Is COVID-19 an event of force majeure?

Does COVID-19 allow you to get out of your contract on the grounds of force majeure?

We have been asked this question several times in recent weeks. COVID-19 has hurt many businesses and has stopped contract performance in its tracks in many instances. Does that mean the contract is suspended or even terminated because of force majeure or an act of God? Carol Ling from the Corporate and Commercial practice group of Tanner De Witt reviews some of the guiding principles.

What is force majeure?

Force majeure is a Latin phrase that means superior force. It typically refers to events that are categorised as an act of God – such as an earthquake, natural disaster, or some other major event that is outside the control of contracting parties.

Force majeure is not the same as a frustration of contract. Frustration of contract can be claimed if an event occurs without the default of either party and which is not accounted for in the contract. If that event so significantly changes the nature of the outstanding contractual rights or obligations from what the parties could reasonably have contemplated when entering into the contract, then it would be unjust to hold them to the contract in the new circumstances. This, however, is an uncertain legal concept that the Courts would be reluctant to invoke.

Can you suspend or terminate your contract on the grounds of force majeure?

Force majeure is a contractual concept. In other words, a contracting party cannot claim force majeure as a reason to suspend the performance of his contract unless the contract permits him to do so, and he follows the requirements of the contract.

So the question of whether COVID-19 can be considered an event of force majeure is really a question of whether the contract itself contains a force majeure clause and COVID-19 (or its consequential events) fall within it. Force majeure should be a more certain and clear basis of claiming suspension or termination of contractual obligations, but it all depends on the terms of the contract.

What does a force majeure clause typically provide?

A force majeure clause is based on the principle that no party to the agreement should be held to perform its obligations if the party is prevented or delayed from doing so by events outside his control.

It will typically provide:

1. an illustrative or exhaustive list of events that are considered force majeure events;
    
2. a notice procedure to claim that force majeure has occurred;
    
3. obligations to perform contractual obligations to the extent possible notwithstanding the force majeure;
    
4. procedures to suspend or terminate affected or all contractual obligations affected; and
    
5. procedures for the allocation of loss and claims for damages.

We expect there will be more attention given to force majeure clauses in contracts. There is no “one size fits all” approach. The clause must be tailored to the business or project in question and will be affected by the bargaining position of the parties.

Key points

1. A party that intends to rely on the force majeure clause should examine the specific drafting language of the clause.
    
2. The party needs to determine whether the event is a force majeure event. It is unlikely that a force majeure clause will explicitly refer to the outbreak of COVID-19 as a force majeure event. However, the global reaction to the epidemic or other relevant measures enacted and appeals made by the Hong Kong government may still be considered as force majeure events. This is because the description of force majeure events are often drafted broadly with wording such as “epidemic”, “disease”, “acts of god”, “emergencies”, and “circumstances outside of the parties’ control”.
    
3. The party should consider whether the event caused the level of disruption as required in the force majeure clause. For example, the force majeure clause might require that the party’s performance of its obligations be “prevented”, “impaired”, or “interfered with”. The party needs to assess whether the level of disruption required has been met.
    
4. Consideration should be made as to whether the party could take any reasonable steps to avoid the event or mitigate the effects of the event. For instance, it may be possible to still perform the contract if alternative contractors or technology is used.
    
5. The effect of claiming force majeure should be considered. Will it suspend or terminate the entire contract, or only affected contract obligations? Does it give the other party the right to terminate the contract? If so, is it an automatic right, or is there a period of escalation before termination is permitted?
    
6. A party seeking to rely on a force majeure clause needs to comply with obligations imposed such as issuing a notice to the other party.
    
7. A party needs to consider the financial consequences of claiming force majeure. There will be demobilisation costs, and losses will need to be allocated. Equally, any benefit or enrichment that results from invoking force majeure should be allocated. Also, deposits or advance payments may need to be repaid.

Recommendations

Our key recommendations to persons who seek to rely on the force majeure clause are:

1. Review the force majeure clause in the contract carefully to make sure that all the key elements of the clause are present and allow you to claim force majeure.
    
2. Consider the consequences – especially financial consequences – of invoking the force majeure clause.
    
3. Carefully follow the notice obligations to claim force majeure.
    
4. Make sure you continue to perform any continuing obligations under the contract, including on resumption of the contract if the force majeure ceases.

Carol Ling

If you would like to discuss any of the matters raised in this article, please contact:

Eddie Look Partner | E-mail

Tim Drew Partner | E-mail

Edmond Leung Partner | E-mail

River Stone Partner | E-mail

Pádraig Walsh Partner | E-mail

Disclaimer: This publication is general in nature and is not intended to constitute legal advice. You should seek professional advice before taking any action in relation to the matters dealt with in this publication.