Is COVID-19 a Force Majeure for International Contracts?
By: Austin Blessing
COVID-19, colloquially known as Coronavirus,[1] is a newly discovered member of the coronavirus family.[2] This particular strain is more severe than most strains and “is not the same as the coronaviruses that commonly circulate among humans and cause mild illness, like the common cold.”[3] COVID-19 has been officially declared a pandemic by the World Health Organization (WHO), is rapidly spreading across the globe, and has had increasingly numerous and severe impacts on daily life around the world.[4]
COVID-19 has also had a major economic impact and is likely to continue to do so for some time.[5] COVID-19 and the spread thereof also raises many legal issues from employment law, to humanitarian law, health care law, travel law, insurance law, and many other areas.[6] One set of issues that should not be overlooked is the impact of COVID-19 on contracts, particularly on international contracts.[7] Specifically, how COVID-19 and the related issues and governmental restrictions may (or may not) trigger force majeure clauses or a related doctrine.[8]
As with any contractual issue, your first step if there is going to be a performance problem should be to try and work it out with the other party. Due to the nature of this crisis, many parties are likely to be understanding and willing to negotiate. However, if this step fails to resolve the issue, then it may be necessary to resort to a legal defense. One such defense could be the contract’s force majeure clause, assuming it has one.
Many contracts include force majeure clauses that can be used to excuse performance if there is a qualifying event.[9] “Force majeure events are, broadly speaking, unexpected circumstances outside of a contracting party’s reasonable control that, having arisen, prevent it from performing its contractual obligations.”[10] Whether or not this current outbreak is a qualifying force majeure event will depend on the precise wording of the applicable clause, the applicable law, the facts of the case, and the jurisdiction.[11] The fact that the current outbreak is not guaranteed to be a qualifying force majeure event is evidenced by disputes that arose from past outbreaks (outbreaks which varied in severity), which demonstrate how different jurisdictions handle force majeure clauses and how the specific circumstances of the claim can create inconsistent results.[12]
Even when there is an express Force Majeure clause in a contract, how broadly or narrowly the clause will be interpreted by a court will depend on the jurisdiction.[13] For instance, under New York law, which a lot of international contracts are subject to, these clauses are given a narrow interpretation.[14] Other jurisdictions take a broader approach to interpreting these clauses.[15]
Force majeure clauses may be particularly relevant for contracts governed by Chinese law. “The China Council for the Promotion of International Trade has issued over 1,600 force majeure certificates for businesses in China — a record number — that are purportedly offered as proof of the existence of an unavoidable and unforeseeable event. It is unclear what the impact of these certificates will be in jurisdictions outside of the People’s Republic of China, but it is perhaps another example of the lack of specificity in many force majeure provisions that may open the door for parties to supply their own standard for establishing the existence of an event outside of their control.”[16] This means that for contracts governed by Chinese law, a company will likely be able to invoke a force majeure defense, especially since contracts governed by Chinese law are presumed to include a force majeure clause, which is not true in many other jurisdictions.[17] For contracts governed by the laws of other jurisdictions, these certificates may still be strong evidence for a court.[18]
In addition to the interpretative and applicability issues, there can be other issues to the invocation of a force majeure clause such as mitigation, prevention, duration, causation, etc.[19]
If a contract does not have a force majeure clause, a party to the contract may still be able to find relief through a related concept such as impossibility, impracticability, frustration of purpose, etc.[20] However, the ability to get relief through one of these doctrines will vary greatly from jurisdiction to jurisdiction and, due to the fact-specific nature of these claims, possibly even from case to case.[21]
Additionally, for contracts that are governed by the UN Convention on Contracts for the International Sale of Goods (CISG), “Article 79(1) of the [CISG] contains similar protections afforded by force majeure provisions and may be applicable to international contracts if the UN Convention is not otherwise expressly excluded by the parties in the agreement.”[22] Specifically, Article 79(1) states 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.”[23] Article 79(1) is subject to the notice requirement of Article 79(4), which requires the party that cannot perform to give notice of the inability to perform to the other party.[24] It is also subject to Article 79(5), which states that “[n]othing in this article prevents either party from exercising any right other than to claim damages under this Convention,” and Article 80 which states “[a] party may not rely on a failure of the other party to perform, to the extent that such failure was caused by the first party’s act or omission.”[25] The Uniform Commercial Code (UCC), which has been enacted in whole or in part by many states and which governs many international contracts, has similar provisions to the CISG, most notably UCC §§ 2-614, 2-615 & 2-616.[26]
In conclusion, one of the many types of legal issues the COVID-19 outbreak will cause will be contractual ones. A solution to some of these issues may be force majeure clauses or related doctrines, although this will vary from jurisdiction to jurisdiction and, due to the fact specific nature of these claims, may even vary greatly from case to case within the same jurisdiction.
#COVID #Coronavirus #Contracts #InternationalLaw
[1] This blog post was completed on March 23, 2020. Due to the highly fluid nature of both this pandemic and the legal issues caused by it, the material and sources herein could become outdated in an unusually fast manner. I would like to thank Professor Lawton for her assistance in reviewing this blog post.
[2] What to Know About Coronaviruses, Medical News Today, https://www.medicalnewstoday.com/articles/256521 (last visited Mar. 23, 2020).
[3] Coronavirus Disease 2019 (COVID-19): Frequently Asked Questions, CDC, https://www.cdc.gov/coronavirus/2019-ncov/faq.html#anchor_1584386215012 (last visited Mar. 23, 2020).
[4] WHO Director-General's Opening Remarks at the Media Briefing on COVID-19 - 11 March 2020, WHO (Mar. 11, 2020), https://www.who.int/dg/speeches/detail/who-director-general-s-opening-remarks-at-the-media-briefing-on-covid-19---11-march-2020; Social Lives are Moving Online as the U.S. Adjusts to the Coronavirus, NY Times (Mar. 18, 2020, 9:20 AM), https://www.nytimes.com/live/2020/coronavirus-covid-19-03-17; COVID-19: We Will Come Through This Together, UN (Mar. 13, 2020), https://www.un.org/en/coronavirus/covid-19-we-will-come-through-together (From the UN Secretary-General: [W]e must act together to slow the spread of the virus and look after each other. This is a time for prudence, not panic. Science, not stigma. Facts, not fear. Even though the situation has been classified as a pandemic, it is one we can control. . . . But that will take unprecedented personal, national and international action.”). Some people even predict that this will permanently alter our society even after the pandemic has ended. Enda Curran, Coronavirus Will Change How We Shop, Travel and Work for Years, Bloomberg (Mar. 14, 2020, 5:00 PM), https://www.bloomberg.com/news/articles/2020-03-13/coronavirus-will-change-how-we-shop-travel-and-work-for-years.
[5] Coronavirus Outbreak: The Legal Implications, Norton Rose Fulbright (Feb. 2020), https://www.nortonrosefulbright.com/-/media/files/nrf/nrfweb/knowledge-pdfs/22534_emea_coronavirus-outbreak-the-legal-implications.pdf?la=en&revision=f3c39aec-7af7-4c74-b75b-0051fa88c2ba.
[6] Id.
[7] Victoria Lee et al., COVID-19 Contract Issues Reach Beyond Force Majeure, Law 360 (Mar. 13, 2020, 4:39 PM), https://www.law360.com/articles/1251749/covid-19-contract-issues-reach-beyond-force-majeure.
[8] The Coronavirus and its Consequences: Legal Impact on Supply and Production Relationships, Deloitte Touche Tohmatsu Ltd., https://www2.deloitte.com/global/en/pages/about-deloitte/articles/legal-consequences-coronavirus-deloitte-germany.html (last visited Mar. 23, 2020); Lee et al., supra note 7.
[9] Coronavirus Outbreak: Global Guide to Force Majeure and International Commercial Contracts, Baker McKenzie (Mar. 3, 2020), https://www.bakermckenzie.com/en/insight/publications/2020/03/coronavirus-outbreak-global-guide.
[10] Coronavirus Outbreak: The Legal Implications, supra note 5.
[11] The Coronavirus and Contract Disputes – 10 Tips for Managing Legal Risk from Global Supply Chain Disruption, Sidley Austin LLP (Mar. 3, 2020), https://www.sidley.com/en/insights/newsupdates/2020/03/the-coronavirus-and-contract-disputes-10-tips-for-managing-legal-risk-from.
[12] Nick De Marco QC, Coronavirus, Sport & The Law of Frustration and Force Majeure, Blackstone Chambers (Mar. 13, 2020), https://www.sportslawbulletin.org/coronavirus-sport-law-frustration-and-force-majeure/; Thomas J. Timmins & Howard Xin, What to do When you Receive a Force Majeure Claim Based on the Novel Coronavirus in Canada, Gowling WLG (Feb. 19, 2020), https://gowlingwlg.com/en/insights-resources/articles/2020/what-to-do-force-majeure-claim-novel-coronavirus/; Assess Your Contractual Obligations Under the 2019-nCoV Outbreak, Leaf Legal (Feb. 7, 2020), https://www.leaf-legal.com/can-you-apply-hardship-force-majeure-during-the-coronavirus-crisis/.
[13] The Coronavirus and its Consequences: Legal Impact on Supply and Production Relationships, supra note 8.
[14] Daniel Balk III, COVID-19: Force Majeure Event?, Nat’l L. Rev. (Mar. 17, 2020), https://www.natlawreview.com/article/force-majeure-clauses-and-covid-19-can-force-majeure-clauses-excuse-performance.
[15] Id. See also Lawrence P. Rochefort & Meghan K. Boland, The Coronavirus and Force Majeure Clauses in Contracts, Akerman LLP (Mar. 17, 2020), https://www.akerman.com/en/perspectives/the-coronavirus-and-force-majeure-clauses-in-contracts.html; Coronavirus Outbreak: Global Guide to Force Majeure and International Commercial Contracts, supra note 9.
[16] Lee et al., supra note 7.
[17] Coronavirus Outbreak: Global Guide to Force Majeure and International Commercial Contracts, supra note 9; COVID-19: Force Majeure Event?, Shearman & Sterling (Mar. 12, 2020), https://www.shearman.com/perspectives/2020/03/covid-19--force-majeure-event.
[18] Coronavirus Outbreak: Global Guide to Force Majeure and International Commercial Contracts, supra note 9; Huileng Tan, China Invokes ‘Force Majeure’ to Protect Businesses — But The Companies May be in for a ‘Rude Awakening’, CNBC (Mar. 6, 2020, 5:53 AM), https://www.cnbc.com/2020/03/06/coronavirus-impact-china-invokes-force-majeure-to-protect-businesses.html.
[19] Lee et al., supra note 7.
[20] Coronavirus Outbreak: The Legal Implications, supra note 5; UPDATE: Force Majeure Under the Coronavirus (COVID-19) Pandemic, Paul, Weiss, Rifkind, Wharton & Garrison LLP (Mar. 16, 2020), https://www.paulweiss.com/practices/litigation/litigation/publications/update-force-majeure-under-the-coronavirus-covid-19-pandemic?id=30881#_edn6.
[21] Coronavirus outbreak: The Legal Implications, supra note 5; UPDATE: Force Majeure Under the Coronavirus (COVID-19) Pandemic, supra note 20.
[22] Lee et al., supra note 7.
[23] United Nations Convention on Contracts for the International Sale of Goods art. 79(1), Apr. 11, 1980
U.N. Doc. A/CONF.97/18 (1980),19 I.L.M. 668 (1980), 1489 U.N.T.S. 3, 59, S. Treaty Doc. 98-9 (1983) [hereinafter CISG].
[24] CISG art. 79(4).
[25] CISG arts. 79(5), 80.
[26] United Nations Convention on Contracts for the International Sale of Goods, ABA (June 18, 2015), https://www.americanbar.org/groups/business_law/publications/blt/2015/06/03_adams/; The New Laws Applicable to the International Sale of Goods, Stimmel, Stimmel & Roeser, https://www.stimmel-law.com/en/articles/new-laws-applicable-international-sale-goods (last visited Mar. 23, 2020); U.C.C. §§ 2-614-2-616 (Am. Law Inst. & Unif. Law Comm’n 1977).