Unforeseeable and unavoidable: implications of coronavirus for business contracts

With the number of infections and the death toll increasing by the day, there is understandable global concern about the ongoing spread of the Coronavirus.

The economic impact of major Chinese cities on lockdown and restricted travel within, as well as to and from the country, remains impossible to gauge at this stage given the current difficulty of containing the spread of the virus.  But the damage will be significant.

For businesses based in China and for the international businesses which trade with them, it is also an alarming and uncertain time.  Business contracts are inevitably being interrupted and delayed.

Retailers are being hit hard with Burberry announcing the closure of 24 of its 64 stores in mainland China.  Ports have also been particularly badly affected with reports suggesting that ship calls at or through major Chinese ports have fallen 20% in the fortnight from 20 January 2020. But the travel restrictions imposed and the extension of the lunar new year holiday will also be impacting upon industrial activity.

In the circumstances, businesses affected will need to carefully review their contractual rights and obligations. For contracts governed by English law, this may well require particular consideration of the force majeure clause, if any, as well as business continuity and/or disaster recover obligations.

Force Majeure

A force majeure event is one that is unforeseeable and unavoidable, and not the result of either parties' actions, which makes it impossible for a party to perform a contract. The clause allows the party unable to perform its contractual obligations due an extreme event to declare force majeure and be relieved from performing its obligations.

Natural disasters, wars, riots, revolutions, explosions, strikes, and government actions can all be force majeure events.

It is not a certainty that the outbreak of coronavirus, or the resulting restrictions in China, will be covered.  It will depend largely on the specific wording of the relevant clause and it is likely that counterparties will seek to challenge reliance on such a clause.

Many force majeure provisions contain non-exhaustive lists of the type of event covered.  Because not every possible event is specifically covered, where a dispute arises the English Courts will aim to interpret the applicability of the clause in light of the examples that are provided.

Supply chains

There are already examples of Chinese businesses seeking to rely on force majeure clauses. The Financial Times reports in particular that multiple copper traders in China, which is the world's largest buyer of the metal, have asked miners in various jurisdictions to cancel or delay shipments declaring force majeure.

Other supply chains, including the tech industry which relies upon manufacturing in Zhejiang, Guangdong and Henan provinces each of which have been hit badly by coronavirus infections, are being similarly affected.

Of course, declaring reliance on force majeure is not an easy decision to take given the detrimental consequences that it could have for business partners and therefore the impact it is likely to have upon those business relationships in future.

Other considerations

  • When considering relying on force majeure, it is important to consider how the clause might interact with any business continuity and disaster recovery provisions.  By way of example, the other party might seek to argue that the impact of the event could have been mitigated by proper implementation of a business continuity or disaster recovery plan. 
  • It is also important to check the contractual notice requirements to protect against a technical challenge on this basis.
  • Finally, where there is no force majeure clause, it may be possible in English law to argue in that the contract has been frustrated.  In that case the contract will be discharged and the parties released from future obligations.
 

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