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HomeCoronavirus as force majeure? Implications for commercial contracts

Coronavirus as force majeure? Implications for commercial contracts

2 March 2020

The current outbreak of coronavirus (COVID-19) disease has already lead to quarantines, bans and other restrictions in several areas inside as well as outside China and as a result, numerous businesses are having difficulties fulfilling their contractual obligations. Consequently, it may be relevant to consider whether the outbreak constitutes a force majeure event granting contractual relief, and how the outbreak should be taken into account when drafting commercial contracts in the future.

Force majeure as a concept

Under Danish law, force majeure describes the concept of extraordinary events preventing a contractual party from fulfilling its obligations under a contract; events which the relevant party could not foresee, prevent or overcome. Typical examples of force majeure events include war, riots, import bans, blockade, public seizure, fire and natural disasters.

The main legal implication of a force majeure event is temporary relief for the party being prevented from fulfilling its obligations – even if this has not been explicitly agreed upon in the relevant contract. Hence, the party subject to the restrictions of a force majeure event cannot be met by remedies for breach of contract from its counterparty. If performance of the contract is impeded by the force majeure event for an indefinite duration, a party’s obligations to fulfil the contract may even cease altogether.

Does the outbreak of coronavirus constitute a force majeure event?

An assessment of whether the outbreak of coronavirus constitutes a force majeure event will be based primarily on an assessment of the contractual relationship in question.

In the lack of a separate force majeure clause in the relevant contract, two particular issues should be considered when assessing whether the outbreak of coronavirus constitutes a force majeure event:

First, the timely and accurate performance of the contract must be deemed impossible as a result of the outbreak. In this respect, the party seeking to rely on force majeure should consider how the outbreak has prevented or hindered the party from performance of the contract. One should keep in mind that, although the outbreak of coronavirus may have rendered it considerably more burdensome, more expensive or even unprofitable for the party to meet its contractual obligations, this will not in itself imply that force majeure can be relied upon. In addition, the mere default of a sub-supplier does not render performance of the contract impossible, if a possibility of contracting with alternative sub-suppliers is present.

Secondly, the outbreak of the coronavirus and the consequences hereof must be deemed as unforeseeable to the party seeking to rely on force majeure. Here, the date of entering into the contract will be an important factor, since it can be assumed that the outbreak, at its present stage, is sufficiently known by the public to render businesses capable of anticipating the potential consequences of the outbreak. However, for contracts entered into prior to the outbreak, e.g. before the point of the WHO officially classifying the outbreak as a public health emergency, it is more likely that the condition of unforeseeability can be met.

Choice of law and force majeure clauses

When operating in the realms of international contracts, it is important to keep in mind that choice of law clauses in the relevant contract may turn out to have great impact on the possibility of invoking force majeure. Where force majeure applies as a general legal norm in contracts subject to Danish law, this will not always be the case if the contract is subject to the law in another jurisdiction. Specifically, common law jurisdictions such as the US, Great Britain, Singapore and Hong Kong have no general force majeure-doctrine. In such jurisdictions, a contractual party is only entitled to rely on force majeure to the extent that this has been expressly regulated in the contract.

Correspondingly, contracts subject to Danish law may contain a separate force majeure clause, which will be relevant to consider. Depending on the specific wording of such clauses, the access to invoking force majeure may vary from contract to contract.

In addition, it is common for international contracts to contain alternative clauses, which may be relevant to consider in relation to the outbreak, including hardship or material adverse change (”MAC”) clauses. Depending on the matter at hand, these clauses may form alternative routes to contractual relief, if a party is unable to rely on force majeure.

Notice requirements

It is important to note that Danish law requires any party seeking to assert force majeure as a basis for suspending performance to provide notice to its counterparty. If this duty of notification is not observed, the party relying on the force majeure event may incur liability towards its counterparty, and the contractual relief may lapse completely.

A similar notice requirement is usually found in international contracts not subject to Danish law. As such, numerous international standard contracts, e.g. the FIDIC Suite of Contracts and the Orgalime General Conditions, prescribe that failure to send such notices within a certain number of days, may result in the force majeure defence being waived or other adverse consequences. The formal requirements for the drafting of such a notice may vary from contract to contract.

Practical implications

As apparent from the above, the assessment of whether the outbreak of coronavirus will constitute a force majeure event will be highly dependent on an in-depth assessment of the contract in question. For this assessment, we recommend that the following is considered:

  • Does the contract contain a force majeure clause? If so, it must be examined to which extent it covers impediments to performance as a result of epidemics, pandemics, quarantines, isolation and other relevant restrictions.
  • If the contract does not contain a force majeure clause, it must be examined whether the law governing the contract contains a general force majeure doctrine.
  • Was the contract entered into before or after the coronavirus outbreak?
  • Has the coronavirus outbreak in fact prevented or hindered performance of the contract or could it be possible to solve the complications by use of alternative means?
  • Have the relevant contractual parties been notified of the lack of performance which should be anticipated due to force majeure?

Furthermore, concerned businesses should conduct an overall review of their standard contracts and consider how the outbreak may be taken into account when drafting contracts in the future. In particular, it should be considered whether the risks associated with the outbreak have been sufficiently addressed in existing force majeure clauses or whether the outbreak necessitates the incorporation of a specific “coronavirus clause” defining the contours and consequences of any non-performance due to the outbreak. When drafting such clauses, a number of issues should be carefully considered, including, inter alia, the specific delimitation of the relevant circumstances granting relief, and the extent of such relief. Gorrissen Federspiel is closely following the development of the outbreak and would be happy to assist in this regard.

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