Do you have an effective “Force Majeure” clause in place to protect you from contractual breaches as a result of the Coronavirus?
Due to the recent outbreak of the new Coronavirus, not only the public health is at peril, but many businesses are at the verge of breaching contracts with their business partners as a result of mandatory quarantine, closure of borders, travel ban, suspension of transport and stoppage or delay of supply of raw materials.
We received frequent requests from clients to advise on whether they can avoid or reduce their legal liabilities pursuant to the Force Majeure clause.
According to the Oxford dictionary, “Force Majeure” is defined as unforeseeable circumstances that prevent someone from fulfilling a contract. Often, if a force majeure clause is successfully triggered, it would often extend the time allowed for parties to fulfil their obligations and may even allow the parties to terminate the contract without liability. However, force majeure clauses “come in many shapes and sizes” and the courts would consider the true construction of a force majeure clause and apply it to the material facts of the particular situation. In fact, such clauses often appear in contracts without it being labelled as “force majeure”, and the courts would often give effect to such clauses by interpreting it narrowly.
Covered Events. “Acts of God” are often included as a category of events covered under force majeure and would typically cover natural disasters such as typhoons, floods, earthquakes, and weather disturbances. However, to avoid any ambiguity, it is recommended that the specific events are listed out. Furthermore, other events that may be covered would include war, terrorism, civil disorder, labour strikes or disruptions, fire, disease or medical epidemics or outbreaks, closure of government offices, and government decision/administrative action that render the parties unable to fulfil their obligations.
Foreseeability. Often force majeure clauses would have provisions that exclude events that could have been foreseen. For example, if the parties entered into a contract in 2018, it is unlikely that the parties would have foreseen that Hong Kong government offices and mainland businesses would be closed during the outbreak of the Coronavirus in late January / early February 2020. However, if the parties entered into a contract in early February 2020, it would be arguable that any further closure and administrative actions (e.g. closing of borders, mandatory quarantine, etc) is a foreseeable event.
Causation. Usually, the party seeking to rely on the force majeure clause has to show that the force majeure event prevents the party from performing its obligation. The party would have to show it was impossible, not merely more difficult, for the party to perform its obligations. For example, if as a result of the Coronavirus, a party is no longer able to purchase raw materials from the mainland China but it is still possible to purchase similar raw materials from elsewhere (albeit at a higher costs), it would be difficult for the party to claim that it was prevented from performing its obligations.
Duty to Mitigation. Before a party could rely on the force majeure clause, it would have to show that it has taken reasonable steps to mitigate / reduce the effects of the force majeure event. For example, as with the above example, the party would have to show that it took active steps to try to purchase the raw materials from other countries before it attempts to claim force majeure.
As mentioned above, the courts would consider the true intention of the parties to construe a force majeure clause and apply it to the material facts of the particular situation. Very often, when negotiating a contract, businessmen do not give much thought to the drafting of force majeure clauses as many consider it a boilerplate clause which is inserted in contracts by lawyers just for the sake of it. However, these clauses, if well drafted, could help save your business in troubled times. Unfortunately, in recent years, with the Coronavirus, protests, Brexit, trade wars and various government administrative actions, we have seen more events that could potentially give rise to force majeure claims and this is the appropriate time to review your contract templates and see whether you have a force majeure clause in place that is legally effective and meets your needs.
Author: Charles To Partner
Date: 7th February 2020