Coronavirus – is it force majeure?
Generally, force majeure is defined as an external and unexpected event which cannot be averted, and which prevent a contracting party from fulfilling its contractual obligations. The question is whether the coronavirus is force majeure – and what it means to the world of transport?
Since the virus originated in the Chinese Hubei province in December 2019, it has developed into a pandemic. The epicentre of the disease has now shifted to the US and Europe, and the world has now been sent into a recession. The transport industry is also faced with this recession and parallels are drawn to the financial crisis of 2008-09. Especially the tanker segment has seen a dramatic fall in the tanker rates, but also the container sector has been affected negatively.
The number of container ships from China dropped by 46% between 19 January and 20 February due to the virus, and the container shippers have imposed emergency fees on the remaining departures. Inventories are still running low, and supply chains and retailers need to stock up intermediate and finished goods before the container industry can begin recovering. However, as Chinese manufacturing industry is recovering, the container volumes are expected to start to pick up (BIMCO: the shipping industry is not immune to a pandemic).
As a result of COVID19, many contracting parties have been struggling or unable to meet their contractual obligation under transport and logistics contracts as well as under other commercial contracts in the first quarter of 2020. Many contracting parties have attempted to protect themselves from breach of contract claims by issuing force majeure notices/declarations to their contractual counterparties. Therefore, it is the question arises as to whether COVID19 can be considered a force majeure event in contractual relationships with the result that the non-performing party is protected against breach of contract claims from the contractual counter party.
Contracts sometimes contain clauses accurately describing the circumstances of force majeure and listing examples of such force majeure events.
In cases where the contract has a force majeure clause, and where, for example, diseases, epidemics, etc. are taken into account, there is a higher chance that force majeure can be invoked because of the impact that the coronavirus has had and possibly will have on the contractual relationship.
However, even if the agreement between the parties does not regulate force majeure, this does not mean that force majeure cannot be invoked; In some countries, a general principle of force majeure apply. It is worth noting that such a general doctrine does not exist in all jurisdictions.
In England for example a party to a contract will only be able to rely on force majeure to excuse non-performance if there is a force majeure clause in the contract as force majeure cannot be implied into an English law contract. Instead English law operates with the concept of "frustration", which may be relied on as a general doctrine. In general, it only applies where events occur that make the performance of the contract: (1) impossible; (2) illegal; or (3) something radically different from that originally envisioned by the parties. It is not enough that a contract becomes more expensive or onerous than originally contemplated due to events falling short of this.
However, the scope of this doctrine is relatively narrow, and it is not certain that contractual parties can rely on the frustration doctrine due to the COVID19 outbreak, quarantine measures or other government actions.
Different from English law, a general doctrine of force majeure exists in Danish law. While it is advisable to insert force majeure clauses in Danish law contracts, parties to a Danish law contract may rely on the force majeure doctrine which is automatically implied into Danish law contracts, unless the parties have explicitly excluded force majeure. This doctrine will be dealt with further below.
Based on the above it is important to be aware that if force majeure is not regulated in the contract, the choice of law may be crucial in invoking force majeure.
Although the concept of force majeure may differ from country to country, in many countries, the concept of force majeure has the commonality of an external and unpredictable circumstance which prevents a party’s fulfilment of its obligations under the agreement. Typical examples of cases where force majeure will be particularly relevant include outbreaks of war, rebellion, fire, and riot, etc.
The occurrence of a force majeure event means that a contracting party may be exempt from liability even though the obligations undertaken in the contract are not fulfilled. Importantly, it is a prerequisite for being exempt from liability that the event could not be foreseen at the time when the agreement was concluded.
In Danish law, the general view is that force majeure can be invoked as a reason to be exempt from liability – even if a clause on this subject is not found in the contractual basis. This presupposes that force majeure is not actively deselected in the agreement between the parties.
If the coronavirus is to be characterised as a force majeure event, it must be regarded as extraordinary, and the performance of the contract must also be impossible as a result of the extraordinary event. Also, force majeure only applies to events that occur after the contract has been agreed and which could not be envisioned by the parties upon the formation of the contract.
Therefore, it becomes central whether the coronavirus is causing the service in question to be undeliverable. The party invoking force majeure must be able to prove that it has been impossible to fulfil the contract as a result of the virus. Therefore, it is not sufficient that, for instance, the supply of goods has become more costly or more time-consuming. In this context, it may be necessary, for example, to be able to document employee reports on the disease and actions related to reducing the impact of the virus.
Throughout the first quarter of 2020 the COVID19 situations has continuously developed and it will therefore depend on the specific contract and the specific circumstances surrounding the performance of the contract whether a contractual party can declare force majeure. A crucial element here is also whether the contract was formed before the outbreak of COVID19 or after the outbreak. In the latter case it will be more difficult to rely on the doctrine of force majeure.
While the COVID 19 situation may differ from the traditional “Act of God” situations (earthquake, hurricanes and the like) many situations in the first quarter of 2020 may be considered force majeure under Danish law, subject to the conditions mentioned above. An example is the closing of a country’s boarder preventing a contractual party to enter the country to perform obligations under a contract. In a transport context the carriage of goods to and from countries are, however, still permitted. Another example could be the restrictions against gathering more than X people together. If this prevents the performance under a Danish law contract this will likely be a force majeure event.
Importantly, the party invoking force majeure has an obligation to notify. The party invoking force majeure is obliged to notify its contracting counter party that the agreed service cannot be provided because of force majeure. This obligation to notify may be stated in the agreement. Still, it also follows from the general duty of acting in good faith and duty of disclosure which contracting parties are subject to under Danish law.
Because of the coronavirus outbreak, the companies affected should review their contracts to determine their rights and obligations in the event of epidemics. In some contracts, it is a condition, to be able to invoke a force majeure event, that a contracting party is notified, within an agreed deadline, that the contract cannot be fulfilled due to force majeure. It is crucial to respect such deadlines, as they are often relatively short (e.g. 7 and 14 days).
In conclusion, it is appropriate to observe and be able to document the required measures that have been taken to reduce the impact caused by the outbreak of the virus. This will also put the contractual party in a better position should a legal dispute arise as to whether a force majeure event was present and the extent of the force majeure event.