Coronavirus is having a profound impact on the world’s economy. With Oxford Economics estimating the potential cost to the global economy at $1.1 trillion (USD), the potential damage that the disease may cause could be devastating.
As a result of the disease, many Chinese companies are unable to perform their contractual obligations. These companies are turning to force majeure and frustration clauses to protect them.
Given that Australia is the most China-reliant economy in the developed world, we can expect considerable impacts on Australian businesses.
What is Force Majeure?
Force majeure is a contractual term used to relieve a party of their duties or suspend the performance of the party’s duties in the event they experience an unforeseeable, unavoidable, and insurmountable event. Parties can rely on a force majeure only in extreme and exceptional circumstances.
Acts of God (floods, bushfires, earthquakes), terrorist attacks and acts of war are all examples of force majeure events.
Depending on the contract, a force majeure clause may allow the affected party to revise the contract (for example the quantity and time of delivery), suspend the time for performance of their obligations under the contract, avoid liability for non-performance or even terminate the contract.
Coronavirus and Force Majeure
Given the nature of the coronavirus, Chinese companies are looking to rely on force majeure clauses to avoid liability for failing to perform their contractual obligations.
The Chinese Government is providing Chinese companies with certificates which certify that the coronavirus is a force majeure event. The China Council for the Promotion of International Trade commented last week that it has given out 3,324 certificates since early February, worth almost $40 billion.
So within China, it is highly likely that the coronavirus will be held to be a force majeure event.
Unlike China, the application and interpretation of force majeure contracts in Australia is on a case by case basis based on an objective assessment of the relevant facts. There is no universal meaning of force majeure. The invocation of these clauses depends on the wording used and may differ between different jurisdictions. Words such as ‘public health emergency’ or ‘pandemic’ indicate that the clause may be invoked.
Force majeure clauses often refer to an ‘act of government’ as a force majeure event. If the government makes a significant response to the disease, there is a high likelihood the disease will qualify.
Furthermore, coronavirus might not need to be the sole cause of the force majeure event. For examples, there is a high likelihood that air cargo from certain countries may be banned from entering Australia. If this is the case, this may make delivery of goods impossible, consequently triggering a force majeure clause due to a shortage of materials required for a party to perform its obligations under a contract, such as a construction contract.
Gaps in Contracts
Companies which rely on an upstream supply contract, which contains an invokable force majeure clause, but have downstream contracts which do not contain these clauses, may be particularly vulnerable.
Relying on Force Majeure
If your business, or one of your business suppliers, intend to invoke force majeure, consider the following:
- Do your contracts include a force majeure provision?
- If so, how is a force majeure event defined, and what circumstances does it cover?
If your business is currently engaging in contractual negotiations, consider the effect that coronavirus may have in the future.