Wai Yue Loh Partner and Chief Representative of Beijing Office, Beijing, Partner, Hong Kong and Joint Managing Director, Singapore
Coronavirus and its impact on your contract ꟷ can you rely on 'Force Majeure'?
On 30 January 2020, the World Health Organization (WHO) declared that the outbreak of the Novel Coronavirus (officially the “COVID-19”) was a Public Health Emergency of International Concern. The virus has been spreading rapidly both within China and globally in recent months. Both the Chinese government and other countries have adopted various measures aimed at containing the spread of COVID-19.
These measures are 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 not being able to do so in the future. Where affected or potentially affected contracts contain force majeure (“FM”) provisions, the parties should consider if and when these provisions might be successfully invoked as a result of the COVID-19 outbreak.
What is FM?
Although the concept of FM is globally recognised in commercial transactions, there are key differences in the treatment and recognition of FM across different jurisdictions. Under common law systems (such as English law), parties who wish to rely on FM must come within the express wording of the FM clause. The courts will not imply FM in the absence of an express contractual provision.
A FM clause expressly excuses non-performance upon the occurrence of certain specified events beyond a party’s control. A FM provision may also allow a party to postpone its contractual obligations for a certain period of time. Where the FM event is continuing, the contract may be terminated. However, as will be seen below, a party must bring itself clearly within the wording of the FM clause before it can claim FM.
By contrast, civil law systems have a more developed concept of FM and may, in appropriate circumstances, excuse non-performance of a party based on FM, even in the absence of an express FM clause. The concept of FM is also a creature of statute in some jurisdictions, such as the People’s Republic of China. It is, therefore, important to consider the potential applicability of FM in the context of the governing law of the contract.
FM vs Frustration
As discussed above, FM is a creature of contract under common law. FM clauses are strictly interpreted by the English courts. Parties wishing to invoke a FM clause must satisfy the conditions required under that clause, interpreted in accordance with the applicable case-law. Furthermore, careful consideration should be given to matters such as, for example, the events that are specified as constituting a FM event, as well as considering their nature and effect. FM clauses often refer to performance being “prevented”, “hindered” or “delayed”, all of which can be construed differently in the context of the rest of the relevant clause and the contract as a whole.
Where the contract does not contain a FM clause, the doctrine of frustration may apply. Frustration is difficult to prove. It requires impossibility of performance caused by an unforeseen event significantly altering the contractual obligations of a party outside of what could reasonably have been contemplated at the time the contract was executed. Delays, such as those caused by measures taken due to the COVID-19 outbreak, will not in principle, and without more, amount to frustration. Similarly, a frustrating event that may be “self-induced”, i.e. performance made impossible by one’s own choice, will not qualify as a frustrating event.
The COVID-19 outbreak and FM
On 30 January 2020, the China Council for the Promotion of International Trade (“CCPIT”) announced that it would offer “force majeure certificates” to help affected enterprises minimise losses arising from COVID-19. CCPIT issued its first FM certificate for COVID-19 on 2 February 2020. As of the date of this article, we understand more than 4,000 of such certificates have been issued by the CCPIT. Based on the examples we have seen, the certificates would state the specific FM event(s) said to be causing the delay.
The application for a FM certificate is relatively straightforward – an affected party can apply for such certificates online with supporting documents evidencing the delays caused by the outbreak.
However, the question remains whether obtaining a CCPIT FM certificate will, in and of itself, be sufficient to prove that a FM event has occurred and/or to allow the party seeking to rely on the relevant FM clause to do so successfully?
Where the contract is subject to Chinese law, the answer is probably yes. Under Chinese law, a party is exempted from liability where it can prove the requisite elements of FM. Furthermore, a contract may be terminated where the purpose of that contract has been frustrated by FM. Under Chinese law, FM is defined as being unforeseeable, unavoidable and insurmountable objective conditions. A CCPIT FM certificate could be key evidence towards satisfying a Chinese court that COVID-19 is a FM event.
Under common law, however, a CCPIT FM certificate might arguably only be useful for its evidentiary value and may only be one factor in establishing the existence of a FM event. Even then, it may only be relevant insofar as COVID-19 could potentially be brought under the FM clause in question in the first place.
Requirements for proving FM
Even where a party is able to show that the current situation is a FM event within the FM provision in the relevant contract, the party seeking to rely on FM to excuse its non-performance must still prove the following:
- That it was prevented, hindered or delayed from performing its obligations due to the relevant event;
- That its non-performance was due to circumstances beyond its control; and
- That there were no reasonable steps that it could have taken to avoid or mitigate the event or its consequences.
The party seeking to rely on FM has the burden of proof and will need to gather the necessary evidence if it wishes to declare FM. The required evidence will be fact-specific and will depend on the contract and the prevailing circumstances.
Standard form contracts
We consider a few examples of standard form contracts below, and whether the FM provisions in these standard form contracts are potentially wide enough to cover COVID-19. The general requirements for proving FM, as outlined above, will apply to these standard form contracts in addition to the specific requirements dictated by the standard forms.
NEWBUILDCON, a standard form shipbuilding contract published by BIMCO, allows a new build’s delivery date to be extended in the event of actual delay caused by a FM event. If that delay exceeds 180 days, the Buyer has the right to terminate the contract with notice.
NEWBUILDCON lists various FM events which include: (a) epidemics; (b) any government requisition, control, intervention, requirement or interference; and (c) lockouts or other industrial actions.
COVID-19 is arguably an “epidemic”, however this may be subject to interpretation by the relevant courts or tribunal as the WHO has not yet declared the outbreak to be an epidemic. Various travel and quarantine restrictions by governments may also fall within the “government requirement” wording and it could be said that “industrial actions” would encompass action taken by companies placing restrictions on staff returning to work due to the outbreak.
However, the NEWBUILDCON only permits the Builder to rely on one of the FM events listed provided that:
- Such events were not caused by the error, neglect, act or omission of the Builder or its Sub-Contractors; and
- The events were not, or could not reasonably have been, foreseen by the Builder at the date of the Contract; and
- The Builder has complied with the notice provision in relation to the FM event as provided for in the contract; and
- The Builder has made all reasonable efforts to avoid and minimise the effects such events have on the delivery of the vessel.
Accordingly, whilst the Builder might be able to establish that the COVID-19 is an epidemic as provided for in the wording of the NEWBUILDCON FM clause, it will also need to establish and comply with all the requirements above to benefit from the protection offered by the FM clause. Whether this is possible will depend on the particular factual situation and whether actual delay was caused by the COVID-19 outbreak.
Ship Sale & Purchase
Given the recent events, we have seen a number of ship closings which have nearly fallen through as the buyers could not arrange for the crew to board the ship as a result of certain measures implemented by the relevant local authority. The standard Norwegian Saleform 2012 MOA does not contain a force majeure provision. In the circumstances, the doctrine of frustration would need to be considered.
Parties should therefore consider including a bespoke force majeure provision in their contracts to cater for this situation specifically.
Oil & gas
Both BP and Shell set out a non-exhaustive list of FM events under their general terms and conditions for the sale and purchase of crude oil. These terms provide that COVID-19 may constitute FM where the supply of crude oil is affected. The effect of quarantine restrictions on the supply and delivery of crude oil may also be a FM event if it is the result of a regulation or order by relevant authorities. Where a FM event exists, a party may either immediately terminate “the affected delivery obligation(s) without liability” if performance is impossible, or postpone those delivery obligations without liability “for a period until midnight local time on the last date of the Laydays, or until such time as the impediment is removed, whichever is earlier”.
The outbreak may also constitute a FM event under the BP Standard Form FOB LNG MSA Agreement (2019 edition) where the outbreak affects the ability to load cargo onto a LNG vessel either at the loadport or at the seller’s premises; or where it causes industrial disturbances; or where it causes delay due to the compliance with quarantine restrictions or other control measures put in place by authorities.
However, as with the NEWBUILDCON above, it is important to assess the precise wording of the contract and the specific delay caused in each case before relying on the contractual FM provision.
The imposition of quarantine requirements may be a FM event under GAFTA standard form contracts (e.g. GAFTA 38, 39 and 100) where it is shown to be an “unforeseeable and unavoidable impediment to transportation or navigation”. COVID-19 may constitute FM where the situation escalates and delay or impossibility occurs as a result of a government or authority prohibiting or restricting exports out of a port named under the contract.
If COVID-19 is uncontained, it is likely to have significant impact on international trade. The Chinese government and other governments around the world have already taken action to control its spread. Nonetheless, we have already started to see declarations of FM from companies, and issuances of FM certificate by CCPIT.
As the situation continues to unfold, there will no doubt be an increased reliance on FM or other exclusion clauses. We strongly recommend that existing contracts and situations be reviewed carefully to determine whether the factual situation allows a party to declare FM. When in doubt, please take legal advice.
The above does not constitute legal advice on pre-existing or drafting of force majeure clauses, nor does it consider a complete list of issues to be aware of arising from COVID-19. Should you have any queries, please do not hesitate to contact the authors of this article or your usual contact at Ince.
This article was also co-authored by Alexandra Hirst, Associate.
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