Last month, we posted an article dealing with the legal impacts of the Coronavirus (see here), bringing together a range of publications prepared by law firms. At that time, the focus was somewhat limited to the economic consequences within Mainland China and those countries who transacted business with Mainland Chinese entities. Since that time, the virus has been declared a pandemic by the World Health Organisation and has spread throughout most of the globe, in some cases exponentially, causing further loss of life and disruption to economic activity. Most countries have taken drastic measures in response to Covid-19 by, for example, prohibiting travel and restricting the movement of people through quarantine and other measures, all in an effort to contain the spread and protect their citizens. While priority must be given to the health, safety and welfare of people, Governments around the world have also sought to ameliorate the enormous economic impact on people and businesses by implementing a range of monetary and fiscal measures.
While it is too early to gauge the full extent of the economic consequences, it is clear that the pandemic continues to severely affect businesses and contractual relations across a broad range of industries. In Hong Kong, particularly in the construction and maritime sectors, we are seeing instances of parties declaring force majeure, sometimes without a full appreciation of the wider consequences of that decision on the progress of the project, entitlements to time and money, and insurance obligations.
Like last month, the aim of this post is to bring together a number of recent articles published by law firms at the forefront of advising commercial parties in dealing with the pandemic.
I hope that an update next month will not be necessary.
Two comprehensive efforts by leading firms. First, Linklaters have collated principles of potential relevance to a variety of commercial contracts across a multitude of jurisdictions, including the PRC and jurisdictions under the Common Law (UK, Hong Kong, Singapore). Other jurisdictions not linked here include Belgium, France, Germany, Italy, Japan, Luxembourg, The Netherlands, Poland, Portugal, Spain and the USA: visit Linklater’s website for links to those publications.
Second, in “Covid-19 – Issues Affecting Performance of Contractual Obligations in Construction Contracts Governed by English Law”, Quinn Emmanuel analyse the following four strategies likely to be available to parties:
- Renegotiate the terms of the contract, including by requesting waivers of contractual conditions and obligations.
- Invoke any force majeure clause in the contract and, depending on its terms, suspend or abandon further performance.
- Assert that the contract has been frustrated and, on that basis, abandon further performance altogether (and likewise release the counterparty from further performance).
- If legislative or administrative interference prevents the performance of specific terms, invoke the doctrine of severance to (in effect) delete the offending terms and preserve the rest of the contract.
In relation to these strategies, Quinn Emmanuel state:
“Broadly speaking, the first option – if realistic in practice – carries the least legal risks (and often produces the best commercial outcome). However, parties seeking waivers or amendments should be aware of the need to ensure that any agreed changes can be evidenced if there is a subsequent dispute. They should also comply with any contractual conditions to amendments or waivers. Both should be (relatively) straightforward to achieve.”
“The next two options, particularly relying upon the doctrine of frustration, are more drastic, and considerably riskier. The gravest risk they pose is that, by indicating that a desire to limit the extent of its further performance, a party will inadvertently repudiate the contract. The financial consequences of this may be extreme. If the counterparty accepts the repudiation as discharging the contract, the default result is that the first party will be liable to put the counterparty in the position it would have been had the contract been performed (subject to the application of any relevant limitation or exclusion clause). The financial compensation which would then be payable could be very substantial.”
“Asserting that specific terms of the contract have been severed from it offers a party an opportunity to preserve the deal but on potentially better terms. Severance operates to excise a clause (or part of a clause) from a contract where whose performance of the clause (or relevant part thereof) has become illegal. While it is difficult to difficult to establish all of the requisite elements of a severance claim, it may in certain circumstances offer a party a less risky means of escaping performance (or impossible performance) of an obligation as opposed to relying upon the doctrine of frustration or a force majeure clause.”
“Where available, relying on a MAC clause may appear to be a safe ground for exiting an agreement which has been negatively impacted by the spread of the coronavirus. However, whether there has been an adverse change which is material is ultimately a subjective question, and, if it has to be made by a court, will (in practical terms) be considered with the benefit of hindsight. Parties may therefore face uncertainty as to whether reliance upon a MAC clause will be upheld by a court.”
For construction practitioners, Quinn Emmanuel specifically analyse force majeure provisions in the standard form contracts, including JCT, FIDIC Silver Book and NEC 3, and provide a suggested checklist for evaluating the applicability of a force majeure clause.
Two articles from my former colleagues at Stephenson Harwood. The first, “commercial leasing in Hong Kong” deals with a range of topics, from rent abatement, force majeure, frustration, fundamental breach and mutual agreement. The second from the London office, “Contracts and COVID-19: 10 Top Tips”, deals with force majeure, the all-important notice provisions, frustration and material adverse clauses.
In “COVID-19: Coronavirus Losses: Will Your Commercial Insurance Policies Respond?”, K.L. Gates deal with the range of insurances that might respond to the present circumstances, including (i) commercial property insurances – business interruption coverage, contingent business interruption and supply chain insurance; (ii) event cancellation insurances; and (iii) liability insurances, including CGL, D&O and E&O policies.
The Hong Kong office of RPC, in “Novel Coronavirus (“Covid- 19”) and its potential implications for Business Interruption Insurers” also consider some key insurance issues with respect to the potential application of notifiable disease and supply chain extensions to standard business interruption insurance policies. The authors provide a useful review of the Court of Final Appeal’s decision in relation to SARS in New World Harbourview Hotel Co. Ltd & Ors v ACE Insurance Ltd & Ors (2012) 15 HKCFAR 120, a leading common law authority on the trigger for infectious disease extensions in business interruption policies, where the CFA confirmed the following:
- business interruption insurance provides an indemnity for losses arising from specific insured perils, with cover triggered according to the wording of the insuring clause and extensions in the policy.
- common law courts (for example, in Hong Kong and Singapore) interpret insurance contracts in the same manner that they interpret commercial contracts – giving effect to a contractual provision according to the words used in the context of the policy as a whole, so as to make sense of a particular provision.
- “Notifiable human contagious or infectious disease” meant an infectious or contagious disease which was required by law to be notified to the relevant authorities.
- SARS became a “notifiable disease” within the terms of the relevant policies when it was gazetted as such under the Prevention and Control of Disease Ordinance (Cap 599) (the “Ordinance”), even though the first incidence of the disease occurred some six weeks before that date. It was only after SARS was added to the 1st Schedule of the Ordinance that there was a mandatory requirement to notify.
- the position would have been different for diseases which were already statutorily notifiable under the Ordinance, where cover would have been triggered as soon as there was an incident.
- as cover was not retrospective, losses arising from SARS were only covered once it officially became a notifiable disease in Hong Kong, at which point it became an insured peril and triggered the policy.
- the calculation of standard revenue under the policies should include the (downward) effect that a notifiable disease (in that case SARS) had upon the revenue of a business prior to the date upon which it became a notifiable disease.
- business interruption cover is not “profit guarantee” insurance.
In “Novel coronavirus outbreak – New business disruptions to Hong Kong industries”, the Hong Kong office of Baker McKenzie focuses on management of insolvency risks in light of economic uncertainties arising from the pandemic, dealing with the definition of an insolvency event under s.177(1)(d) of the Companies Winding-Up and Miscellaneous Provisions Ordinance (Cap.32) and other events which may be an insolvency event by law or deemed to be an insolvency event in contractual clauses.
Australia has temporarily suspended insolvent trading laws, insulating directors from insolvent trading claims for six months. In “Solvency issues in the fact of COVID-19”, Coors undertake a comprehensive review of the measures and consider the consequences to directors duties and corporate action. For entities doing business in or with Australian entities, this is well worth a read.
Construction & Energy
In addition to the Quinn Emmanuel article referred to earlier, in “Construction delays arising out of the Novel Coronavirus outbreak”, DLA Piper in Hong Kong also focus is on the impact of the pandemic on construction projects.
The authors deal with delays caused by disruption to public services (eg. issuing or approving drawings), delays caused by a temporary suspension of works, and insufficient man-power as a result of quarantine measures imposed by the Hong Kong Government or travel bans imposed by other countries. Helpfully, DLA review the risk allocation under the various standard forms of contract commonly in use in Hong Kong as they relate to extensions of time for delay to completion, including the Standard Government Form, the HKIA Standard Form and NEC3, as well as dealing with force majeure clauses and employment issues.
See also the useful Note produced by NEC – “Covid-19 issues and NEC4”, which provides guidance in relation to the standard wording in NEC4 contracts, stating:
“In the most severe cases, where work has had to be stopped or suffers delay, because of the virus, clause 19 – prevention – may well apply. The situation could arise when people have been prevented from working on the contract or Plant and Materials or Equipment cannot be obtained due to restrictions on movement. These restrictions may have been applied in another country where essential Plant and Materials or Equipment were being sourced. It would be difficult to argue that, in such an extreme case, the Contractor could have anticipated the issue and have allowed for it. If the impact stops the whole of the works being completed by the date for planned Completion shown on the Accepted Programme, or being completed at all, then the provisions of this clause apply and the Project Manager should take control of dealing with the matter.”
Hogan Lovells in Hong Kong have compiled a comprehensive analysis of the impact of the pandemic to long-term energy agreements such as a sale and purchase agreement for liquefied natural gas, dealing with the legal position under various laws including English, New York, French and Chinese law, concluding that:
“In the midst of a potential force majeure event, contracting parties that may be affected should carefully review their contractual terms, in particular, all relevant provisions on force majeure and any other alternative reliefs. In the case of an LNG SPA, the parties should also review upstream and downstream agreements and see whether any upstream/downstream force majeure circumstances will trigger the force majeure clause in their own SPA. Now is a good time to see whether standard clauses in commercial agreements are fit for purpose…”
From Australia, Coors Chambers Westgarth consider the impact of Covid-19 on solvency issues to both suppliers and customers and the potential consequences of the appointment of a voluntary administrator. In a follow-up article a few days later, Coors consider the impact of Covid-19 on construction, development and infrastructure projects in Australia, noting the issues potentially arising throughout the various phases of a construction project, including risk allocation at the tendering/pre-contract phase, powers that may be exercised at the delivery phase (eg. to grant a unilateral extension of time or consider carving out work as a separable portion), impacts to payments and insurance.
From Mainland China, two articles. The first from Gowling WLG’s offices in Guangzhou which deals with restarting business operations in Mainland China amid the pandemic, covering four key issues: (i) legal liability, and why companies and managers must abide by the administrative controls; (ii) employment, and how to deal with Chinese and foreign employees during the epidemic; (iii) business discontinuity, and why force majeure and hardship clauses aren’t so simple to claim against business partners or insurers; and (iv) going forward, and how foreign invested enterprises will benefit from the Chinese stimulus package and subsidies.
The second is from Hogan Lovells, who ominously (but not unsurprisingly) state:
“we have already seen … disputes are arising out of international trade contracts from the impact of the outbreak. The international trade and shipping industries should ready themselves for disruption and difficulties of an even higher degree, including but not limited to potential delays or breaches.” The authors review the air cargo and shipping industries, force majeure in international trade contracts, and the quarantining of vessels/cargo and safety of the ports.”
From the USA, in “New OSHA Coronavirus Guidance for Employers: What You Need to Know”, Wilmer Hale review two guidance documents issued by the Occupational Safety and Health Administration (“OSHA”) intended to help employers plan for and respond to workplace risks. The first, released on 9th March 2020, and entitled “Guidance on Preparing Workplaces for COVID-19”. The second, released on 14th March 2020, and entitled “Temporary Enforcement Guidance”, deals with the use of filtering facepiece respirators by healthcare providers.
Staying in the USA, Hogan Lovells, in “SBA loans and government economic relief programs: responses to COVID-19″ focus on the array of options made available by the US Government to combat the economic impacts of the pandemic.
Finally, in “Impact of Covid-19 in International Arbitration”, Mayer Brown have put together a useful summary of the measures being taken by the main arbitral institutions in dealing with the pandemic, focussing on the adoption of videoconferencing and various technology platforms for the conduct of hearings. The authors deal with the LCIA, ICC, HKIAC, SIAC, ICSID, and AAA/ICDR.
As the situation evolves, so will the responses from the various institutions so please the websites of each arbitral institution for the latest information. See, for example, the measures adopted by the HKIAC (updated on 26th March 2020), SIAC and the LCIA.