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Is the coronavirus a contract killer?

09 March 2020 #Commercial #Corporate #Force Majeure


The current spread of the coronavirus is likely to be used as justification for the delayed or non-performance of contracts globally. Do established contract law principles support non-performance because of COVID-19?

Turning to force majeure

COVID-19 has now been characterised as a pandemic by the World Health Organisation. Is this status sufficient enough to constitute a force majeure event so as to delay or abrogate a party of its contractual obligations?

Force majeure lacks a legal definition but translates to "superior force" in French. A force majeure clause excludes liability for failure to perform a contract as a result of events outside a party’s control. Enforcing a force majeure clause can lead to suspension of the parties’ contractual obligations or a right to terminate the contract if the event persists for a specified period of time (usually expressly defined in the contract).

A party will need to look at the terms of the contract and prove that the virus has materially impacted or rendered the performance of the contract impossible. Compliance with any notice provisions or mitigation clauses will also be required. A claim for force majeure is likely to be unsuccessful where a party’s obligations have merely become costly or time-consuming.

Determining factors

If COVID-19 could qualify as a force majeure event, the party invoking it would need to demonstrate that it is not possible to perform their contractual duties at all as a result of the virus. The interval period between which a contract was executed and when COVID-19 significantly affected the ability for a party to perform its contractual obligations could also justify the termination of the contract. There is no definitive answer and it would depend on several factors such as the jurisdictions involved and the complexity of the agreement.

If a contracting party is based in China

As of 26 February 2020, the China Council for the Promotion of International Trade (CCPIT) issued more than 1,610 force majeure certificates to enterprises affected by the virus, involving contracts valued at £90 billion and higher to assist companies to safeguard their rights and interests and reduce the losses caused by the epidemic.

The applicability of these certificates in jurisdictions outside of China has been questioned. The receipt of these certificates may merely prove that there has been a situation which indicates force majeure and may not mean that the certificate has the legal effect of releasing parties from their contractual obligations. It may be likely that the certificates will not be binding on UK courts or other courts outside China in the event of a dispute. The most commercially sensible decision to make with Chinese suppliers declaring force majeure would likely be to delay delivery to a future date.

Successfully invoking force majeure

If a party is successful in declaring COVID-19 as a force majeure event, it may be challenging to recover any payments they have lost if an exporter does not have an overseas subsidiary. In particular, if a judiciary holds that a non-domestic party owes a domestic party a certain amount of monies in the form of damages, there will be no certainty that such amount will be recoverable based on the fact that such recovery may be against public policy in the other party’s country. An alternative option could be to commence proceedings against the non-domestic party’s assets (if any) which sit in an overseas country. This can prove challenging.

Can COVID-19 really kill my contract?

It is likely that your ability to successfully enforce a force majeure clause will depend on several factors. We outline two which have significant weighting: (1) the nature and jurisdiction of your contract and (2) the complexity and degree of governmental decisions. With regards to the latter, it will be worth considering whether restrictions such as quarantine and closed borders really do create unforeseeable and insuperable hindrances to contractual execution. This will be subjective given that COVID-19’s degree of impact is unpredictable. Cross-border deals often require that disputes arising out of the contract will be decided by a specific court or arbitration body. In practice, you may be better off avoiding litigation and negotiating a compromise.

Clarkslegal, specialist Commercial lawyers in London, Reading and throughout the Thames Valley.
For further information about this or any other Commercial matter please contact Clarkslegal's commercial team by email at contact@clarkslegal.com by telephone 020 7539 8000 (London office), 0118 958 5321 (Reading office) or by completing the form on this page.
Disclaimer
This information is for guidance purposes only and should not be regarded as a substitute for taking legal advice. Please refer to the full General Notices on our website.

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