COVID-19 - can force majeure clauses remain immune to the coronavirus?
The recent outbreak of novel Coronavirus, or ‘COVID-19’, in China has disrupted the world’s second largest economy. COVID-19 and the measures taken to try and contain the virus have had a significant impact on the ability of entities in the region to perform contracts.
The effects are likely to continue for at least the coming months, and disputes are already emerging as to: (i) whether material adverse change clauses are invoked by the COVID-19 epidemic; and (ii) whether it may also constitute a force majeure event. So far as English law is concerned, the answers to these questions will be a matter of contractual interpretation.
Material Adverse Change (MAC) clauses
MAC clauses are used in transactional documents to allocate the risk of events that are unforeseen at the time of contracting, and that are detrimental to one of the parties to the contract. The impact of MAC clauses is generally magnified during events that significantly impact usual commercial trade, such as the COVID-19 outbreak. Though their effects and usage are varied, the unique nuances and challenges presented by COVID-19, and the uncertainty of how the situation will develop in the coming months, may leave parties no option but to rely on these clauses and ultimately litigate, if they do not sufficiently provide for the present circumstances.
Force majeure clauses suspend or excuse performance of obligations when incidents specified in the contract, that are beyond the control of the parties, occur. Force majeure clauses are usually drafted to be intentionally broad and non-exhaustive, to ensure a wide range of unforeseen events are encompassed in the clause. Under English common law, force majeure is not recognised as a standalone principle, therefore the precise drafting of the clause is of fundamental importance. In the event of a dispute as to the scope of a force majeure clause, the English courts will apply the usual principles of contractual interpretation. This was most recently examined by the Supreme Court in Wood v Capita Insurance, in which the Court found that both the literal meaning of the words, and the commercial context in which they were drafted, must be considered in the course of contractual interpretation.
Situation in China
Commercial effects of the COVID-19 include gas and oil prices falling to an all-time low and raw material supply chains being disrupted, which have caused unprecedented repercussions across the globe. Big cities have been quarantined, flights have been cancelled and public holidays have been extended to try and limit the spread of the virus. This has left many entities unable to carry out their obligations under their respective contracts, forcing them to look to force majeure provisions as a means of rescue.
The China Council for The Promotion of International Trade (CCPIT), officially accredited with Beijing's Commerce Ministry, announced that a Chinese international trade promotion agency would offer force majeure certificates to companies struggling to cope with the impact of the COVID-19 on their business with overseas partners. The CCPIT stated that if companies have documents evidencing their plight, including proof of delays or cancellation of transportation, exports contracts and customs declaration, they would be granted a force majeure certificate. The agency says on its website that its certification is recognised and accepted overseas.
However, whether such certificates have a significant bearing on a particular contract if it is governed by English law will be a question for the relevant Court or Tribunal. As stated above, in a contract governed by English law, an affected entity’s ability to rely on force majeure provisions will be determined exclusively by reference to the facts and specific circumstances and how they relate to the precise interpretation of the relevant clause.
Given our experience both on an international scale and specifically in China, Hausfeld is well-equipped to advise parties affected by these events.