China Desk Newsletter - 新冠疫情下,贵公司可适用不可抗力条款吗? To what extent can your company invoke force majeure as a result of the Corona virus?



Published 17 March 2020
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The Coronavirus (COVID-19) has spread rapidly in recent weeks, with infections occurring across the world. The World Health Organization has declared a global health crisis and there are fears that the situation will escalate into a pandemic. Comprehensive infection prevention measures have been implemented globally, and some companies are experiencing challenges in fulfilling contractual obligations. This has raised questions about whether the effects of the virus outbreak can be considered as force majeure.

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The concept of force majeure

Force majeure is a legal basis that restricts or excludes the right to make default claims against a party that fails to fulfil its contractual obligations due to exceptional circumstances. Normally, commercial contracts will contain their own force majeure clauses that regulate what situations constitute force majeure and what effects this will have. Even without a specific regulation in the contract, it will often be possible to invoke force majeure based on legal rules outside the contract. This will depend on which country's laws govern the contract.

The following key points are based on general principles under Norwegian contract law.

Does the Coronavirus constitute a force majeure incidence?

What constitutes a force majeure incidence will vary between different contracts, depending on how the term is defined. Therefore, the assessment of whether force majeure can be invoked as a result of the Coronavirus will always have to be considered based on the contract definition of force majeure. For example, it is not uncommon for epidemics and/or pandemics to be explicitly mentioned in definitions as examples of situations covered by the term. Our view is that such a widespread case of disease as the Coronavirus would generally have to be accepted as a force majeure incidence.

Conditions for the Coronavirus to be invoked as force majeure

The key question is whether the consequences of the virus outbreak should be accepted as a force majeure basis for freedom from liability with respect to fulfilment of contractual obligations. Current consequences include, for example, employees being infected or quarantined, and the imposition of travel bans, import bans or other public law prohibitions / injunctions that affect the possibilities of contract fulfilment. In order for such obstacles to be accepted as a force majeure basis for freedom from liability, it is normally required (i) that the party should not have foreseen the relevant obstacle at the conclusion of the contract, and (ii) that the party cannot reasonably be expected to avoid or overcome the consequences of the obstacle.

The condition that the party should not have foreseen the obstacle in question, raises few issues with contracts that were entered into before the virus outbreak became known. For contracts entered into after the outbreak became widely known, this will be different. In this situation, a contracting party should be able to anticipate that the Coronavirus can make it difficult to fulfil contractual obligations. For such contracts, one would most likely be unable to invoke force majeure. Consequently, for new contracts entered into while the outbreak is still not under control, explicit reservations should be made relating to impediments to performance as a result of the Coronavirus.

A more difficult assessment is whether the obstacle can be reasonably avoided or overcome. Normally it is not required that it is physically impossible to get around the obstacle. How far a party must go to avoid or overcome the effects of the Coronavirus will then have to be decided on the basis of a discretionary and concrete assessment of what measures are proportionate. In such assessment, the requirement for efforts on the part of the contractor will have to be balanced against the consequences that a non-fulfilment of the contractual obligation in question will have for the customer.

Efforts must be made to find solutions that make it possible to fulfil the contractual obligation, typically by purchasing equipment/material at a higher price than one otherwise would , or finding subcontractors who can execute the work the contractor is prevented from performing itself. The fact that the contract will be unprofitable in the implementation of such measures is not in itself a sufficient reason for accepting the obstacle as force majeure.

Some situations may arise due to the Coronavirus where financial consequences must be balanced against potential health consequences, both at individual and public health levels. For example, a contractor may be required to perform work in areas where widespread Corona infection has been located. Here, the risk of infection will have to be balanced against the financial consequences of postponing the work or performing the work in an alternative location. With an ordinary definition of force majeure, it will hardly be required that the contractor's personnel carry out the work if this means that the staff must defy entry bans, authorities' travel advice or quarantine orders. In quarantine cases, a large proportion of the workforce will probably have to be placed in quarantine, as individual quarantine cases do not differ significantly from ordinary cases of sick leave amongst employees.

Effects of impeding the Coronavirus constitute force majeure

Where it is found that the impediments to performance constitute force majeure as a result of the Coronavirus, the effects between the parties will vary. This must always be considered on the basis of the contract's regulation of the effects of force majeure, or any background law regulation of force majeure for the type of contract in question. The most common effects of force majeure are summarised below:

Notification: Normally, the party affected by force majeure is required to notify the contractor that one has been prevented from fulfilling contract obligations as a result of a force majeure situation. Note that there are often short time limits for giving such notice. Failure to notify within the time limitmay result in the company losing the right to invoke force majeure and/or becoming liable for any loss incurred by the contractor as a result of failure to give notice in time.

Limited default remedies: Where delivery is prevented by the force majeure situation, the customer will usually be prevented from claiming compensation for delays, including liquidated damages. The customer may in turn have the right to withhold payment with reference to the failure to deliver. In contracts relating to work to be performed in accordance with an agreed work schedule, the supplier will usually also be entitled to adjust the work schedule. Note that there may be time limits for setting forth such requirements for adjusting the work schedule. Consequently, the right to adjust the work schedule may be lost if such time limits exceeded. Furthermore, correction or performance of other warranty work may normally not be required as long as the contractor is prevented from performing such work.

Termination: As a starting point, a party will normally have the right to terminate the contract where the delay due to the force majeure situation constitutes a material breach of the contract. What constitutes material breach in this situation must be based on an assessment of the specific contract and the circumstances surrounding it. For example, if, as mentioned above, the contract allows for adjustment of the work schedule in the event of force majeure, one will probably not be able to claim that the delay constitutes a material breach of the contract. However, the contract's force majeure clause will often contain a special regulation specifying how long the force majeure situation must persist before the contract can be terminated.

Costs: Unless the contract specifies otherwise, the parties will have to cover costs incurred in connection with a force majeure situation.

Right for the customer to demand delivery: Even if a force majeure obstacle exists, the customer may have the right to demand delivery of the unfinished contract item on the agreed delivery date. This follows from i.a. the widely used manufacturing contract within the Norwegian oil industry, NTK 15. In such situation, NTK 15 stipulates that a delivery protocol must be established and a certificate of completion issued. Furthermore, the customer must issue a variation order (VO) that reflects that the contract item is delivered unfinished. This is to cut off any claims for defects as a result of the contract item not being delivered in accordance with the originally agreed specifications.

Obstacles caused by the Coronavirus do not constitute force majeure

If, after a specific assessment, it is concluded that the consequences of the outbreak of the Coronavirus do not meet the requirements for a force majeure situation, the parties will be obliged to deliver under the contract, unless the contract in question contains other provisions giving the right to suspend or cancel delivery.