The outbreak of the coronavirus (COVID-19) has been declared a global health emergency, causing major disruptions across industries: travel, retail, manufacturing and technology for businesses. In light of this, pre-agreed contracts may become “commercially impossible” to perform.
A common clause known as force majeure is usually incorporated within contracts to deal with the contractual parties’ respective rights, obligations and reliefs in the event of unforeseen frustrating events occur. The clause provides for contingencies to take effect, provided that there is no ambiguity in the terms stipulated. When the force majeure clause is invoked, the common types of relief include the suspension of contractual obligations as well as exclusion from certain liabilities for non-performance, delay or termination of the contract.
The force majeure clause, which refers to “any cause beyond the control of the party”, can be interpreted depending on the governing law regulating the coronavirus outbreak or the effects of the outbreak.
Parties directly affected by the outbreak would need to show that the event falls within the scope of the clause, as interpreted under the governing law of the contract.
This may include whether the clause expressly states that an epidemic, pandemic or contagious disease would constitute a force majeure event in light of the World Health Organization’s (WHO) declaration that the coronavirus outbreak is a pandemic.
Although the coronavirus may affect the parties of the contact, the defaulting party will still need to show, in their best effort, that they have used reasonable actions to prevent, or at least mitigate, the effects of the force majeure.
The legal consequence of the coronavirus outbreak may vary depending on the nature of the contract, the type of obligations by the parties, the circumstances in which the obligations are to be performed as well as the foreseeability of the change in circumstances. Importantly, parties need to carefully consider the terms in the contract being entered into to safeguard their interests.
As a precaution, affected parties are advised to review their commercial contracts to ensure their force majeure clause covers pandemic such as coronavirus. They may also consider mitigating circumstances to remedy the contract to have a win-win solution, as opposed to a final resort method of terminating the contract.