Is Covid-19 a Force Majeure Event?

Do you have enough surgical masks? This is likely the most commonly-asked question nowadays. Hong Kong has not seen a more threatening disease like the Coronavirus since SARS ripped through the city almost two decades ago,  The virus originated from Wuhan, China and on 30 January 2020. The World Health Organization declared that the Coronavirus outbreak constituted a public health emergency of international concern.

But another question has arisen too: Coronavirus – Is it a Force Majeure Event?

Having the dark memories of SARS, citizens are extremely cautious. Many employers allow work from home arrangements during this critical period of time. In China, factories and companies are closed for an extended Chinese New Year holiday. Many are still shut down up till mid-February. The closure of ports, disruption to supply chains, shortage of labour and postponement of events all create considerable difficulty to companies who have to work with Chinese entities. As the coronavirus shows no signs of subsiding any time soon, business owners who are affected may want to know if there is any leeway for unfulfilled contractual duties. Here are the steps you need to take to figure out if force majeure applies in your case. 

1. Can I invoke the Force Majeure Clause?

Generally, a force majeure clause gives parties the right to be exempted from the performance or to revise the contract terms in the event of unforeseeable and uncontrollable circumstances that prevent the meeting of contractual obligations. These generally apply to radical, external events that are not due to the fault of either party, such as natural disasters and strikes. If the incident falls within the operation of the force majeure clause, the parties may be absolved of their legal obligations. Hong Kong’s legislation does not incorporate a doctrine of force majeure like that of civil law systems, as such a force majeure clause is subject to usual rules of contractual construction and interpretation. Therefore, when reviewing the applicability of the force majeure clause in your contract, it would be helpful to start by considering these questions:

2. Look at how ‘force majeure’ is defined in your contract

First off, if your contract does not contain a force majeure clause, unfortunately, you will not be able to rely on one as the Hong Kong courts cannot imply such a clause into your contract.

If the contract does contain a force majeure clause, you will need to look at the construction of it. Force majeure clauses vary from contract to contract. For example, does the clause expressly include pandemics or ‘acts of God’ or does it include unforeseen ‘acts of the government’? Despite not all contracts mention diseases as a force majeure event, the severeness of the virus has caused the Chinese government to order lockdowns and suspension of factories, these may qualify as ‘acts of government’ restricting the performance of contractual obligations.

The outbreak of viruses may not be considered rare. However, a party can argue that it is unforeseeable in terms of the unprecedented scale of government restrictions in the Mainland. The courts would also take into account other facts such as the WHO’s declaration of this virus outbreak as a global health emergency, which is only the sixth declaration the WHO has made in 15 years. All things considered, the Coronavirus is likely differentiated from earlier epidemics like the H5N1 Avian Influenza or the Swine Influenza.

3. What kinds of failure of performance does the clause cover?

Some clauses may only cover a hindrance or delay to performance. While some excuse non-performance in part or even in full. But most importantly, you have to show that you have taken all reasonable steps to avoid the operation of the clause and it is effectively impossible to perform your contractual duties. It will not suffice to assert that it is now more costly or uneconomical to perform the obligations.

4. Any prerequisite requirements for invoking the clause?

Some clauses may stipulate that the party failing to meet the obligations has to serve a written notice to the other in advance. It may also require the party to mitigate the loss with his/her best endeavour.

5. Consequences

If you can invoke the force majeure clause, what now? The types of relief available are usually stipulated in your contract. Some common types of relief include suspension of contractual obligations, termination of the contract and renegotiation of target dates. As for compensation, contracts usually state that parties shall bear their own costs in relation to losses suffered due to a force majeure event. However, once again, all of these are subject to the wording of the scope of the clause and relief.

Summary

Not only SMEs but also large companies are facing financial burdens during this tough period not yet seeing its end. At this juncture, if you anticipate, or are already experiencing, a failure to perform your obligations, review your contract. Then consider how you can apply the force majeure clause and ensure timely notice is given if required. If non-performance has occurred already, record the details. This includes the timing of the incidents causing the failure and their respective impacts on your performance. These will be evidence showing the other party or the court why the force majeure clause should be invoked.

In case you and the other party agrees to renegotiate the terms or draft a new contract in replacement of the old one, discuss and draft clearly the terms and conditions so as to cover any further possibilities developed from the present coronavirus outbreak.