Email overload on whether COVID-19 triggers a force majeure clause?
Whether you're considering a claim, worried about receiving one or busy drafting following the outbreak, here's our 10-point, jargon-free checklist on what to do:
Check your contract's governing law
- This note focuses on Hong Kong law-governed contracts, where the actual words used in the contract are what ultimately matter. Some jurisdictions impose overriding force majeure-type provisions which apply no matter what the contract does or doesn't say.
Find the force majeure clause
- It could be buried somewhere unexpected or refer to "special circumstances", "exceptions", "unforeseen events", or "acts of God" rather than force majeure. This reflects the absence of a general meaning of the term "force majeure" under Hong Kong law.
Establish the events it covers
- One party will obviously prefer a non-exhaustive list, the other an exhaustive one. Whichever you are faced with, look closely at how force majeure events are defined and decide whether COVID-19 fits the definition.
- Epidemics and pandemics generally will not be defined or state their location or who decides whether an outbreak has reached this threshold. However, there's less of a hurdle now COVID-19 is classed as a global pandemic. Some governments have officially certified COVID-19 as a force majeure event in their jurisdiction.
- If neither epidemics nor pandemics are mentioned, the clause could still be triggered where it covers labour and supply shortages (which are caused by COVID-19) or broadly defines events as exceptional, beyond one party's control, unavoidable and not attributable to the other party (but check carefully that all these conditions are fulfilled).
- If there is no force majeure-type clause or the event is not covered by the contract wording, consider relying on provisions such as those dealing with material adverse change, price adjustment, liability limitations and exclusions, extensions of time, variations or changes in law (for example, laws prohibiting employees or transport from working, which slow down the supply chain). Hong Kong law makes it hard to prove that the contract has been frustrated (that is, impossible to perform).
Work out how your clause links COVID-19 and non-performance
- A force majeure clause usually requires performance of contractual obligations to be "prevented", "impeded", "hindered" or "delayed". "Prevent" requires that the obstacle to perform is insurmountable, for example that it is no longer physically possible or legally permissible to perform the contract. "Impede", "hinder" and "delay" can be construed more broadly and do not require the affected party to prove impossibility to perform.
- Other contracts identify the Site as being the place at which impact is considered, it will be necessary to consider how this affects work being carried out in several jurisdictions.
- To rely on the clause, the event must be the only one affecting contractual performance (unless clearly stated otherwise). In other words, "but for" COVID-19, a party must have been willing and able to perform.
Understand the effects of notifying a force majeure event
- Depending on how long performance is affected, the contract may allow the right to suspend, seek an extension of time or for either party to terminate. Are you prepared for one or more of these consequences? Is there an opportunity to leave or renegotiate a difficult commercial situation?
- If a dispute were to result from the claim, is your dispute resolution mechanism robust or are there drafting gaps that could lead to satellite claims, for example over the law governing an arbitration? What would be the steps to enforce court orders or arbitral awards?
Comply strictly with contractual notice requirements
- Ask yourself:
- Is an initial notice of the force majeure event needed?
- Must you supply supporting details and evidence of the event and its effects?
- By when and in what form should notices (initial and subsequent) and supporting documents be served?
- Pinpointing when COVID-19 started to affect your contract might not be easy. If unsure, consider notifying force majeure at the earliest opportunity, followed by further periodic notices or updates regarding the continuing disruption so your claim is not time-barred.
Document evidence which supports your claim
- Properly record and store evidence of all communications with your counterparties about the disruption and its effects, including order or service cancellations.
- You must mitigate the effects of a force majeure event, so document reasonable steps taken to do so.
Respond quickly to force majeure notices
- Failure to respond to a notice within stipulated time limits may constitute acceptance of the counterparty's force majeure claim.
- Review subcontracts and supply contracts in case you too need to claim force majeure. If this will require force majeure event notices from counterparties, engage them early to manage the risk of late or premature notices.
Prepare for the force majeure event ending
- Agree with your counterparty a date when obligations will resume after the event and its effects have ended, especially if the contract is unclear.
- The supply chain will need time and resources to resume operations or clear backlogs and the party claiming force majeure won't want to be in breach once the event is over. There may in limited cases be room to explore (or a contractual right to request) a further extension of time for performance. However, you are more likely to get relief during the remobilisation period by highlighting to your counterparty that the event is over but the preventing effects are still being felt.
- As the effects of COVID-19 are felt at different times, force majeure notices could continue to be issued after it is downgraded from a pandemic. At this stage, return to the contract wording to check if COVID-19 is covered and whether the location of the force majeure event is mentioned. For example, would your clause be triggered if there were still an epidemic at the place of delivery but not the place of manufacture?
Learn lessons for future disruptions
- Assess your supply chain contracts so you know which counterparties are likely to be affected by COVID-19 (if they haven't already) and by other future force majeure events. Engage with them early to plan how to manage these situations.
- Do force majeure clauses in your existing and future contracts clearly and expressly allocate force majeure risk? Depending on your relationships with counterparties, think about amendments to prepare for future outbreaks.
Authored by Timothy Hill, Damon So, and Mark Crossley.