Apart from the obvious global health and economic impacts of the novel coronavirus (COVID-19) virus, with the World Health Organization now calling the outbreak a global pandemic, various legal issues are sure to arise for businesses across the world. One such issue that businesses are already questioning is whether the pandemic will trigger force majeure provisions in their contractual relationships.
Executive Summary
Whether or not the COVID-19 pandemic will excuse contractual performance under a force majeure contractual provision and/or similar statutory provision is a factual question that will depend on various factors including the specific contractual provisions, the applicable law, and the factual circumstances surrounding the effects that the party has experienced due to COVID-19.
A party should seek legal advice as soon as possible as to whether force majeure may apply as a claim could be barred if not timely made, but giving notice may also have negative legal results in some circumstances.
What is Force Majeure?
Force Majeure (French for “superior force”) is a contractual provision that allows a party to be excused from contractual performance when certain unforeseeable circumstances arise outside of the parties’ control. What specifically will qualify as a force majeure event will turn on the specific definition in parties’ contracts, but traditionally would include “Acts of God” and Acts of War. Typically, events such as natural disasters (hurricanes, earthquakes, tornadoes, etc.), war, riots, and terrorist attacks have been seen as force majeure events. Some contracts will define force majeure events to include certain events as illustrative as the types of events that will qualify and could be interpreted somewhat broadly while other contracts will include a closed list of events that are specifically limited to the events explicitly listed in the contract. Indeed, some contracts may explicitly include epidemics, pandemics, disease, government action, etc., within the definition of force majeure.
Depending on the specific wording of the force majeure clause, the nature of the event, and/or other circumstances, a force majeure clause could suspend duties under the contract during the force majeure event, partially excuse performance of certain obligations, or, in more rare cases, to cancel the entire contract.
It should be noted, however, that courts view with disfavor, and are more likely to find force majeure clauses inapplicable, when a party attempts to invoke force majeure simply to avoid an unfavorable contract.
English Law
Under English common law, the courts of England and Wales do not recognize a common law right to claim force majeure. It is purely a situation of contractual interpretation and the court will apply the terms that have been negotiated by the parties.
Typically, unless the parties’ contract explicitly states otherwise, the English courts take a narrow view of force majeure events. In order for a force majeure event to extinguish a parties’ contractual liability the party will need to demonstrate that its performance was entirely prevented by the force majeure event. It is not sufficient to show that the event hindered the parties’ performance or combined with other events to prevent the parties’ performance. Performance must have become impossible exclusively by the force majeure event.
For instance, in the case of Seadrill Ghana Offshore v Tullow [2018] EWHC 1640 (Comm), the court reaffirmed the principle that the claimed force majeure event must be the only cause of the failure to perform under the contract. In Seadrill, the court found that despite the claimed force majeure event, Tullow likely could have performed under the contract even if it would have required additional technical development and greatly increased costs to perform, at least in part, despite the government action that Seadrill claimed was the force majeure event.
American Law
American courts, both state and federal, also will first look to the parties’ specific contractual provisions to see if force majeure will apply. However, some states also have statutory provisions that have similar effect to a force majeure clause. For instance, California’s Civil Code provides that “[t]he object of a contract must be . . . possible and ascertainable by the time the contract is to be performed” (Cal. Civ. C. § 1596) and performance under a contract is excused “[w]hen it is prevented or delayed by an irresistible, superhuman cause, or by the act of public enemies of this state or of the United States." (Cal. Civ. C. § 1511). Thus, even if the parties’ contract does not provide a force majeure provision, the parties may have similar protections under certain state laws.
Additionally, the courts will also often look to the Uniform Commercial Code to excuse contractual performance even if the parties’ force majeure clause would not otherwise do so.
Uniform Commercial Code (“UCC”)
The UCC is a uniform law that was created in an attempt to harmonize commercial laws that existed in across the United States of America. It has been adopted, at least in some form, by all 50 states and the District of Columbia.
The term “force majeure” is not included in the UCC, but UCC section 2-615 provides for Excuse by Failure Presupposed Conditions. Under UCC 2-615, a seller of goods can be excused from “[a] delay in delivery or non-delivery in whole or in part . . . if performance as agreed has been made impracticable by the occurrence” of an unforeseeable event.
Thus, if the contract falls under the UCC, a party does not need to show that the event was the sole cause or made performance impossible, but only that it became commercially impractical to perform.
Convention on Contracts for the International Sale of Goods (“CISG”)
The United Nations Convention on Contracts for the International Sale of Goods (“CISG”) has been adopted by most of the countries of the world, including the United States, China, South Korea, Canada, Japan, and most of Europe. Unless the contract explicitly exempts itself from the terms of the CISG, the provisions of the CISG will apply to contracts between international parties whose home nations have adopted the CISG. The CISG will also apply regardless of the nationality of the parties if the contract specifies that the contract will be governed by an adopting nation’s laws.
Article 79 of the CISG provides that a “party is not liable for a failure to perform any of his obligations if he proves that the failure was due to an impediment beyond his control and that he could not reasonably be expected to have taken the impediment into account at the time of the conclusion of the contract or to have avoided or overcome it or its consequences.” In other words, a parties’ performance is excused if it was prevented by an unforeseeable event that was outside the party’s control.
In the case of Scaforn International BV & Orion Metal BVBA v. Exma CPI SA, 25 Jan. 2005, Commercial Court Tongeren (Belgium), the court addressed whether Article 79 applied to a contract between a French seller and a Belgium buyer when the seller claimed that a “serious increase” in the price of steel prevented performance. The Court found that the provisions of the CISG applied to the parties’ contract and that specifically Article 79 could apply. The Court thereafter found that Article 79 did not apply in this specific instance because, despite the seller proving the dramatic increase in steel prices, price increases were not an unforeseeable event.
When applying Article 79, courts have also required that the event must have made performance “impossible,” not simply more difficulty or hindered.
Notice
Most contractual force majeure provisions require that a party invoking the clause give notice to the other party within a defined period of time. Similarly, the CISG requires that a party give notice within a “reasonable time.”
Parties may need to be careful in deciding whether to provide such notice, however, as the notice could relieve the other party of contractual obligations it may owe and, especially if it is found that the event falls outside the force majeure clause, could be seen as an anticipatory breach of the contract.
COVID-19 Conditions
When assessing whether COVID-19 conditions may fall within a force majeure clause or trigger statutory protections for non-performance, the individualized factual situation will be relevant. Parties will need to consider how the COVID-19 pandemic specifically affected their individual circumstances. Parties will also need to evaluate the specific contractual provision at issue. For instance, does the force majeure definition include such events as epidemic, pandemic, government action, port slowdowns, etc.? Some provisions will explicitly address such events, some may not. Further, companies will want to consider if they have evidence to prove that they could and would have performed under the contract but for the existence of the COVID-19 pandemic.
One particular situation to note is in China. It is understood that the Chinese government has been issuing force majeure certificates to many of its companies on request. Such certificates may be helpful in proving that a force majeure event occurred but will not necessarily be dispositive. Companies should still be prepared to have evidence of their individual situation to show how the pandemic affected their performance if they wish to prevail themselves of force majeure or similar statutory provisions.
Conclusion
Whether or not the COVID-19 pandemic will excuse contractual performance under a force majeure contractual provision and/or similar statutory provision is a factual question that will depend on various factors including the specific contractual provisions, the applicable law, and the factual circumstances surrounding the effects that the party has experienced due to COVID-19.
A party should seek legal advice as soon as possible as to whether force majeure may apply as a claim could be barred if not timely made but giving notice may also have negative legal results in some circumstances.
Lee, Hong, Degerman, Kang & Waimey (“LHDK&W”) have been advising international clients on various international laws, the interplay between different domestic legal systems, and contractual interpretation for over 30 years. LHDK&W’s attorneys and solicitors are licensed to practice or qualified in various jurisdictions including several U.S. states (including California, New York, New Jersey, and Virginia) and England & Wales.
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