CONTRACT LAW UPDATE 09 MAR 2020

Coronavirus: impact on
commercial contracts
The impact of the Coronavirus has the potential to cause
significant disruption to businesses around the world

What you need to know

The ongoing Coronavirus (COVID-19) contagion is having an unprecedented impact on
trade and commerce.

Some businesses may seek to rely on force majeure clauses or other contractual rights
for relief from the performance of certain obligations due to the impact of the
Coronavirus outbreak.

What you need to do

Review any commercial contracts you have with a connection with industries or
countries affected by Coronavirus or the response to the virus, to consider whether you
or your counterparty's rights may be affected.

If force majeure clauses have been included, consider whether the clauses might be
triggered by or against you and seek advice.

Overview

The outbreak of Coronavirus is impacting global markets, trade and commerce. Quarantine
and travel measures have begun to impact central global industries including
manufacturing, and transport, and the supply chains supporting them.

Many organisations doing business with China (or other affected areas), or that are reliant
on the operation of businesses in affected areas, are considering whether they (or any
counterparties) are able to seek relief from the performance of contractual obligations and
whether any relief sought is valid. One common mechanism to seek relief in such a situation
is through reliance on a force majeure clause.

Force majeure clauses

Force majeure clauses are commonly included in commercial contracts in case certain
de ned circumstances prevent performance of contractual obligations. The term force
majeure means "superior force", and may encompass "acts of god" (such as earthquakes or
tsunamis) and certain acts of man of a disruptive and unforeseeable nature, such as
industrial action.

If one of the events listed in a force majeure clause occurs, the clause will usually prescribe
what the parties must do next, e.g. a party claiming force majeure may have to notify its
counterparty and take reasonable steps to mitigate the effect of the event impacting
performance.

Importantly, in common law jurisdictions, force majeure is not implied as a matter of law,
and express clauses are interpreted strictly. No doctrine of force majeure will apply outside
of the contractual mechanism.

The position is different in many civil law systems where the substantive governing law of
an agreement may allow for implication of force majeure mechanisms.

Certain civil law jurisdictions will also provide – through a doctrine of hardship found in the
relevant contract law – for the variation and/or suspension of contractual obligations where
performance of the obligation becomes more onerous as a function of unforeseen events
outside the control or in uence of either party.

Even where a governing law that does not provide for operation of a hardship doctrine has
been chosen by the parties to the contract, arguments as to the mandatory application of
local law may arise, including under the Rome Convention or Rome I Regulation, where
relevant. Such arguments are often run by parties seeking to avoid performance with the
aim of relying on a hardship doctrine where it might otherwise be excluded.

The terms of the UN Convention on the International Sale of Goods 1980 (CISG) may also
be relevant where the seller and buyer of goods have their place of business in different
CISG signatory countries (or if the rules of private international law apply the laws of a
signatory country).

Does the force majeure clause in your contract capture the

Coronavirus outbreak?

Notwithstanding that a court or tribunal may have sympathy for circumstances which have
arisen and may cause disruption to the contractual relationship, the task required in
common law jurisdictions is an analysis of which risks it was agreed would be borne by
which commercial party. This requires careful consideration of the precise wording in the
particular agreement.

Since the virus is a relatively new phenomenon, it is unlikely that any force majeure clauses
would explicitly refer to the event of a Coronavirus outbreak. Accordingly, in order to rely
on the clause, parties will need to consider the other events included, such as epidemics,
actions by government agencies, or work stoppages.

In addition, force majeure clauses that are widely worded will not necessarily capture
events such as the Coronavirus outbreak. The party relying on the clause will still likely
need to prove that the force majeure event was not "reasonably contemplated" by the
parties when making the contract, and that the event is "beyond the reasonable control" of
the party seeking relief.

How can you seek / prevent relief for force majeure?

The onus is on the party seeking to rely on the force majeure clause to prove that the force
majeure event has prevented, hindered, delayed or affected the performance of the contract
(depending on the wording of the relevant clause).

In many common law jurisdictions, the closest possible analysis of the cause of the delay is
at the heart of the matter. For example, is the cause of delay contagious disease, or is it
subsequent circumstances as society responds such as supervening legislation passed by
national legislatures intended to limit the economic impact of the virus, and which (if either)
of these is within the scope of the clause? Whether performance under a contract can be
suspended under a force majeure clause will always depend on the interpretation of the
relevant provision, and should not be assumed.

Generally, if a force majeure event occurs, performance of certain obligations within the
contract will be suspended for a speci ed period of time (for example, until the Coronavirus
outbreak is contained or its consequences on the contract parties come to an end). In some
cases, a suspension of obligations may not be viable and parties may seek to terminate the
contract entirely. Contracts often provide for the parties to have the right to terminate
after force majeure has been in place for a de ned period of time.

Contracts also commonly outline notice periods and other steps that must be taken in the
event that a party seeks to rely on a force majeure clause. Legal advice should be taken on
the question of whether noti cation of the invoking of a force majeure mechanism is a
contractual pre-condition or not. There is a wealth of Court of Appeal jurisprudence on this
issue in England and Australia.

What if there is no force majeure clause?

The purpose of a force majeure clause is usually to provide for the termination or adaption
of a contract if supervening events affect its performance. If there is no force majeure clause,
or the impact of the Coronavirus outbreak is outside its scope, the parties may need to
consider whether the contract has terminated by operation of law on any other basis, such
as upon acceptance of a renunciation or "frustration".
The doctrine of frustration applies where events occur that result in a situation
fundamentally or radically different from what was in the contemplation of the parties
when the contract was made. However, the doctrine of frustration is rarely available in
practice and is unlikely to apply where performance is merely delayed. This is because
courts and tribunals typically require the parties to demonstrate something akin to
"impossibility" of performance in order to nd that frustration has occurred.

Who has felt the impact?

In addition to the serious personal health concerns, the Coronavirus outbreak has had a
severe impact on global trade and commerce. China (the main country impacted by the
outbreak) has been hit hardest, with shutdowns and reduced demand for energy. However,
other countries and organisations that rely on trade and commerce with China have also
suffered.

In particular, the manufacturing and transport industries, and their supporting supply
chains may feel the effect of restrictions constraining the movement and supply of goods
and services.

All industries reliant upon a supply chain that involves China may face disruption, as will
those that rely upon Chinese customers, including not just global tourism but many
educational institutions across the Asia-Paci c, the UK and North America.

With insuf cient cargo bookings from China, extensive rescheduling of container line
shipping voyages make the availability of other routes and services unpredictable too.

What steps can your organisation take to mitigate risk?

Given the current uncertainty and global reach of the outbreak, measures to mitigate
potential negative implications include:

Consider which existing contracts may be impacted by closures or delays, or where a

counterparty may seek to terminate or suspend the contract.

Seek information and invite communications from suppliers or customers regarding the
impact of the outbreak, to prepare as best you can for potential disruptions.

If in doubt about whether a force majeure event applies to specific contracts your
organisation is a party to, or what relief may be available, seek legal advice before acting or
sending communications.

Consider how the risks associated with this outbreak, or a future outbreak of similar effect,
could be mitigated in future contracts.

Ashurst is currently assisting a number of parties asserting and receiving force majeure claims to
best protect their positions. Please do not hesitate to reach out to any of the key contacts below to
discuss these issues further.

Authors: James Clarke, Partner; Matthew Saunders, Partner; Hazel Brasington, Consultant;
 Huei-Deen Yeong, Lawyer and James Samartzis, Graduate.

Read more on managing the impact of Coronavirus on business

For more information on the impact of Coronavirus please see our Employment and Safety
Alert: Coronavirus: Managing the impact on workers and business

Key Contacts

We bring together lawyers of the highest calibre with the

technical knowledge, industry experience and regional know-how
to provide the incisive advice our clients need.

James Clarke Georgia Quick

PARTNER PARTNER
MELBOURNE SYDNEY

+61 3 9679 3093 +61 2 9258 6141

james.clarke@ashurst.com georgia.quick@ashurst.com

Matthew Saunders Ronnie King

PARTNER PARTNER
LONDON TOKYO

+44 20 7859 1339 +81 3 5405 6201

matthew.saunders@ashurst.co ronnie.king@ashurst.com
m
 Jeremy Chenoweth Catherine Pedler
PARTNER PARTNER
BRISBANE PERTH

+61 7 3259 7028 +61 8 9366 8064

jeremy.chenoweth@ashurst.co catherine.pedler@ashurst.com
m

James Comber Rob Palmer

PARTNER PARTNER
HONG KONG SINGAPORE

+852 2846 8916 +65 6416 9504

james.comber@ashurst.com rob.palmer@ashurst.com

Tom Cummins Emma Johnson

PARTNER PARTNER
LONDON LONDON

+44 20 7859 1051 +44 20 7859 1356

tom.cummins@ashurst.com emma.johnson@ashurst.com

The information provided is not intended to be a comprehensive review of all developments in the law and practice, or to cover all aspects of those referred to. Readers should
take legal advice before applying it to specific issues or transactions.