Coronavirus – a force majeure event?
As the crisis worsens and the more measures to contain the virus are unsuccessful, the case for force majeure will only get stronger.
What is force majeure?
A force majeure clause relieves parties to a contract from their contractual obligations under certain extreme circumstances. Derived from the literal French translation for 'superior force', force majeure clauses are found in most commercial English law contracts but the term 'force majeure' does not actually have a recognised meaning under English law. It is commonly defined in contracts by reference to circumstances 'not within a party's reasonable control' and a non-exhaustive list of examples.
Coronavirus and its immediate worldwide impact
As the latest crisis surrounding the Coronavirus (2019-nCoV) outbreak (the Outbreak) continues to play out, it has already been widely reported that, among other things:
- The World Health Organization declared a global health emergency on 30 January 2020;
- Entire cities in China have been quarantined, with wider regions on full or partial lockdown due to travel restrictions;
- China National Offshore Oil Corp., China's biggest buyer of liquefied natural gas (LNG), has invoked force majeure in refusing to take delivery of LNG cargoes, claiming that the Outbreak is constraining its ability to import fuel;
- French oil giant Total announced it has rejected a force majeure notice in respect of the Outbreak from a Chinese LNG buyer, becoming the first major energy supplier to publicly oppose such notice;
- Sinopec Corp., Asia's largest oil refiner, is cutting throughput in February 2020 by approximately 12% (the biggest cut in over a decade) as a result of the Outbreak's effect on demand, and will likely reduce the amount of crude oil delivery from Saudi Arabia in March 2020. It remains to be seen whether force majeure will be invoked;
- Major Chinese copper buyers have asked Chilean and Somalian suppliers to delay shipments, cancelled preliminary contracts and stopped placing new orders; and
- China's Council for Promotion of International Trade announced on 30 January 2020 that it will provide force majeure certificates to local companies struggling to fulfil their international contractual obligations due to the Outbreak.
The implications of these developments will be immediate, pervasive and far-reaching. LNG, copper and other commodity prices have plummeted since the start of the Outbreak and businesses around the world are looking into the possibility of issuing, and defences against, notices of force majeure as a result of the Outbreak.
Will the crisis impact construction?
The clear and immediate answer in our view is 'Yes'. The travel restrictions and quarantines are affecting the operation of manufacturing plants in China as well as the supply of Chinese labour both in China and internationally. This will have an impact on the global supply chain and subsequently on construction projects and other related downstream industries. Delays in shipping of construction materials and machinery due to quarantines and increased port checks will only add to the problem.
With Chinese businesses being major players in the global construction market, the potential cumulative effect of the transport and labour restrictions in terms of delay and additional costs to projects cannot be understated.
There can be no doubt that certain employers, contractors and subcontractors would, opportunistically or otherwise, look to rely on force majeure clauses in their contracts. Although the Outbreak will not act as a carte blanche to successfully invoke force majeure, the fact that Chinese authorities seem willing to recognize and certify that the Outbreak and its impact constitute a force majeure event should be cause for concern. As the crisis worsens and the more the measures to contain the virus are unsuccessful, the case for force majeure will only get stronger.
Steps to be taken
It would be prudent at this stage for businesses to review existing and potential new contracts and the force majeure clauses contained therein, with specific regard to whether the Outbreak constitutes a force majeure event and the notice provisions. Where breaches under a contract have already occurred, best efforts should be made to try to mitigate the circumstances and to keep an accurate record of all such efforts and related communications.
Whether a party to a contract can invoke force majeure will depend on whether the contract actually makes provision for force majeure clauses and whether the Outbreak falls within the contractual definition of force majeure. This, and the types of protection afforded to parties in the event of a valid force majeure event, will depend on the specific drafting of the contract. If in doubt, legal advice should be sought.
We have already provided advice to a number of our clients in relation to the Coronavirus outbreak in order to ensure the preservation of their respective rights.
Any queries in relation to the matters identified above can be addressed to our key contacts on this page.
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