As Coronavirus Cases Rise Globally So Too Do Risks for International Businesses and Transactions

By Cody Lind, Associate Editor

Coronavirus (COVID-19) has captured the world’s attention and concern as it continues to spread globally – leaving the international community with more questions than answers. As of March 3, 2020, The Word Health Organization has confirmed 91,783 cases of the virus worldwide, totaling 3,123 deaths. The virus has been confirmed in 74 countries, including China (80,303) where it was first detected, South Korea (4,812), Iran (2,336), Italy (2,036), and the United States (64).

While the virus’s human impact is clear, the coronavirus’s impending threat to the global economy cannot be understated. In the past week, stocks in Europe and Asia have plummeted. In the US, the stock market saw seven consecutive days of declines and the market’s largest loss since the beginning of the 2008 financial crisis.

For companies reliant on international transactions and supply, the illness represents a substantial risk of lost revenue, breached contracts, and mounting questions of what liability and relief is available for unmet obligations. A primary source of concern for companies are force majeure clauses that continue to be invoked by businesses who are unable to perform under their contracts due to the spreading virus. The China Council for the Promotion of International Trade (CCPIT) is reported to have issued more than 1,600 force majeure certificates to Chinese companies seeking to avoid legal claims for contracts totaling $15 billion and spanning all sectors of the economy.

Generally, force majeure clauses seek to cover unexpected or unforeseeable events outside of a contracting party’s control that have impacted the company in a way that prevents it from carrying out its contractual obligations. The concept has been recognized as a general principle of international law and varies in application across domestic law. In some countries like China, force majeure is an implied term in any contract, while under English law there is no general concept for force majeure, instead requiring explicit force majeure clauses that are subject to party negotiation, making force majeure a creature of contract and often strictly interpreted by English courts.

For these reasons, companies should first carefully review the terms of existing contracts to determine whether the current event is sufficient to invoke force majeure at all. Force majeure events have traditionally been understood to cover acts of God, extreme weather events, war, government regulatory action and/or even the imposition of an embargo. However, examples of force majeure within the language of the contract may have a controlling effect on whether the clause will protect against claims of nonperformance. For example, if “disease” or “epidemic” are not included under party provisions, the term “act of God” may or may not be sufficient upon further consideration. This said, force majeure clauses that expressly consider health emergencies or epidemics are less common and parties invoking force majeure risk incorrect declarations, potentially resulting in damages.

If the outbreak counts as a force majeure event, the invoking party must generally show:

  1. an event that is beyond the party’s reasonable control;
  2. which has prevented, hindered or delayed its performance;
  3. with no fault or negligence of the affected party; and
  4. that the affected party has taken reasonable measures to avoid or mitigate the event or its consequences.

Additionally, force majeure clauses will usually specify notification requirements and consequences following a declaration of force majeure to which invoking parties must follow to properly assert the liability exception. These obligations, again, are highly dependent on the drafted provisions contained in individual contracts.

As companies face concerns prompted by the coronavirus, they should be diligent in recognizing situations of government restrictions, like quarantine, and the impact it may have in creating unforeseeable impediments to performance under the contract. Further, companies may consider questions of whether orders of quarantine originated from the Chinese government, local authorities, or non-governmental entities in analyzing support, or lack of support, for force majeure claims.  In contemplating arguments against justifications for force majeure declarations, it may be noteworthy that governments like China have made reassuring statements on the minimal impact the virus is having.  China itself has acknowledged that even where force majeure certificates have been awarded, they only serve to help indicate force majeure and do not prove its occurrence.

With new outbreaks of the virus surfacing around the globe, there is good reason to believe that global supply chains and contractual arrangements will remain impacted. Accordingly, force majeure claims will continue to surface. With such widespread uncertainty, it is critical that companies take action to know the obligations and requirements under their current agreements while modifying drafting processes to better mitigate risk in the future.

 

References:

Michael Corkery, Coronavirus Fears Reverberate Across Global Economy, The New York Times (Feb. 28, 2020) available athttps://www.nytimes.com/2020/02/28/business/economy/coronavirus-economy.html

World Health Organization, Novel Coronavirus (COVID-19) Situation, WHO (Mar. 3, 2020) available athttps://experience.arcgis.com/experience/685d0ace521648f8a5beeeee1b9125cd

Simon Hentrei and Ximena Soley, Force Majeure, Oxford Public International Law (April 2011), available athttps://opil.ouplaw.com/view/10.1093/law:epil/9780199231690/law-9780199231690-e1042

Marisa Iati, Derek Hawkins, Adam Taylor, Siobhán O’Grady and William Wan, Live updates: Second coronavirus case of unknown origin confirmed in California, indicating virus is spreading in the state, The Washington Post (Feb. 28, 2020) available athttps://www.washingtonpost.com/world/2020/02/28/coronavirus-live-updates/

Huileng Tan, Coronavirus outbreak in China spurs supply chain shifts that began during trade war, CNBC (Feb. 20, 2020) available at https://www.cnbc.com/2020/02/20/coronavirus-outbreak-spurs-supply-chain-shifts-started-by-us-china-trade-war.html

Jingzhou Tao, Breaking contracts over coronavirus is harder than it sounds, Financial Times (Feb. 25, 2020) available athttps://www.ft.com/content/8e644cbe-5719-11ea-abe5-8e03987b7b20

Lillian Hardy, Benjamin Kostrzewa and Byron Phillips, Coronavirus Crisis Management, LAW.COM (Feb. 26, 2020) available athttps://www.law.com/international-edition/2020/02/26/coronavirus-crisis-management-378-135434/

Sue Reisinger, China Is Making Force Majeure Claims, Leaving General Counsel with Many Questions, LAW.COM, (Feb. 12, 2020) available at https://www.law.com/international-edition/2020/02/12/general-counsel-pondering-how-to-handle-chinas-force-majeure-claims-378-134237/?kw=China%20Is%20Making%20Force%20Majeure%20Claims%2C%20Leaving%20General%20Counsel%20with%20Many%20Questions&utm_source=email&utm_medium=enl&utm_campaign=intnewsalert&utm_content=20200213&utm_term=lawint

HFW and 20 Essex Street, Force Majeure(June 2018) available at http://www.hfw.com/downloads/Force-Majeure-Pack-by-HFW-and-20-Essex-St-June-2018.pdf

HFW, Coronavirus: Can it Be A Force Majeure Event?, Briefings (Feb. 2020) available athttps://www.hfw.com/Coronavirus-Can-it-be-a-Force-Majeure-event-Feb-2020

Norton Rose Fulbright, Coronavirus outbreak: The legal implications(Feb. 2020) available athttps://www.nortonrosefulbright.com/en/knowledge/publications/29747bbb/coronavirus-outbreak-the-legal-implications

Tom Fotheringham and Natalie Caton, Coronavirus COVID-19: The legal impact on force majeure events, DLA Piper (Feb. 12, 2020) available at https://www.dlapiper.com/en/us/insights/publications/2020/02/coronavirus-covid19-the-legal-impact-on-force-majeure-events/

Mark Clarke, Dr. Markus Burianski, Christian M. Theissen, Dr. Maximilian Clasmeier and James Hart, Suspending contractual performance in response to the coronavirus outbreak, White & Case (Feb. 18, 2020) available athttps://www.whitecase.com/publications/alert/suspending-contractual-performance-response-coronavirus-outbreak

Skadden, Arps, Slate, Meagher & Flom LLP, Coronavirus/COVID-19: Implications for Commercial and Financial Contracts, Skadden (Feb. 26, 2020) available at https://www.skadden.com/insights/publications/2020/02/coronavirus-covid19-implications

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