The Legal Impacts of the Coronavirus Outbreak

This post is not about any specific development in the international arbitration space.  However, as a range of businesses – and the lawyers advising them – are dealing with a host of issues arising out of the coronavirus outbreak, it is considered timely to provide an update, as disputes to existing contractual arrangements may well surface in future arbitration claims.

Given they are at the front line of advising commercial parties, a large number of law firms have published articles dealing with a range of issues, including the impact on employment, supply chains, and construction contracts; the aim of this post is to bring a few of them together.

Tanner De Witt, one of Arbitrium’s sponsors, have published a comprehensive article, “Legal and Workplace Implications of Reported Cases of the Novel Coronavirus”, which highlights some of the key issues and consequences that employers and employees may face in Hong Kong, dealing with paid sick leave; protection from termination and discrimination; protection of personal data; the employer’s safety obligations; special work arrangements during an outbreak; and insurance issues. They conclude:

“…employers should pay attention to the terms of the employment contract (which may vary between employees) and the regulation of the [Employment Ordinance] or other relevant legislation. Any measures taken should also be adjusted accordingly as the situation of the novel coronavirus develops. More importantly, all parties should maintain good communications with each other and be informed of any updates and advice issued by the Government or other health organisations.”

Pinsent Masons have published two notes. In the first, “Managing the business impact of the coronavirus”, the authors note that businesses must continue to monitor the impact of the coronavirus outbreak on their employees, facilities and supply chains as decisions may need to be made quickly to take account of what is a fast changing situation, and consider business travel and employment implications; immigration implications; UK health and safety law. The article also deals with the implications for business supply chains and the potential impact of force majeure clauses, noting that:

“Under English law contracts, the term ‘force majeure’ is not legal one, and is therefore open to interpretation. It will very much depend on the drafting of the contract and the specific circumstances affecting performance. Where parties are unable to come to a commercial agreement, the party who wishes to rely on the clause will have to convince an adjudicator or court that their circumstances qualify. Under the civil law of the People’s Republic of China (PRC), there is a general principle of force majeure. Therefore, businesses should carefully review contracts in light of the relevant governing law to ensure that they are taking the right action. Pay particular attention to any contractual notice requirements or duty to mitigate the impact of the force majeure event, as a failure to comply with these requirements will probably mean that you are unable to benefit from the provisions.”

In their second article, “Coronavirus: remedies for Hong Kong construction contractors”, the focus is on construction contracts, where the author notes that the outbreak of the coronavirus is an issue of concern for construction organisations as construction contracts are being badly affected, stating that

“While it is hoped that employers will take a sympathetic view of the impact of the outbreak on construction works and grant contractors extensions of time and additional costs, experience shows that contractors need to be ready to protect their own interests if disputes arise. Contractors should take action. Doing nothing and hoping for the best is not an option.”

It is noted that outbreak of illness does not fall within the meaning of “excepted risks” used in most of the standard form contracts that might otherwise have entitled contractors to time or money, so contractors may have to rely on other clauses in the contract, including clauses dealing with suspension; force majeure and prevention; change in law; instructions by the architect/engineer; delay in delivery of materials; variations; delays as a result of the engineer’s flexible working arrangements; or special circumstances. Critically, the author highlights the importance of contractors making timely notification:

“Contractors should act promptly to protect their interests by making formal notifications and providing the necessary particulars in accordance with the contract and on time. This is especially important as a number of standard form provisions operate as conditions precedent to entitlement. It is also essential that contractors record the effect of the outbreak of the coronavirus on the works in terms of both time and cost.

In “Coronavirus outbreak: The Legal Implications”, Norton Rose Fulbright deal with force majeure clauses; frustration of contract; implications under funding arrangements; and risk management measures which corporates should consider. The authors also note the potential impact to the shipping industry:

“The shipping industry is likely to be impacted in a number of ways: not only through disruption to voyages to and from China, but also from delays in other countries as a result of quarantine and port checks due to cases, or suspected cases, of the coronavirus amongst crew and passengers on board vessels. Delivery of cargo may be delayed, or cargo may need to be discharged at alternative or interim ports, with expensive consequences and significant logistical and insurance implications. The construction of newbuilding vessels and scheduled ship repairs and upgrades are being delayed as a result of the impact of outbreak on the Chinese workforce which could adversely affect operating schedules. There have already been press reports that Chinese energy companies may be considering rejecting scheduled LNG cargoes claiming force majeure as national demand weakens.”

DLA Piper, in “Going viral: the legal impact of coronavirus on force majeure events”, examine force majeure clauses in some depth, noting that that the concept is a civil law concept which aims to ‘keep the contract alive’ in circumstances
where “innocent” contracting parties, who are not in default, are prevented from performing their contractual obligations due to disrupting supervening events beyond their control, often contemplated to cover acts of God, extreme weather events, riot, war or invasion, government or regulatory action including strikes, terrorism, or the imposition of an embargo.

Interestingly, the authors note that on 30 January 2020, the China Council for the Promotion of International Trade encouraged businesses which have, as a result of the coronavirus epidemic, failed to perform on time, or failed to fulfil an obligation in an international trade contract, to apply for a “force majeure certificate” excusing their performance. For example, CCPIT issued its first “force majeure certificate” to a manufacturing company in Zhejiang province to help stem the firm’s losses arising from its inability to meet its contractual obligations with Peugeot’s African plant, potentially exposing it to a damages claim. DLA conclude:

“The effects of coronavirus on business operations and profits may have created additional hardships on contracting parties to satisfy their contractual obligations. Parties who have experienced interruptions to their businesses as a result of the coronavirus should review the wording and scope of the force majeure clause in their contracts prior to ceasing performance and declaring a force majeure event.”

Fieldfisher, in “Coronavirus & implications for international supply contracts”, note the importance of the defaulting party to show that it used reasonable endeavours to prevent, or at least mitigate, the effects of the force majeure. They state:

“Generally, this is to mean that such clauses can be relied upon only if all reasonable steps had been taken by a party to mitigate the effect of the event. The shortage of component materials may have an impact on pricing now and in future months, the scarcity of such parts may well drive prices upwards if demand remains stable. Contracts should be reviewed to ensure that protection against price rises is included or whether they otherwise need to agree new terms or ‘flex’ other parts of their supply chains to ensure adequate provision of stock at a commercially sensible price.”

Gibson Dunn, in “Coronavirus and Force Majeure: Addressing Epidemics in LNG and other commodities contracts” examine common formulations used in force majeure provisions in LNG sale and purchase agreements, consider the scope of force majeure clauses under English and New York law, and identifies points that clients should consider when negotiating and seeking to enforce force majeure clauses. They note the approach of the English courts to force majeure clauses:

“The usual rules of contractual interpretation under English law apply to the interpretation of force majeure clauses. The court must ascertain the objective meaning of the language which the parties have chosen to express their agreement, and consider not only the wording of the particular force majeure clause but must also consider the contract as a whole and, depending on the nature, formality and quality of drafting of the contract, give more or less weight to elements of the wider context in reaching its view as to that objective meaning. Market practice may also be relevant to the exercise of interpretation, provided that it is clearly evidenced. In practice, however, market practice may be difficult to prove and a recent English case has confirmed that evidence of market practice after a contract is concluded will not result in terms being implied into a contract.”

Morrison Foerster, in “Contract Performance in the Time of Coronavirus: Perspectives from Mainland China and Hong Kong” provide an overview of force majeure clauses under Chinese law and English law noting, in relation to Chinese law:

“Useful guidance in evaluating the applicability of force majeure to the coronavirus outbreak is a notice of the Supreme People’s Court (SPC) issued in 2003 in relation to the SARS epidemic, which confirmed that force majeure would apply where the SARS epidemic or government measures adopted to combat it rendered a contract unable to be performed. It is not unreasonable to expect similar SPC guidance in response to the current outbreak, but even without that formal guidance, force majeure may be a useful doctrine for defaulting parties in appropriate circumstances.”

In relation to Hong Kong law, the authors examine the importance of the doctrine of frustration in circumstances where a contract does not contain a force majeure clause and, in relation to force majeure itself:

“Whether the coronavirus outbreak qualifies as a force majeure event ultimately will depend on the construction of the contractual clause at issue. Some clauses may make it reasonably clear if they specifically identify “disease”, “epidemic”, or “quarantine” as force majeure events. Other clauses may include more general events such as “acts of God”, “acts of government”, “strikes”, or “circumstances beyond the parties’ control”. The current outbreak could be a combination of more than one factor, the disease/epidemic itself and the government/public actions that ensue. Affected parties should carefully review the force majeure clauses in their contracts to determine whether they may apply.”

See also the review by King & Wood Mallesons and the review focussing on the construction industry from Quinn Emmanuel.

 

About Phillip Rompotis

Phillip practices as a barrister and arbitrator in Hong Kong. He has over 25 years’ litigation and arbitration experience in commercial disputes relating to construction & engineering, financial services, joint venture & shareholders agreements, technology, trusts, property and landlord & tenant. He is a Fellow of the Chartered Institute of Arbitrators, the Hong Kong Institute of Arbitrators, the Singapore Institute of Arbitrators, the Malaysian Institute of Arbitrators, and a member of various lists/panels of arbitrators.

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