Coronavirus (officially named COVID-19) has been declared by the World Health Organization to have "pandemic potential".
With the virus spreading rapidly and 19 cases now reported in the UK, not only is the virus a major concern from a public health perspective, businesses are seeing disruptions which are only likely to increase in the coming weeks and months.
Whether it be due to workers not being able to attend work, delays in shipment or cancellation of major events, the virus is starting to have huge commercial implications across many industries. Can a force majeure clause help a party to avoid contractual liability for losses?
First, it is noteworthy that a force majeure clause cannot be implied into a contract and so there will need to be an express term of the relevant contract. Whether an event constitutes "force majeure" is a fact-specific issue and it is often difficult to predict how a Court will approach the interpretation of the clause. Whilst the Chinese government has been issuing 'force majeure certificates' to Chinese companies (with it reported that over 3,000 were issued in February alone) it is important to note that whether there has been a force majeure will nonetheless depend on the circumstances of each case and the specific drafting of the clause.
The wording in the contract may be clear as to what amounts to a force majeure and indeed a wide spreading virus such as COVID-19 may firmly fit into such a definition. If not, parties may be left relying on a more generic sweep-up phrase often included in force majeure clauses such as the event being an "act of God". With major events such as exceptional storms and change in economic markets having not previously been classified as an 'act of God' by the Courts however, demonstrating an "act of God" is a high burden.
Even if it COVID-19 can be classified as a force majeure event, there is then a question of how long for. Given that the effect of force majeure clause is often suspension of contractual obligations and sometimes even providing for the right to terminate, Courts will be alive to opportunistic parties attempting to use the crisis as a chance to 'get out' of their contractual obligations. It will be necessary in each circumstance to show therefore that the force majeure was the sole cause of the failure to perform the obligation as well as evidence that a party has attempted to mitigate its loss. If there are other contributing factors to the prevention of contractual performance then a party is likely to face push back from the other side. Business contingency plans and board decisions on the handling of the virus are also likely to come under scrutiny and therefore careful monitoring of the ongoing situation is crucial.
The burden of proof is on the party attempting to rely on the clause and therefore if it is likely that a party may need to rely on a force majeure clause then all relevant evidence should be collated as the impact of the virus continues to unfold.
Finally, and perhaps most importantly, if the time does come for a party to rely on a force majeure clause there are often strict notice provisions in the contract. The relevant contractual provisions should therefore be considered urgently and with care.
Important – if you have Business Interruption Insurance which may respond to the Coronavirus crisis please also read our article – here.