Force Majeure Applicability: Comparison between COVID-19 and Past Pandemics of the 21st Century – Spanish Influenza (1918-1920), SARS (2002-2004) and Swine Flu (2009-2010)
The outbreak of a pandemic has always disrupted the smooth flow and operation of business activity around the world. It has also affected living conditions, day-to-day running of households and people’s lives, social gathering and mobility. The outbreak of a pandemic halts the functioning of a country temporarily. More importantly, it affects business persons and companies severely because agreements and contracts may need to be re-evaluated on the premise that the pandemic has affected their execution. A contingency plan may need to be put in place swiftly. Events such as pandemics may fall within the scope of a force majeure event and the question is whether a force majeure clause (FM) can be relied upon in such circumstances. An understanding of the force majeure clause with reference to relevant case-law and comparison with past pandemics will give a better view of how the clause is applied and whether it can be relied upon in the prevailing COVID-19 circumstances.
Force Majeure
Simply put, a force majeure clause relieves parties of their contractual obligations if a major event has taken place which is out of either party’s control. For example, the COVID-19 pandemic has resulted in travel and lockdown restrictions, including in Pakistan. If a worker or an entire workforce falls ill due to the disease or is prevented from fulfilling duties due to travel restrictions, then this may fall within the scope of a force majeure clause. However, companies should still refer to their contracts to consider what alternative steps they can take.
Force majeure as a concept can prove to be difficult because it is not precisely defined in many jurisdictions. A well-drafted force majeure clause should reduce the level of uncertainty in the meaning of “force majeure” and its consequences. However, the drafting remains inconsistent across standard form contracts.
The concept originates from French law where there are express force majeure provisions in the Napoleonic Code or French Civil Code[1] whereas in English Common law, such circumstances are heavily relied upon under the doctrine of frustration.[2] The concept seems to have posed difficulty in interpretation and reliance during the outbreak of pandemics in the past and with a brief analysis we may perhaps be able to understand whether COVID-19 can surpass the FM test.
The Spanish Influenza (Spanish Flu) 1918 to 1920 (H1N1)
The Spanish Influenza started in the year 1918 and lasted till 1920. It is said that the first known case (of a soldier in a military camp) was reported in Camp Funston, Fort Riley, Kansas, United States on March 11, 1918. As soldiers traveled overseas, the flu is said to have spread across the world into military camps and quickly to Spain during the war. Spain was hit hardest by the pandemic; the disease principally affected men and women between 15 and 44 years of age, very similar to that of COVID-19. The symptoms were similar as well, starting from chills, fever, fatigue in mild cases with skin turning blue, lungs being filled with water and ultimately death due to suffocation, in serious cases. The economic effects of the Spanish Influenza were catastrophic, with businesses declining at a high rate due to a large number of workers reporting sick and unable to work. High number of lay-offs resulting in unemployment, travel restrictions, shortage of food and medical supplies, compromised healthcare system, decline in retail businesses, closures and fall in GDP were common. Since the scenario during that time is synonymous with COVID-19, the test for the applicability of force majeure was no different than what it is today.
The force majeure test is a 3-stage test as follows:
- the event must be beyond the reasonable control of the affected party;
- the affected party’s ability to perform its obligations under the contract must have been prevented, impeded or hindered by the event; and
- the affected party must have taken all reasonable steps to seek to avoid or mitigate the event or its consequences.
During the Spanish Influenza outbreak, although the criteria were the same, legal experts opined that a party’s ability to rely on an FM clause depended on whether the contract contained such a clause in the first place and on the clause’s interpretation. A case during the Spanish influenza outbreak, Citrus Soap Co. v. Peet Bros. Manufacturing Co. (1918), explained how the courts at the time dealt with the clause in light of the pandemic. In November 1918, Peet Bros. ordered more than six tons of glycerin from Citrus Soap. Citrus Soap agreed to deliver the glycerin in installments as it was made. Under the contract, Citrus Soap was to deliver the final barrel of glycerin before December 31, 1918. The contract between the parties had the following force majeure clause:
“This contract is made subject to suspension in case of fire, flood, explosion, strike or unavoidable accident to the machinery or the works of the producers or receivers of this material, or from any interference in plant by reason of which either buyers or sellers are prevented from producing, delivering or receiving the goods and in such event the delivery thus suspended is to be made after such disabilities have been removed; otherwise to be fulfilled in good faith. Notice, with full particulars and the probable term of the continuance of such disability, shall be given to the other party hereto, within ten days of the date of the occurrence of such disability.”
Citrus Soap delivered three barrels of glycerin before December 31. But in November and December, the Spanish flu gripped San Diego where Citrus Soap had its factory. The city adopted a quarantine that lasted for five days and disrupted Citrus Soap’s production. Citrus Soap delivered the remaining barrels of glycerin to Peet Bros. within a week after the contract deadline. Peet Bros. refused delivery of the tardy glycerin and sued for damages equal to the difference in the contract price of the glycerin and the market price at the time Peet Bros. refused delivery.
A suit for damages was subsequently filed and the trial court determined that Peet Bros. was not entitled to damages because of the force majeure clause. On review, the appellate court agreed. The court reasoned that the quarantine sufficiently interfered with plant operations to trigger the force majeure clause. Within a few days after the quarantine, Citrus Soap sent Peet Bros. a letter stating that the quarantine might interfere with timely delivery of the glycerin. Citrus Soap stated that it nonetheless hoped to deliver the glycerin in a timely manner. While this notice did not precisely follow the requirements of notice under the force majeure clause (i.e. it did not give “with full particulars” the anticipated length of delay), the court found it sufficient. Citrus Soap acted in good faith to give Peet Bros. a heads-up about the possible delay and acted in good faith to deliver the glycerin as close to the deadline as possible.[3]
SARS 2002-2004
SARS coronavirus (SARS-CoV) was a virus identified in 2003. It is thought to be an animal virus from an as-yet-uncertain animal source, perhaps bats, that spread to other animals (civet cats) and first infected humans in the Guangdong province of southern China in 2002. An epidemic of SARS affected 26 countries and resulted in more than 8000 cases in 2003. Since then, a small number of cases have occurred as a result of laboratory accidents or, possibly, through animal-to-human transmission (Guangdong, China). Transmission of SARS-CoV is primarily from person to person. Symptoms are influenza-like and include fever, malaise, myalgia, headache, diarrhoea and shivering (rigors). Cough (initially dry), shortness of breath, and diarrhoea are present in the first and/or second week of illness. Severe cases often evolve rapidly, progressing to respiratory distress and requiring intensive care.[4] Once again, symptoms are similar to that of COVID-19, especially since the nature of both pandemics originates from the same family of coronavirus agents.
To analyze how courts determined the impact of the SARS pandemic, a reference to a notification issued by the Supreme People’s Court of China stated the following:
Notification released on June 11, 2003, providing that “disputes arising from administrative measures taken by the government and relevant departments to prevent the SARS epidemic directly resulting in the contract being unable to be performed, or due to the impact of the SARS epidemic causing the parties to the contract to fail to perform at all”, force majeure clause shall apply (Notice on the Trial and Enforcement of the People’s Courts During the Prevention and Control of Infectious Atypical Pneumonia, article 3).
Case-law during this time was limited since most companies and businesses understood the nature of the circumstances and the approach taken by the courts catered to a wide interpretation of the clause, allowing individuals to forego any liability because of the pandemic.
Swine Flu 2009-2010 (H1N1)
The term “swine flu” refers to influenza in pigs which was first identified in Mexico City on 18 March 2009. Occasionally, pigs transmit influenza viruses to people, mainly hog farmers and veterinarians. Less often, someone infected with swine flu passes the infection on to others.
In the spring of 2009, scientists recognized a particular strain of flu virus known as H1N1. In August 2010, the World Health Organization declared the pandemic over.[5] The symptoms of Swine Flu are also similar to that of the Spanish Influenza and COVID-19 which are fever, cough, sore throat, fatigue and in worse cases, diarrhea, vomiting, pneumonia and death. The economic impact of Swine Flu cost the world close to 3 trillion dollars[6] and an estimate range between 0.5% to 1.5% fall in the GDP.[7]
Once again, a pandemic which affected the smooth operation of businesses raised questions regarding the interpretation and applicability of the force majeure clause. The approach taken by the courts during this time was referenced to past pandemics such as the Spanish flu, in order to ascertain the applicability of this clause. The test applied was the same as mentioned above since the pandemic was of a similar nature. The following citations explain the approach taken by the courts:
[Please note that the facts of these cases were not accessible – only the principles were]
Judgment of the Court of Appeals of Valencia (Section 7) no. 204/2011 of 11 April, presiding judge Mr. José Antonio Lahoz Rodrigo:
“an outbreak of swine flu (…) falling within a clear case of force majeure, was able to affect the claimants’ expectations in the carrying out of its scheduled trip.”
Judgment of the Court of Appeals of Madrid (Section 20) of 10 December 2013, presiding judge Mr. Juan Vicente Gutiérrez Sánchez:
“before the declaration of the swine flu pandemic, that the World Health Organization had declared (…) which was unforeseeable and unavoidable and which met the necessary requisites to consider that the resulting situation originated because of a force majeure event and they cannot be held liable for the damages that may have been occasioned on the appellants here”.
Judgment of the Court of Appeals of Barcelona (Section 14) no. 346/2012 of 8 June, presiding judge Ms. Yolanda López Morales:
“the undeniable events (…) due to a force majeure (…) the incident being sudden and unanticipated by the defendant, which has been recognised as the swine flu, led to a change in the scheduled trip, although, given the closure of the archaeological area and the recommendations of the Mexican authorities, the defendant did not have any option but to recognise this change as necessary in order to avoid losses.”
M/s Saadat Business Group v Federation of Pakistan and others (2013 CLD 1451) before Justice Muhammad Ali Mazhar at the honorable High Court of Sindh in Karachi defined force majeure in the following words:
24. Force Majeure:
“Should any of the force majeure circumstances, namely Acts of Allah, natural calamity, fire, government restrictions, strikes or lock-outs by workmen, war, military operations of any nature and blockades preventing the Seller/Buyer from wholly or partially carrying out his contractual obligations, the period stipulated for the performance of the contract shall be extended for as long as these circumstances prevail, provided that, in the event of these circumstances continuing for more than three months, either party shall have the right to refuse to fulfill its contractual obligations without title to indemnification of any losses it may thereby sustain. The party unable to carry out its contractual obligations shall immediately advise the other party of the commencement and the termination of the circumstances preventing the performance of the contract. A certificate issued by the respective Chamber of Commerce in the Seller or the Buyer country shall be sufficient proof of the existence and duration of such circumstances”.
Black’s Law Dictionary (Sixth Edition) defines force majeure as under:
“In the law of insurance, superior or irresistible force. Such clause is common in construction contracts to protect the parties in the event that a part of the contract cannot be performed due to causes which are outside the control of the parties and could not be avoided by exercise of due care. An oil and gas lease clause that provides that the lessee will not be held to have beached the lease terms while the lessee is prevented by force majeure (literally, “superior force”) from performing. Typically, such clauses specifically indicate problems beyond the reasonable control of the lessee that will excuse performance.”
Justice M.L. Singhal in his book Supreme Court on Words and Phrases (Vinod Publications Ltd), quoted the case of Lebeaupin v. Crispin, 19202 KB-714 in which McCardie J. had given an account of the meaning of force majeure in the following words:
“With reference to its history. The expression “force majeure” is not a mere French version of the Latin expression “vis major”. It is undoubtedly a term of wider import. Difficulties have arisen in the past as to what could legitimately be included in “force majeure”. Judges have agreed that strikes, breakdown of machinery, which, though normally not included in “vis major” are included in “force majeure”. Where reference is made to “force majeure”, the intention is to save the performing party from the consequences of anything over which he has no control. This is the widest meaning that can be given to “force majeure”, and even if this be the meaning, it is obvious that the condition about “force majeure” in the agreement was not vague. The use of the word “usual” makes all the difference, and the meaning of the condition may be made certain by evidence about a force majeure clause, which was contemplation of parties.
With reference to the above-mentioned definition and the approach taken by the courts in the past, it is clear that a pandemic may fall within the scope of a force majeure clause. Justice M.L Singhal has stated in his book that “the intention is to save the performing party from the consequences of anything over which he has no control” so if any peculiarity persists, it can be argued that the outbreak of COVID-19 may perhaps be construed as an event over which there has been no control and therefore non-performance of a contract should not result in breach.
A comparison with pandemics in the past enables us to understand that a wide approach has been taken for the applicability of a force majeure clause and it is possible to render COVID-19 as a situation in which the same can be done. As a result, contracting parties may have to bear their own losses as opposed to seek damages for non-performance unless proven otherwise.
References
[1] https://www.trans-lex.org/944000/_/force-majeure/
[2] https://blacks_law.enacademic.com/11676/frustration_of_purpose_doctrine
[3] https://www.23es.com/wp-content/uploads/2020/04/23ES-Force-Majeure-in-times-of-Coronavirus.pdf
[4] https://www.who.int/ith/diseases/sars/en/
[5] https://www.mayoclinic.org/diseases-conditions/swine-flu/symptoms-causes/syc-20378103
[6] http://www.nbcnews.com/id/30464098/ns/business-world_business/t/swine-flu-fear-already-affecting-global-economy/#.XpSx_cgzbIU
[7] https://www.economist.com/news/2009/07/27/the-cost-of-swine-flu
The views expressed in this article are those of the author and do not necessarily represent the views of CourtingTheLaw.com or any organization with which he might be associated.
