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Can Companies Invoke the Force Majeure Clause in the Context of COVID-19?

February 26, 2020

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.

What Is Force Majeure?

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.

Is the COVID-19 Outbreak an Event of Force Majeure?

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:

  • If the force majeure clause expressly specifies epidemics, diseases, and/or public health emergencies as events of force majeure, it is likely that the COVID-19 outbreak would qualify as an event of force majeure.
  • Even if epidemics, diseases, and public health emergencies are not expressly specified as events of force majeure in the contract, the COVID-19 outbreak may nevertheless fall within the general force majeure wording as an unforeseeable event beyond the parties’ reasonable control.
  • If the force majeure provision covers “acts of government” as a force majeure event, it can also be argued that the travel bans and restrictions, city lockdowns, and mandatory business closures imposed by the government constitute “acts of government” beyond the parties’ reasonable control that are preventing the performance of contractual obligations.
  • The party seeking to invoke force majeure will typically need to show a causal connection between the force majeure event and its failure to perform its contractual obligations, and it must show the COVID-19 outbreak has made it effectively impossible for it to perform its contractual duties. It is unlikely that a party will be able to rely on force majeure simply because performing its contractual obligations has now become more expensive, onerous, or time-consuming as a result of the COVID-19 outbreak. For example, a party seeking to rely on force majeure may need to show that it was impossible for it to source for alternative suppliers, contractors, materials, or personnel.
  • Depending on the wording of the force majeure provision, events that could have been reasonably avoided or overcome may be excluded. Whether the COVID-19 outbreak is an event that could have been reasonably avoided or overcome will depend on an objective interpretation. Given that there have been other similar epidemics in the past such as SARS, one view is that the outbreak of virus is no longer an unforeseeable event that would not be within the parties’ knowledge or contemplation. Another view is that the scale of the government measures in response to the COVID-19 outbreak (such as the expanded travel restrictions and city lockdowns) are extraordinary in nature and are broader in scope and scale compared to government responses to previous epidemics. The World Health Organization (WHO) has declared the COVID-19 outbreak a public health emergency of international concern. This is only the sixth such declaration by WHO, and supports the view that the COVID-19 outbreak is an unprecedented event. To this extent, it could be argued that the COVID-19 outbreak does not constitute a foreseeable contingency within the parties’ knowledge or contemplation such that reasonable steps could have been taken by the affected party to avoid or overcome it.
  • Parties seeking to invoke force majeure provisions should also consider what the period of force majeure would be during which contractual obligations are suspended. Given the fluidity of the situation, it may be difficult to ascertain when an event of force majeure has commenced and when it has ended.

Will Force Majeure Certificates help?

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.

Conclusion

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.

Contacts

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):

Singapore
Wai Ming Yap
Joel Seow
Gina Ng

Shanghai
Todd Liao
Alex Wang