, illustrating a drastic drop in China’s air pollution due to the closing down of industrial organizations, suspension of activities and workers staying at home. This reflects the magnitude of impact on economies and trade between countries.

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The world economy this year could grow at its slowest rate since 2009 due to the coronavirus outbreak, according to the Organization for Economic Cooperation and Development (OECD), unless control is established over the outbreak. China is the world’s largest exporter of goods, which builds upon the statement that coronavirus is a force majeure event considering the fact that only 3 months of 2020 have passed and economic growth overall has already been drastically affected.

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The views expressed in this article are those of the author and do not necessarily represent the views of or any other organization with which he might be associated.

Ahmed Uzair

Author: Ahmed Uzair

The writer is a Partner at AUC Law, a firm that specializes in corporate law. He can be reached at [email protected]