COVID-19: A question on force majeure and contractual obligations

As the coronavirus outbreak in China and other countries shows no signs of abating any time soon, affected companies, including those that buy and sell goods in the Chinese market, are considering the legal defense of force majeure in regards to their contractual obligations.  Lee Kok Leong, executive editor, Maritime Fairtrade, reports

The World Health Organization has declared the outbreak a public health emergency of international concern and raised its global risk assessment to the highest level.  The virus has spread globally, emerging in every continent except Antarctica, with the rate of infection and death toll continuing to climb.

Both China and other countries have adopted comprehensive containment measures.  However, these measures are also causing disruption to international trade and transport, with the consequence that many companies have found themselves either unable to perform their contractual obligations or at risk of potentially not being able to do so.

Where affected or potentially affected contracts contain force majeure provisions, the parties can consider if and when these provisions might be successfully invoked as a result of the COVID-19 outbreak.

Force majeure refers to unexpected external circumstances that prevent a party to a contract from meeting their obligations.  The underlying event must be unforeseeable and not the result of actions undertaken by the party invoking force majeure. Natural disasters, strikes, and terrorist attacks can all be force majeure events.  Declaring force majeure may allow a party to a contract to avoid liability for nonperformance.

Any company invoking force majeure would need to show that it is effectively impossible to perform their contractual duties as a result of the outbreak.  A company is not excused from an obligation just because it has become more costly or time-consuming.  In other words, the COVID-19 outbreak is not carte blanche to invoke force majeure.  

On 30 January 2020, the China Council for the Promotion of International Trade (CCPIT) said it would offer “force majeure certificates” to help affected companies minimize losses arising from COVID-19. CCPIT issued the first certificate on 2 February 2020.

So, is the CCPIT certificate sufficient to prove force majeure?

According to Ince, an international law and business services firm, this will depend on the governing law of the contract and the terms of the relevant clause.  If the contract is subject to Chinese law, the answer is probably yes.  

Under common law, however, the CCPIT certificate might arguably only be useful for its evidentiary value and may only be one factor in establishing the existence of a force majeure event. Even then, it may only be relevant insofar as COVID-19 could potentially be brought under the force majeure clause in question in the first place.

Generally, a party who seeks to rely on a force majeure clause bears the burden of demonstrating the following:

  • It could not perform its obligations due to the relevant event.
  • The inability to perform was beyond its control.
  • There were no reasonable steps the party could have taken to avoid the event or its consequences.

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