Coronavirus and force majeure – Hill Dickinson

Legal firm Hill Dickinson has written on what could be one of the most debatable parts of the nCoV when it comes to shipping – whether force majeure can legally be declared.

On Thursday 30th January the China Council for the Promotion of International Trade released a statement confirming that China was offering force majeure certificates to local companies unable to fulfil their international contractual obligations due to the coronavirus outbreak. Hill Dickinson said that the relevant directives and certificates did not, for the time being, apply to Hong Kong law contracts where the counterparty is a non-Chinese entity.

Where parties were trading with Chinese entities, Hill Dickinson said that it appeared that the Chinese state was endeavouring to facilitate the exercise of force majeure clauses in international sale contracts for local companies. The validity of claiming force majeure would be subject to the scope of the specific contractual provisions and evidence that alternative means of contractual performance were not available.

Hill Dickinson noted that in English law force majeure was a contractual term that could not be implied. It arises solely on the basis of provisions which are included in a contract and, as such, there is no standard clause and force majeure provisions vary from contract to contract.

Hill Dickinson noted that the effect was usually to relieve a party from performance of their obligations when one of a defined number of events occur.

Whether the delay and disruption resulting from the novel coronavirus would be considered a force majeure event would therefore depend on the particular wording of a contract, and not the parties’ intentions.

In circumstances where there was no specific reference to disease, epidemic or quarantine, the same may be caught by ‘Acts of God’, ‘Acts of Government’ or by general wording such as ‘other circumstance beyond the parties’ control’.

If a force majeure event can be identified, then it must be the only effective cause of default.

(See Classic Maritime Inc v Limbungan Makmur SDN BHD [2019] EWCA Civ 1102, where the charterers argued that they should be relieved of their obligations to provide cargoes for shipment following a dam collapse. The Court of Appeal held that the clause was not a true force majeure clause, but was instead an exception clause and further that the charterers would not have been able to perform in any event.)

That is to say, a party may not be excused performance of its obligations under the contract despite the occurrence of an unexpected and extraordinary event, when it would not have been able to perform its obligations even in the absence of such an event.

Hill Dickinson said that the effect of a force majeure clause could vary from contract to contract. Some operate to suspend obligations during the period of the applicable event, some give rise to a right to terminate and some may relieve the non-performing party of liability.  Almost all clauses require that notice be given of the force majeure event.

A force majeure clause usually requires the defaulting party to show that it used its reasonable endeavours to prevent, or at least mitigate, the effects of the force majeure.

(In Channel Island Ferries Ltd v Sealink UK Ltd [1988] 1 Lloyd’s Rep 323, the Court of Appeal held that any clause which included language referring to events “beyond the control of the relevant party” could only be relied upon if all reasonable steps had been taken by aid party to mitigate its results.)

If force majeure does not apply, then the doctrine of frustration may provide relief in circumstances where the issue goes to the root of the contract and renders it impossible to perform or the performance or essentially different to the contract envisaged. Whether frustration may apply is both fact and contract sensitive.

The legal firm advised that as disruption in China, a key market for import and export, was set to continue, traders and shippers alike should:

  • Review applicable force majeure provisions to ascertain whether the provision was appropriate, together with any notice requirements in the clause.
  • Obtain information and evidence regarding the issue and assess whether the particular delay or disruption resulted from the force majeure event, or whether it was a consequence of force majeure being declared elsewhere.
  • Consider whether the spread of novel coronavirus might impact other facilities in the supply chain and make contingency plans (or trigger existing ones).
  • When in receipt of a force majeure notice, consider whether it applies at all, and whether back to back force majeure notices need to be given.
  • Consider and take appropriate mitigation steps.
  • Take advice.

Beth Bradley, Partner (London), Damien Laracy, Partner (Hong Kong) and John Agapitos, Paralegal, Hill Dickinson, contributed to the piece.