Since the coronavirus was first reported in Wuhan, China on 31 December 2019 there has been increasing speculation that parties to affected supply contracts may invoke force majeure provisions in those contracts in order to cancel or delay shipments as the deadly outbreak's impact on world trade unfolds.

It has not taken long for speculation to become reality. The Financial Times has reported that multiple copper buyers have already declared force majeure under contracts with miners from Chile to Nigeria since the end of January. Shipbuilders are likely to follow and there are several indications that China's state-owned oil company CNOOC has already declared force majeure on several LNG contracts, as the country's largest LNG importer tackles widespread disruptions in downstream markets (though reports suggest that these claims have been rejected to date by the shippers).
Below we reflect on the concept of force majeure under English law and the extent to which it might apply in the current circumstances.

What is force majeure?

The concept of force majeure ("FM") derives from civil law but it is of wide application in common law jurisdictions. It is frequently used in international supply contracts because of the limited remedies available to parties under English law when the contract becomes impossible, difficult or onerous to perform due to events outside the affected party's control.

While there is a generally consistent body of case law on how to approach the interpretation of force majeure provisions, English courts have consistently focused on the actual language used in these types of provisions - with the result that each particular case rests on its own set of facts and contractual language. A further complication is that the term "force majeure" is frequently used to refer to several distinct types of provisions, for example:

  1. A provision which excuses non-performance. This type of provision typically seeks to define or list the excusing FM events with a reasonable degree of specificity, followed by a "catch-all" provision and suspends relevant obligations upon a FM event arising. It often also specifies which events will not constitute FM. Frequently, if the FM event prevents performance for a defined period one or both parties may then terminate the contract.

  2. A provision which adjusts the commercial terms for a defined change in economic or market circumstances. Sometimes referred to as a "hardship" clause this is a species of FM provision that provides for some form of amendment or right of renegotiation of the contract in the event of substantial hardship to one of the parties. Most likely to be invoked in an economic downturn and therefore relevant now, what constitutes "hardship" and the nature and extent of the adjustment will depend on the wording of each particular provision.

  3. A provision which automatically terminates the contract if a defined FM event occurs. Less commonly used than (1) or (2) above, this type of provision usually acts in a similar manner to the English law doctrine of frustration (see below). This is perhaps most likely to apply to a scenario where government crisis measures have made the supply permanently unavailable. Where applicable, the contract is ended and the economic balance between the parties is adjusted according to the particular drafting.

The first type of provision, in some form, is included in most contracts as "traditional" FM and is usually the first port of call in evaluating whether the affected party has an excuse for non-performance of its obligations. For "traditional" FM, "epidemics" (or sometimes "pandemics") are quite commonly included as a specific FM event in supply contracts, particularly for certain markets, hence FM currently being such a topic of discussion. But "epidemic" or "pandemic" may not need to be mentioned in the FM provision at all, particularly if the "catch-all" is wide enough (sometimes these refer vaguely to "Acts of God" or simply "matters beyond the affected party's control").

The second type is less common, although a feature of some markets, and drafting tends to be bespoke. While it may be of more limited application, it may offer a more attractive remedy for a party seeking to change the contract rather than avoid its contractual responsibilities. Of course the supply contract may include more than one of these types of provisions and the question may turn to which remedy takes priority.

FM provisions commonly contain a notification requirement, which, depending on the drafting, can operate as a "condition precedent" precluding relief if the relevant notice is not given in the necessary timeframe. Such provisions are generally enforceable, and so complying fully with all notice requirements will be important for parties seeking to declare FM.

Frustration – An alternative to FM?

Even if the supply contract does not include FM provisions, the affected party might claim relief under the English law doctrine of frustration, which permits parties to cease performing contractual obligations where it becomes impossible to do so in circumstances entirely beyond the remit of the parties. Whilst we have not yet seen this being invoked in respect of the coronavirus, likely due to its limited application, it is possible that in circumstances where performance is prevented by the coronavirus (e.g. the necessary skilled labour to perform a supply contract is unavailable due to travel restrictions or illness) this could be a potential avenue of relief from contract terms. However, this form of relief will likely be even more difficult to establish if the supply contract does contain FM provisions similar to those noted above.

Will FM claims be successful?

Ultimately, it depends on the circumstances and the drafting of the FM and other contractual provisions. The FM event does not generally need to be unforeseeable to the affected party but if the FM provision provides that the relevant event must "prevent" performance, the claiming party must generally demonstrate that performance is legally or physically impossible, and not merely more difficult or more expensive. By contrast, English courts have found that the words "hinder" and "delay" have a wider scope and FM may be satisfied if performance has become substantially more onerous. In addition, there is recent Court of Appeal1 authority that the claiming party must also generally establish that it would have been "ready, willing and able" to perform the contract but for the FM. FM drafting also commonly requires the claiming party to show that is has taken all reasonable endeavours to avoid or mitigate the event and its effects (a highly fact sensitive enquiry).
In general terms, claims based on the physical impossibility of the supplier to deliver, or buyer to accept delivery of, the particular supplies (e.g. as a result of quarantine restrictions or other crisis measures) are likely to be easier to make out than claims essentially based on a decrease in local demand (which in some markets was dipping even before the outbreak). It is well established under English law that a change in economic or market circumstances affecting the profitability of a contract is not generally FM2. Also, especially in some sectors, it is common specifically to exclude changes in the relevant market or demand.

On this basis, a buyer who wishes to claim FM but cannot show it was unable to accept delivery of the supply may face challenges, particularly if it has taken advantage of falling prices and already sourced the supply from elsewhere.

Other issues

Aside from the potential legal position, there are clearly several other important matters of concern to supply contract parties:

  1. There is the issue of enforcement of the supply contract, particularly if the contract does not provide for international arbitration (or may require enforcement of an arbitral award inside China, which can be a lengthy and uncertain process).

  2. Then there are the reputational risks and potential damage to long-term supply relationships with foreign buyers and suppliers. Even where they consider there is no legal basis for relief, parties who receive FM claims may wish to be flexible about amending or restructuring (i.e. by postponing deliveries) the supply contract to accommodate the affected party.

  3. Declaring FM or receiving a FM claim may impact on a party's insurance arrangements.

  4. Buyers who are part of a chain of supply contracts may themselves need to declare FM in response to a supplier's declaration in order to avoid being in breach. Each contract in the chain may of course be on different terms or subject to entirely different governing laws and this can create substantial challenges for the buyer, especially where their downstream contract has less favourable (or no) FM provisions. There may also be applicable time bars or other procedural requirements as above.

Conclusion

With the effects of the coronavirus likely to play out for some months yet and the importance of the Chinese economy as both a source of demand for commodities and supply of manufactured goods of all types, this is an issue which is unlikely to recede. Whether the claim is for an extension of time/suspension, termination of the contract, adjustment of price or commercial terms or otherwise, it is important to review your supply contracts, consider your position under each contract and notify of FM if desirable and necessary. It is equally important to be able to assess the validity of any notification of FM received from counterparties. Given that FM is a creation of contract under English law, this will require careful consideration of the terms of each contract and of the underlying facts.

 


 

1 Classic Maritime v Limbungan Makmur Sdn Bhd [2019] EWCA Civ 1102

2 Thames Valley Power Ltd v Total Gas & Power Ltd [2005] EWHC 2208 (Comm); Tandrin Aviation Holdings Ltd and Aero Toy Store LLC and others [2010] EWHC 40 (Comm))

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