Does Coronavirus outbreak qualify as a Force Majeure event?

By Hemant Batra, Executive Editor, Public Policy – South East Asia 

NEW DELHI: Coronavirus disease 2019 abbreviated as COVID-19 is an infectious disease, a virus closely related to the SARS virus. The disease is the cause of the recent coronavirus outbreak which has led to more than 2770 deaths, including 2715 deaths in mainland China alone.

The World Health Organization has declared the coronavirus outbreak to be a Public Health Emergency of International Concern. Initially, only Mainland China was listed as an area with known ongoing community spread of the disease but now the disease has engulfed more than 30 countries.

The number of confirmed infected people has surged to more than 81000, with the cases in mainland China crossing 78000.  In other countries, the cases reached at least 2100. After human mortalities, coronavirus has started to now seriously impact trade, commerce, businesses, and movement of people be it business or working communities as well as tourists.

COVID-19 has hit business too 

Health and Lives are no doubt the most significant dimensions of COVID-19 but equally important are the trade and commerce proportions, which have got gravely jeopardized by this fatal virus. Hundreds and thousands of commercial contracts, trade deals, and business transactions are in the state of limbo or indeterminate state.

Nothing seems to be moving, leading to a plethora of non-compliances by the transactional parties. What would be the fate of these business deals and contracts, where the contracting party or parties have defaulted and breached the contract not on their own volition but due to reasons beyond their control i.e. Force majeure supposedly.

What is Force majeure?

It is derived from a Latin expression vis major meaning ‘superior force’. It is also associated with another Latin word casus fortuitus, which signifies ‘chance occurrence, unavoidable accident’.

It is a common clause in contracts that principally releases both parties from liability, commitment or obligation when an extraordinary event or circumstance beyond the control of the parties, such as a war, strike, riot, crime, or an event described by the legal term act of God like flood, earthquake, volcanic eruption, epidemic, etc., precludes one or both parties from accomplishing their obligations under the agreement. Ordinarily, force majeure clauses do not absolve a party’s non-performance completely but only postpone it until the force majeure event ends.

English common law does not necessarily employ force majeure principles to contracts. Parties to English law contracts who desire to have force majeure assistance should categorically incorporate in the contract itself as to what events shall constitute force majeure. Omitting to do so means that an ensuing event that prevents the performance of the contract will not be treated or deemed as a force majeure event.

Chinese firms are sprinting to take recourse to force majeure, in other words, an unexpected act of God to protect themselves from the effects of breach of contractual obligations on the ground of coronavirus outbreak.

As per media reports, one Chinese government-backed agency, China Council for the Promotion of International Trade has already issued more than 3000 certificates to Chinese companies recently thereby certifying that “they were victims of unexpected external circumstances that prevented them from fulfilling contracts signed before the coronavirus outbreak”.

This is an attempt by the Chinese agency to help the Chinese firms to renegotiate terms with foreign clients and parties.

Also read: CoVid19 Effect: Business meets canceled, foreign delegates avoid travel

Though how tenable and viable would that recourse be, only time will tell after the legal agreements are put to judicial or arbitral tests. It would be fundamental to prove that coronavirus is actually a force majeure event constituting an act of God or unforeseen calamity.

Even the Indian Government acting through the Ministry of Finance has very recently allowed solar project developers who could not comply with contractual obligation deadlines due to coronavirus-prompted supply chain disruption, to invoke force majeure clauses to avoid financial penalties.

The judicial adjudications and arbitral appraisals of looming disputes triggered by COVID-19 ought to appreciate that where the respective Governments step in to back and support the legitimacy and genuineness of a force majeure event, in the instant case coronavirus outbreak, the defaulting parties invoking force majeure clauses must be allowed to sail through comfortably in their respective legal contentions and dispute battles.

About the author

Hemant Batra, is an internationally renowned commercial lawyer, arguing counsel, arbitrator and bestseller author of commercial law book `Due Diligence’ amongst other books on law and public policy. He is a Tutor at the Indian School of Public Policy.