For more than a month, China has been suffering from the COVID-19 outbreak, leading to strict containment measures and the standstill of many production plants of raw materials or parts.
While this is starting to disrupt industrial supply chains in Europe and France, some Chinese companies now also wish to suspend their purchase of supplies from these areas, as they know they will not be able to make any use of such supplies due to the shutdown of their factories or the slowdown of their activities.
Finally, the first outbreak of the COVID-19 virus in Europe and the heightened containment measures that will more than likely follow, increase the fear that certain productions of goods or services may no longer be provided.
In this regard, the legal mechanism that may excuse a party’s failure to perform its contractual obligation is the so-called Force Majeure.
To date, depending on the degree of contamination and the intensity of the corrective measures put in place, epidemics or pandemics may well qualify as such Force Majeure, defined as an event:
- which is beyond the control of the debtor
- which could not have been foreseen at the time of conclusion of the contract
- which has effects that cannot be avoided with appropriate measures
Yet, in the context of the COVID-19 virus and the slowdown of activities, could a Chinese buyer go as far as relying on Force Majeure to refuse receiving, and consequently paying for, goods that nothing prevents him, technically speaking, from receiving?
Such situations have been happening in China for several weeks and, as it could now occur in France, it is advisable to prepare for it.
Another question that may arise in these situations is how to deal with the possible cancellation of an event and more generally of a service, when most of the appointed service providers have already provided all or part of their services. Can the principal justify the cancellation, and consequently the nonpayment of such services, based on Force Majeure?
Furthermore, for contracts that are concluded today, will it still be possible to consider that future disruptions caused by the COVID-19 outbreaks were unpredictable, as per the definition of a Force Majeure event?
These questions and possible difficulties should induce economic operators to quickly look ahead for the likely consequences of the COVID-19 outbreaks on their contractual relationships and, in this context, to take preemptive measures such as:
- Question their suppliers (i) on the impact of the outbreak for their industrial activities as well as those of their subcontractors that may be located in the affected areas and (ii) on the measures implemented to date in order to mitigate such impact and secure supplies.
- Check the content of Force Majeure clauses included in their contractual documents, with a particular focus on the exclusion or inclusion of epidemics and pandemics as Force Majeure events as well as the effects related thereto.
- Check the conditions and possible formalism for declaring Force Majeure and review the type and intensity of the contractual measures that the party affected by an event of Force Majeure may be required to take.
- Check possible disclaimer clauses.
- Start building a case in the event(s) and consequences that are likely to be invoked on the grounds of Force Majeure, either to justify such qualification and consequences or challenge them. In this regard, there is notably case law where epidemics were not qualified as Force Majeure, based on their insufficient unpredictability and/or irresistibility (notably having regard to the number of persons affected by the epidemic).
- Adapt the drafting of contracts under negotiation in order to anticipate the qualification and possible effects of epidemics and pandemics. As it stands, the COVID-19 outbreak and its consequences are no longer fully unpredictable and may therefore not qualify as Force Majeure. It may therefore be useful to exclude such events from the Force Majeure clause and, in any event, to define precisely the effects that such events may have on the performance of the contracts.
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.
