The legal impact of coronavirus: Is it an event of force majeure?18 Feb 2020 // Insights
In the wake of the coronavirus outbreak, businesses should carefully consider whether they should notify an event of force majeure.
The recent coronavirus outbreak is not only having a devastating impact on global health and wellbeing, it also continues to have a massive impact on businesses around the world, many of whom are finding that they are no longer in a position to perform their contractual obligations. From airlines to energy companies, the economic effects of the coronavirus are just beginning to manifest themselves. So, what’s next for those businesses that suddenly find themselves unable to keep up their side of the bargain and are seeking to get out of their contractual obligations on the grounds of force majeure? Unfortunately, whether they can validly invoke force majeure to relieve them from their ongoing contractual obligations is unlikely to be a straightforward affair.
What does the contract say?
For contracts governed by English law, the first step will always be to review the wording of the contract itself to determine whether force majeure can be validly invoked. As force majeure is not a defined term in English law, the circumstances under which it can be relied upon will depend largely on what the parties have agreed, which should hopefully be set out clearly in the contract. In the case of a properly drafted contract, where both parties have given thought to the issue of force majeure, there should be a clause which expressly states that one or both parties are relieved from some or all of their ongoing contractual obligations on the occurrence of certain specified events. The types of events that regularly feature in such clauses are: war, riots, fire, flood, hurricane, typhoon, earthquake, lightning, explosion, strikes, lockouts, slowdowns, prolonged shortage of energy supplies, and acts of state or governmental action prohibiting or impeding any party from performing its respective obligations. The underlying principle is that, on the occurrence of a specified event which is outside a party's control, that party is excused from or entitled to suspend performance of all or part of its contractual obligations. In those circumstances, the affected party can notify an event of force majeure and, in theory, will not be liable for its failure to perform some or all of its contractual obligations in accordance with the force majeure clause.
What factors should businesses consider before notifying an event of force majeure?
In addition to carefully reviewing the terms of the contract, before notifying force majeure and considering themselves relieved from ongoing performance, businesses should consider the following:
1. What is the true impact of the event in question on the business?
Under English law, a contract becoming more expensive to perform as a result of the occurrence of a force majeure event is generally insufficient for the party to be relieved of its contractual obligations. In simple terms, this means that if a business has to spend more money to comply with its contractual obligations because of the event in question (for example, if it has to reroute flights or cargoes in the context of the coronavirus outbreak), but it is still able to comply with its obligations (albeit at greater expense), then it is unlikely the English courts will consider there is proper legal basis for notifying force majeure. In general terms, increased expense is considered by the courts to be a risk of doing business and the English courts are wary of parties seeking to terminate on force majeure grounds where, in reality, the contract has become less commercially attractive. If parties could simply call time on their contractual obligations when something occurred that made performance more expensive, it would lead to huge legal uncertainty in the context of commercial contracts. As such, the general rule is that increased expense on its own will not suffice.
2. Whether the force majeure event has “prevented” performance or if a lower threshold than “prevention” applies
Here, again, the clause itself will need to be carefully reviewed in the context of the event in question in order to ascertain what threshold has been agreed by the parties for a valid invocation of force majeure. Where a force majeure clause states that the relevant triggering event must "prevent" performance, the non-performing party must be able to prove that performance is impossible, not just difficult or unprofitable1. However, not all force majeure clauses specify a threshold of “prevention”. The English courts have accepted that a lower threshold of “hindrance” can apply, where that has been explicitly agreed by the parties and set out in the force majeure clause. Various judicial tests have been put forward in relation to the meaning of “hindering”2, however, it is unlikely to be clear cut whether the event in question can be said to have “hindered” performance to the necessary degree. In circumstances where the threshold is “hindrance” as opposed to “prevention”, the parties will need to carefully consider the effect of the triggering force majeure event in the context of the contract as a whole, which is likely to involve a complex legal and factual analysis.
3. Whether the force majeure event is the only effective cause of default by the non-performing party
The English courts have determined that a force majeure event must be the only effective cause of default by a party under a contract relying on a force majeure provision3. In the context of the coronavirus outbreak, press reports indicate that some energy companies are rejecting notices of force majeure served on behalf of their Chinese counterparts4. In these cases, reports are suggesting that energy companies are denying that force majeure applies and claiming there is an ulterior motive for the purported cancellations, namely that the Chinese companies wish to take advantage of lower prices on the spot market in circumstances where the market has dropped. However, if there has been an effective shut-down of the ports as a result of the fact that Chinese workers are, or have been, in quarantine and/or forbidden to go to work, it will not be easy for energy companies to demonstrate that force majeure has not been validly notified. As above, the situation on the ground must be assessed carefully in the context of the contract and, if the matter is disputed in court or arbitral proceedings, it is likely that factual evidence will be required.
4. What are the risks to a business of wrongly notifying an event of force majeure and treating itself as relieved of its contractual obligations?
If one party to the contract considers the other has wrongly notified an event of force majeure and is no longer complying with its obligations on that basis, it is likely to commence legal proceedings. As above, the outcome of those proceedings in the context of arguments on force majeure will be dependent on the proper interpretation of the contract in the context of the impact of the force majeure event in question.
Advice to businesses
As outlined above, there are complex points to consider when it comes to the invocation of force majeure on coronavirus grounds (or any grounds). The first step will always be a review of the relevant contractual provisions.
It makes sense for businesses to consider events that could be catastrophic to their businesses and to undertake a review of their contracts to identify whether they have adequate protection in the case of such risks materialising. The outbreak of the coronavirus reminds us that it is worth considering the inclusion of pandemics, epidemics, and other civil emergency situations to the list of force majeure events in the contract.
1. Tennants (Lancashire) Ltd v G.S. Wilson & Co. Ltd  AC 495
2. Peter Dixon & Sons Ltd v Henderson, Craig & Co Ltd: Hindering encompassed the existence of obstacles which were “really difficult” to overcome
3. Intertradex v Lesieur  2 Lloyd's Reports 509
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