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ANALYSIS: Coronavirus Shuts Down Contracts, Too

Feb. 25, 2020, 5:01 AM

At what point does the coronavirus health crisis get you out of a contract? Short answer: when the epidemic interrupts delivery of services or products. Ripple effects from the widespread illnesses may also interfere with legal obligations. A market or supply chain may fail as a result of a series of disruptions, or a government may impose quarantines or impose public health regulations or other rules that make it impossible for parties to follow through with their commercial obligations.

Force Majeure (‘Superior Force’) Clauses

Disease and quarantine may not be listed specifically as force majeure events in many contracts. But commentators generally agree that the combination of the coronavirus epidemic, the China government’s virtual lockdown of the Hubei province, and its restrictions on movement of people and goods within, into, or from the country qualifies as a force majeure event under conventional characterizations of the term. In fact, the China Council for the Promotion of International Trade stated at the end of January that it would issue force majeure certificates to local companies affected by the outbreak to support a claim for force majeure relief in any dispute with a foreign or domestic counterparty.

Not everyone shares that point of view. During the first week of February, oil and gas companies Total S.A. and Royal Dutch Shell Plc rejected force majeure notices from a buyer of liquefied natural gas in China that cited the outbreak of the virus, transportation interruptions, and government restrictions as cause for lowered demand and inability to perform. Given the unprecedented nature of the coronavirus outbreak and its impacts, parties in similar circumstances may be reluctant to risk litigating the issue, particularly in a Chinese forum.

Should the virus continue to spread outside China, or if the World Health Organization declares the coronavirus a global pandemic, there will be little doubt that this health calamity will also be regarded as excusable force majeure due to the havoc it has wreaked on the commercial world.

Recent Examples of Force Majeure

Parties have invoked force majeure clauses in other types of unexpected situations in recent years: damage to the Keystone pipeline because of a leak; closure of the Brazilian Brucutu mine by Vale SA because of a dam burst that killed up to 300 people; fuel contracts held by state-owned Petroleos Mexicanos (Pemex) that could not meet new standards for ultra-low sulfur diesel; a strike in the Escondida Peruvian copper mine owned by BHP Billiton Ltd.; not to mention the Fukushima meltdown, which—even years later—impacted Tokyo Electric Power Co. electricity deliveries in Japan.

Boilerplate: Take a Second Look

Most commercial contracts, particularly those of an international scope, contain a force majeure clause. The clause addresses events that excuse or delay a party’s contractual performance when resulting from circumstances outside the party’s reasonable control. Parties may invoke this excuse to avoid contractual liability, either in advance of a likely breach, or as a defense to a charge of breach of contract.

Practitioners who might be tempted to skim the so called “boilerplate” or miscellaneous section of a commercial contract may now want to parse more carefully the words of their agreements’ force majeure clauses. Is there an argument that the performance of clients or counterparties may be excused, delayed or suspended due to the current situation?

There is no universally accepted definition of what constitutes a force majeure. However, typical force majeure events listed in a commercial contract include natural disasters (fire, storms, floods), governmental or societal actions (war, invasion, civil unrest, labor strikes), infrastructure failures (transportation, energy), acts of God, and other events beyond the control of the affected party.

A party invoking the protections of a force majeure clause is usually required to give prompt notice to its counterparty detailing the nature of the event and the anticipated extent and duration of the event’s effects on the party’s performance. The affected party must diligently work to remove the cause or remedy the impact of the event. A force majeure event of permanent or long-term duration will typically lead to a termination of the parties’ arrangement.

Conventional wisdom suggests that contract parties keep lines of communication open and attempt to reach a negotiated accommodation regarding the effects of the virus outbreak on their commercial arrangement.

We can expect that international supply chain participants and their legal counsel will quickly work to bring additional commercial and legal clarity for similar situations that may arise in the future. The disruption in global markets occasioned by the coronavirus epidemic will likely result in force majeure, frustration, impossibility, or similar clauses being rewritten or amended to specifically include widespread infectious diseases, epidemics, and government lockdowns each as a qualifying force majeure event in international commercial agreements.

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