The outbreak of coronavirus is widely being reported as having an impact on global manufacturing, shipping and cross-border supply chains as well as on local commercial dealings, thereby undermining many aspects of trade and commerce. While the full impact of the outbreak remains to be seen, it is not premature to proactively consider your potential risk and understand the possible legal consequences within the context of future planning or dealing with the ramifications arising from the coronavirus outbreak.
In this regard, special attention is focused on the effect of the coronavirus outbreak on the extent to which the outbreak excuses parties to commercial contracts from their contractual obligations (or even allowing them to terminate the contract).
We are setting out below some general guidance on this matter and some practical steps that should be considered by parties to contracts that may be affected by the coronavirus outbreak.
Check your contract
As a preliminary step, it is advisable to consider the terms of your contract, as construed under the applicable governing law.
In this regard, it is necessary to determine what law governs the contract, since: (1)"Force Majeure" clauses (and the contract as a whole) will be interpreted from a perspective of the applicable law (which may include specific relief or termination rights for special areas of law, such as aviation, tourism, energy, etc.); and (2) even if the contract does not include a Force Majeure clause, a Force Majeure concept (such as the doctrine of impossibility or frustration) could be implied under the contract law of the applicable governing law.
Commercial contracts often contain Force Majeure clauses, which excuse a party from performing in certain circumstances, or may even allow for termination of the contract without liability. A party directly affected by the coronavirus outbreak would generally have to demonstrate that the outbreak falls within the scope of the Force Majeure clause, as construed under the governing law of the contract: whether the clause specifically refers to the phenomenon (stating an "epidemic", "disease" or "pandemic" as Force Majeure events); if the coronavirus outbreak has resulted in events that are expressly stipulated in the clause (for example, shortage of labor or acts of government); or whether the Force Majeure clause contains general language defining a Force Majeure event as an "event beyond the parties control", allowing broader room for interpretation.
Check the applicable law(s)
Parties may seek to rely on the statutory provisions under the law governing the contract which excuse parties from strict compliance with their obligations where it is impossible (or possibly, difficult) to do so, or even allow them to terminate the contract entirely due to the impediment.
Section 18(a) of the Contract (Remedies for Breach of Contract) Law, 1970
Similar to many countries worldwide, Israeli law grants a statutory remedy (known as "frustration") in the event of non-performance of a contractual obligation due to unexpected occurrences, which are beyond the control of the contracting parties. Section 18(a) to the Contract (Remedies for Breach of Contract) Law, 1970 requires fulfillment of the following cumulative conditions:
- The breach of contract is the result of circumstances, which at the time of making the contract, the person in breach did not know of or have foreseen, and need not have known of or foreseen;
- Those circumstances could not have been avoided; and
- Performance of the contract under these circumstances is impossible or fundamentally different from what was agreed between the parties.
Under Israeli law, the threshold for establishing an event allowing the non-performance of a contractual obligation is relatively high, and accordingly, where there is a broadly drafted Force Majeure clause or one which "captures" the present situation, the parties may be better off relying on such a clause and the remedies provided under the contract (as this may differs from the remedies provided for under applicable law).
UN Convention on Contracts for the International Sale of Goods (CISG)
Certain types of international contracts may be governed by the United Nations Convention on Contracts for the International Sale of Goods ("CISG"), which was incorporated into Israeli law by the Sales Law (International Sale of Goods), 5760-1999. Section 79 of the CISG contains what is commonly known as a force majeure provision, which is somewhat "softer" than the statutory protection provided under Israeli law. The CISG allows a party to a contract to be excused from performance where the failure to perform was due to an unforeseeable impediment beyond the party's control that it could not have overcome. Under the CISG, the exemption lasts only so long as the impediment exists and notification must be given.
Ultimately, a party's ability to exercise its rights, based upon a Force Majeure event, will be determined on a case-by-case basis. There are, however, some general practical considerations that should reasonably be taken, whether you are the purchaser of goods/services or the supplier thereof:
- Assess whether your supply chain may be exposed to the effects of the coronavirus outbreak.
- Review the contract, especially the governing law and Force Majeure clauses, if exist.
- Consider whether there are alternative means to performing the contractual obligations or to take any reasonable actions to mitigate damages, which have occurred to the counterparty as a result of the non-performance.
- Be aware of and consider notice requirements, which may be preconditions to Force Majeure provisions and insurance coverage.
- If you are a supplier, pay close attention to legal and commercial implications of prioritizing performance of some of your contracts.
- Keep close attention to your insurance coverage and assess whether insurance may cover losses arising out of a party's inability to meet its obligations due to the coronavirus outbreak.
- Keep a detailed record of how the coronavirus outbreak implicates the performance of the parties, notices exchanged in this respect and any mitigating actions performed. This may be useful in any future litigation in any related disputes.
- Evaluate whether a party has a termination right if the Force Majeure event continues for a specific length of time.
- Ensure that specific language is included in any new contracts addressing the coronavirus outbreak and its outcomes.
The coronavirus outbreak is already disrupting businesses all around the world. In order to better understand the possible legal implications caused by the outbreak, parties will need to know what specific rights they have under their contracts and applicable law, and importantly, the steps they need to take to protect those rights.
Our firm is continuously monitoring the situation and has established a designated and multidisciplinary team which is able to assist in addressing the various legal aspects arising from the outbreak. We are doing our best endeavors to keep you informed on the latest legal implications relating to this matter and in the coming days we will issue further client updates in this regard.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.