The 2019 Novel Coronavirus (COVID-19) outbreak has led to travel bans and restrictions, the lockdown of cities, and the quarantine of individuals. These government measures have disrupted businesses and supply chains, and many companies listed on the Singapore stock exchange have announced disruptions to their operations in China, including factory and store closures. Under such circumstances of continued uncertainty, parties are likely to seek reliance on force majeure provisions in their commercial contracts to avoid liability or penalties for nonperformance of their contractual obligations.
Force majeure provisions operate as a risk allocation mechanism to govern situations that are beyond the parties’ control. They are generally meant to cover extraordinary events such as the outbreak of war and natural disasters. Typically, a force majeure clause allows for the contract to be terminated or for a party to avoid liability for nonperformance upon the occurrence of certain specified events or unforeseen events beyond the reasonable control of either party, which render the performance of the contractual obligations impossible or radically different from what was contemplated by the parties.
Whether the COVID-19 outbreak constitutes a force majeure event depends on the exact wording and scope of the force majeure provision. These are some considerations to be taken into account when reviewing a force majeure provision:
The China Council for the Promotion of International Trade announced on January 30 that it intends to offer force majeure certificates to help companies deal with disputes with overseas counterparties arising from measures taken to combat COVID-19.
Whether a party can rely on force majeure certificates to declare an event of force majeure will again depend on the exact wording of the force majeure provision. Certain force majeure provisions require such a certificate while others do not. Even if the contract does not require a certificate to declare a force majeure event, such recognition by a body with semi-governmental status in China may support the view that COVID-19 is an event of force majeure.
It was reported that a major French oil and gas company has rejected a force majeure notice from a liquefied natural gas (LNG) buyer in China. Reuters also reported that one of China's main state-owned energy companies, being the country's biggest LNG importer, has declared force majeure in relation to at least three of its suppliers. With the rapid spread of COVID-19 and the expansion and escalation of government measures taken to combat and contain the outbreak, we are likely to see more cases of parties declaring force majeure. Affected companies should review the force majeure provisions in their contracts carefully and consider the implications if such force majeure provisions are to be invoked. Companies may also consider drafting their force majeure clauses more widely in the future to clearly include epidemics and public health emergencies, without the need to rely on a force majeure certificate.
If you have any questions or would like more information on the issues discussed in this LawFlash, please contact any of the following Morgan Lewis lawyers (lawyers in Singapore are directors of Morgan Lewis Stamford LLC, a Singapore law corporation affiliated with Morgan, Lewis & Bockius LLP):