COVID-19 & Force Majeure

This year, the China Council for the Promotion of International Trade (CCPIT) has issued over 4800 force majeure certificates to Chinese businesses that have not been able to fulfil their contractual obligations due to the Corona Virus. The COVID-19 virus, dubbed a “pandemic” by the WHO, has surpassed 500,000 cases globally.

Would you say the novel COVID-19 qualifies as an act of God? On the surface I’m sure you’d give a firm yes. But it’s not that simple. If I were a lawyer, I’d type more confidently. So, this is just an opinion piece with real gems from a real lawyer and a real law firm.

Usually, when business is done under a strong legal framework but with a healthy amount of good faith, one wouldn’t hasten to tag a hiccup as a dispute. Many times have I made and received calls where it’s a more of “how best do we handle this” than “you failed, be penalised”.

Nevertheless, lockdowns, curfews, travel restrictions, restrictions on port activities and other government actions can cost companies a lot of money. At a juncture like this, labels go out the door. It’s becomes all about who carries the cost and other liabilities.

The litmus test, in my opinion, is whether the “act of god” or exact wording in the force majeure clause, even when proven to be true, actually affected the ability of the party making the claim to execute the contract. If you call on this, then the burden of proof is on you to prove.

It goes even deeper than that but Kim puts it best.

Kim VandenAkker is the Legal Counsel for Western Digital and has worked on many procurement contracts out of the company’s office in Irvine, California. From Kim,

“The interpretation of any given force majeure clause will depend on the specific contract and how the clause was drafted in that contract, as well as the law in the relevant jurisdiction. The courts in many jurisdictions, however, interpret ‘acts of God’ narrowly to refer only to natural disasters such as hurricanes, earthquakes, and the like.

If the force majeure clause refers only to ‘acts of God’ and does not contain other helpful language, a party may have a difficult time arguing a pandemic like COVID-19 qualifies to trigger the clause.

On the other hand, if the force majeure clause includes, for example, a reference to government actions, a party may find success in triggering the clause by pointing to certain government orders and restrictions that have resulted from COVID-19.

Again, in each case it will depend on the facts and circumstances of the specific contract and scenario, and certain jurisdictions may be more lenient than others when it comes to interpreting force majeure clauses.”

To further illustrate her point, she sent me a very helpful article from the Gibson Dunn Law Firm that outlines a “4-Step Checklist and Flowchart to review and assess force majeure clauses”.

In the event that the contract does not have a force majeure clause, the Gibson Dunn Law Firm article adds that,

“Whether or not the contract contains a force majeure clause, the common law doctrines of impossibility or commercial impracticability may be available and legal analysis of such a claim should be conducted…

The party asserting this defence will bear the burden of proving that the event was unforeseeable and truly rendered performance impossible, and the doctrine generally is applied narrowly…

if an agreement does not have a force majeure or “act of god” clause, an analysis under the doctrine of impossibility or commercial impracticability, depending on the jurisdiction, may be warranted.”