The coronavirus epidemic has upended life as it was. Many businesses across the globe are scrambling to oblige their contractual commitments. In the prevailing situation, many businesses are wondering whether Force Majeure can be invoked in their situation.
To help readers understand the subject better, Mr. Ahmad Uzair – Partner at AUC Law – shared sound legal perspective on Force Majeure which we are presenting below for our readers.
Is Coronavirus a Force Majeure event?
A force majeure provision will only arise in contracts where the parties have specifically agreed to it and on the terms that they have negotiated.
1- Specific mention of a disease or virus outbreak in China is important here!
If a contract included a force majeure provision (‘Clause’) excusing the performance parties’ obligations for lack of demand of products resulting from the outbreak of a disease or virus in China, it would likely be invoked in the current circumstance of the outbreak of coronavirus.
However, if the Clause excused performance because of natural disaster, flood, war, acts of God or even of epidemics generally, it is less clear that the outbreak would fall within the intended use of the Clause. A party must bring itself clearly within the wording of the Clause before it can claim force majeure. A party will not get a relief from its obligations merely due to the performance of the contract becoming more difficult or harsh than initially intended: this is the cost of bargain a party is stuck with.
2-Importance of causal connection between the virus outbreak and the inability to fulfil contractual obligations
A trend is emerging that most of the contracts entered into after the outbreak of the Severe Acute Respiratory Syndrome (SARS) in China, contain the term ‘epidemic’ in the Clause. But, it will only be fair to grant relief where causal connection is established between the outbreak of the virus and the inability to fulfil contractual obligations. Therefore, the second requirement is proving the causal connection.
It will only be fair to grant relief where causal connection is established between the outbreak of the virus and the inability to fulfil contractual obligations.
To be able to utilize the Clause, a party needs to show that:
i. it was the outbreak of coronavirus that is causing the party to be unable to fulfil its obligations; and,
ii. and that the party trying to invoke the Clause, used reasonable endeavors to avoid the effects of force majeure to the extent possible through the exercise of diligence and reasonable care; but,
iii. non-performance was due to circumstances beyond its control.
3- Proving the unavoidability
Therefore, the third requirement is to prove that there were no reasonable steps that it could have taken to avoid the event or its consequences from coming in the way of performance of the contract.
A force majeure event must make the fulfilment of the contractual obligations impossible as opposed to merely causing inconvenience.
A force majeure event must make the fulfilment of the contractual obligations impossible as opposed to merely causing inconvenience. This is a crucial difference one must bear in mind while attempting to comply with the first requirement as mentioned above. The effect of a force majeure event is to absolve a party from liability of non-performance of an obligation due to a supervening impossibility. The party that claims the aid of force majeure will have to prove the impossibility. Mere difficulty in acquiring of raw materials for manufacturing a product to be supplied under an agreement, for instance, will not constitute as a supervening impossibility.
Normally, courts do not entertain pleas of commercial impossibilities under force majeure. So even if a force majeure event has occurred, unless that event creates circumstances in which the performance of the agreement is impossible, the obligations of the party so claiming will not be excused. In the specific context of coronavirus, price hikes will not be sufficient for a successful plea of force majeure.
Real-life Example
Taking a real-life example of the Clause, as used by a public body of Pakistan, Private Power and Infrastructure Board (PPIB) of Pakistan in its definition of force majeure event included “epidemic” as one of the events which is beyond the reasonable control of a party and can qualify as a force majeure event. Reading the basic definition of an epidemic, which is “a widespread occurrence of an infectious disease in a community”, one would establish the stance that coronavirus is an epidemic.
Nevertheless, it is arguable that the outbreak of coronavirus is covered within the term ‘epidemics’. The World Health Organization (‘WHO’) declared that the outbreak of coronavirus is a Public Health Emergency of International Concern, but not a globally recognized epidemic.
Having said that, the WHO Director General’s remarks at a mission briefing on coronavirus stressed upon the “rapidly evolving nature of this epidemic”, which may be interpreted as portraying a potential force majeure event in the making. It remains to be seen whether the courts, in other jurisdictions and those in Pakistan, independently embark on the journey of deciding whether coronavirus is an epidemic or they follow the WHO or their respective government’s stance thereon.
At the end of January, the China Council for the Promotion of International Trade (CCPIT) confirmed that China would offer force majeure certificates to local companies which were not able to fulfil contractual obligations because of the outbreak of coronavirus as a means of evidencing their inability to perform the contract and application for this certificate is relatively straightforward.
An affected party can apply for such certificates online with supporting documents evidencing the delays caused by the outbreak. It can be analyzed from this that coronavirus is a force majeure event and such a certificate will be very useful where the force majeure clause is not wide enough to cater to the circumstances at hand.
However, is CCPIT force majeure certificate sufficient to prove that a force majeure event has occurred and/or to allow the party seeking to rely on the relevant force majeure clause to do so successfully?
Under Chinese jurisdiction, the answer is probably yes but in other jurisdictions, such a certificate would only be useful to the extent of being one of the factors in establishing the existence of a force majeure event.
Where does the burden of proof lie?
So, the burden of proof is entirely on the party seeking to rely on force majeure. The required evidence for this purpose will be fact-specific and will depend on the contract and the prevailing circumstances. The Clause and the surrounding circumstances will need to be evaluated on a case by case basis.
Legal Implications of Coronavirus Outbreak
If it can be established that coronavirus is a force majeure event, then a secondary question arises: what are the legal implications of coronavirus outbreak?
If coronavirus triggers the Clause, then the legal implication thereof will be no different from that of any other force majeure event
If coronavirus triggers the Clause, then the legal implication thereof will be no different from that of any other force majeure event, and the affected party will be excused from performing wholly or partly such part of the contract as is directly affected from coronavirus. Both parties will be left to bear their own losses.
What if there is no Force Majeure provision in the contract? “Principle of Frustration”
In the current day and age, usually, every commercial contract would include a force majeure clause, however, in an off-chance where either there is no force majeure clause or the force majeure clause does not cover the eventuality of coronavirus, in Pakistan, one may still get out of performance of agreements that have become impossible to perform or radically different from what was initially envisaged.
This is possible due to the allied principle of frustration. Any event which is supervening, unforeseen and not an event which has been anticipated in the agreement may be an event of frustration.
The doctrine of frustration needs not to be expressly mentioned in the agreement. On the one hand, this increases uncertainty, especially when viewed in contradistinction to a force majeure clause.
Why you should still have the Force Majeure clause in the agreement?
With a force majeure clause, the parties know, with more certainty, that a particular contractual obligation is either suspended or excused, however, under the doctrine of frustration since there are no express events or situations, therefore, the parties are at a disadvantage. Secondly, an event of frustration immediately and automatically discharges the contractual obligations, without any need for the party affected by the frustrated event to either repudiate or even serve a notice.
Although, regardless of whether a force majeure clause exists in an agreement or not the doctrine of frustration can still provide a similar relief. However, it is advisable that a force majeure clause must be added.
This advice sounds more forceful when viewed in the light of the uncertainty of frustration: the innocent party’s losses may be higher than those under events of force majeure. This is due to the fact that the innocent party, unbeknownst of the fact that the contract has become frustrated, will continue to abide by its obligations under the mistaken belief that the contract is still ongoing and binding. Since under the doctrine of frustration (just like under force majeure) each party must bear its own loss, therefore, the losses of the innocent party may continue to pile up without it having any opportunity to mitigate or stop them.
About the author: Mr. Ahmad Uzair is Partner at AUC Law. His firm advises corporate entities on legal compliance, handle their transactions, such as M&As, debt restructuring, contract negotiations, and drafting. He can be reached at uzair@auclaw.com.
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