COVID-19 pandemic and Force Majeure clause in contracts

This clause is found in most contracts, from commercial to construction to various other contract types. It is a very important clause as it considers the risks of certain unforeseeable events, and the affect it may have on stakeholders and their ability to perform their job. Mostly, the clause focuses on the following “Classic Force Majeure” events:

• Acts of God (fire, flood, earth quick).
• War, Civil unrest (civil war, terrorism, undeclared war)
• Labour Stoppages.

Moreover, there are other events, which known as “Political Force Majeure” events and some contracts consider them as such:

• General Change in Law (tax, environmental, government or administrative action, minimum local ownership requirements may affect fundamental economic underpinnings of the contract).
• Discriminatory Change in Law (nationalization/expropriation, denial of permit or consents, regulatory change specifically targeting one party or a narrow class of parties usually foreigners).

Nowadays, COVID-19 pandemic is spread globally and may be invoked as a reason for non-performing of contractual obligations. Companies should prepare for possible disruptions in contractual performance caused by this. Unfortunately, the force majeure clauses differ in their terms, the common thread between them is the occurrence of something unexpected and beyond reasonable human foresight, skills, & knowledge. In the absence of a qualifying event that is ancillary to COVID-19 and can be identified as the cause of a party’s non-performance, in other word “it is not clear whether and in what circumstances the COVID-19 outbreak alone would successfully provide the basis for a party to claim force majeure especially since the event is a global pandemic”.

Assuming the force majeure clause contains language such that it applies to “pandemics ”, “disease,” or similar events and the specific breach in question is subject to the force majeure clause, then the party would still have to show that its failure to perform was caused by COVID-19 and the virus is likely to be viewed as the direct cause of the breach of a contract.

In China, and in the event that a government responds to the spread of COVID-19 by declaring a state of emergency or closing its borders to trade, such action may fall under a definition of force majeure .For example, a  government action that prevents or hinders performance of a party. Consequently, since last January, the China Council for the Promotion of International Trade (CCPIT) has issued more than 5,000 “force majeure certificates” to local companies that have failed to comply with international contract obligations due to the virus.

To overcome this predicament in contracts (i.e the absence of an applicable force majeure clause) in very limited circumstances a party may be relieved from its obligations by applying or claiming through one of the followings:

• Claiming that the contract is frustrated, this applies as a matter of law where, through no fault of the parties, an unforeseen event renders performance of the contract radically different from what the parties had bargained for.

Unlike the flexibility of force majeure, which can be determined by the parties as expressed in their contractual terms, frustration automatically results in both parties being discharged from their obligations.

• Mitigation and Cooperation, in any situation where losses are likely to be incurred, contractual parties have a duty to mitigate those damages. Nevertheless, no secured relieve will be applied if parties have not exhausted the options available to them to perform their obligations under the contract.
• Doctrine of Impossibility , Impossibility is a common–law doctrine that may excuses performance under certain circumstances and means not only strict impossibility but also impracticability because of extreme and unreasonable difficulty expense injury or loss  incurred .Case in point the  contract of  “ Foster wheeler  Corporation V. United States, 513F.2d 588,598(Ct.Cl.1975)” was relieved through impossibility .

The force majeure clause in the contracts needs to be drafted carefully so that the specific language will need to be analyzed to determine if the facts and events will result in relief from the applicable obligation. The text of force majeure clause even if it does not captured COVID-19 pandemic specifically or in analogous term, it  needs to be examined to determine whether the current pandemic or its effect fall within language, example of such  include but not limited to  “government or administrative actions” “an act of God” or events outside of the reasonable control.

Good practice is to incorporate the contract with a savior clause like; “material adverse event” or “material adverse change”, which may help depending on the wording of the clause to relief from COVID-19 pandemic consequence disruptions.