Coronavirus and the impact on commercial contracts
The Financial Times reported recently that China has “issued a record number of force majeure certificates in an attempt to exempt local exporters from fulfilling contractual agreements with overseas buyers”. As coronavirus continues to disrupt global supply chains, we ask what is “force majeure” and how could it affect your commercial contracts?
What is force majeure?
A Force Majeure clause (French for “superior force”) is a common contractual provision that enables a party to suspend or terminate their performance obligations under a contract, upon the occurrence of an extreme event beyond their control, colloquially referred to as an “act of God”.
While some legal systems recognise “force majeure” by statute (as in the case of PRC law), the term has no recognised meaning in English law. For this reason, the events constituting force majeure, the impact of the force majeure event and the conditions in which it may be invoked will usually depend upon the precise terms of the contract in question.
Defining a force majeure event
A force majeure clause will often seek to define or list the types of events that qualify as force majeure events under the contract. Some common examples include, “natural disasters”, “terrorist attacks”, or even “acts of government”. Such lists are often followed by a more general “catch all” statement such as, “any event that is beyond the reasonable control of the parties”.
Force majeure clauses will also usually specify the extent to which the event must have impacted performance in order to qualify as a force majeure event. For example, it may be necessary to show that the event has "prevented" performance entirely. Alternatively, it might suffice to show that the event has merely "delayed" or “hindered” performance. Careful consideration should be given to the precise wording of the clause.
Does coronavirus constitute a force majeure?
The short answer is that it depends. Parties looking to invoke or challenge an assertion of force majeure need to consider both the governing law of the contract and the precise wording of the relevant clause. An assessment must be made as to whether the event: (i) falls into a category of defined force majeure events; (ii) was beyond the parties' control; and/or (iii) has impacted performance to the extent required.
Notice and mitigation requirements
Once a determination has been made that a force majeure event has occurred, the contract will usually prescribe what the parties must do next. For example, the contract may require the party claiming force majeure to notify the other party and/or take steps to mitigate the effect of the force majeure event. Failure to comply with such conditions may undermine a party's ability to rely on the force majeure provisions.
In the absence of a force majeure clause, it may be possible (under English law) to argue that an extraordinary event has frustrated the contract. If the contract is frustrated, rather than suspending performance, the contract automatically comes to an end (whether or not the parties want it to). If the test for frustration cannot be met, the parties must continue to perform under the contract, however difficult or burdensome the contract may have become in the circumstances.
The test for frustration is generally stricter than that included in a force majeure clause. In common with a number of legal systems, English law is very reluctant to discharge the parties from the obligations they have expressly assumed by way of contract. In determining whether or not a contract has been frustrated, the courts will consider a number of different factors, including: (i) the terms of the contract; (ii) the background to the contract; (iii) the parties' knowledge, expectations, assumptions and contemplations - in particular as to risk - when entering into the contract; and (iv) the parties' calculations as to future performance of the contract in the circumstances which are said to have frustrated the contract.
Consequences of getting it wrong
For businesses affected by the current pandemic, it is important when considering whether to assert force majeure or frustration to be aware that a mistaken assertion could amount to a breach (or anticipatory breach) of the contract. Depending upon the severity of that breach, the affected party could be entitled to claim damages and/or terminate the contract.
*This note has been published to provide general information and not as legal advice.