The coronavirus outbreak is not merely awful news to follow, but a reality to be fought.
In the last century and after the sixth Cholera Pandemic (1910-1911) which caused a death poll of 800,000 people, this is the worst situation that involves many all around the world. The implications of this unpleasant situation have not yet studied enough. The first visible effect on the day to day needs of people, which many governments are dealing with, are the shortage of medical equipment, sanitizers and even food and many other supermarket necessities of civilians.
The point that puts a distinction between the last pandemic and this one is the delocalisation of business. In the past, societies were more independent and were able to stand on their feet for more. Nevertheless, the progression of international commerce, which is a characteristic of recent developments in shipping, banking, insurance and trade has infected the independence of societies. The writer is not in a position to predict the extent that it is good or bad, but upon following the news, can predict the market demands and say that the situation will become worse.
Today, more than in the past, every part of the puzzle of supplement in many industries comes from abroad.
The breakdown of the supply chain after the newest strategy of governments to close their borders would affect almost all different industries. Petroleum, construction, and international trade, which are dependent on the supply chain and
even are a combination of many skills, abilities, and goods from distinct markets in one place, are the next victims.
Any further view of upcoming news puts more strain on the shoulders of lawmakers to consider the sequence of events and satisfy their society and others who bargain with them, that all are on a single boat and any opportunistic behavior would strictly be barred. The current defect of legal resources to provide a solution to this issue could be problematic. There is no case law or act to address the issue manifestly.
The doctrine of frustration in common law is a good visor to look at the arising disputes throughout and judge the various ways people shall manage their contractual relationships.
It is naive or even impossible that one should think all would apply their rights in a proper and honest way. Whereas nothing goes on its usual way, it is indeed weird to expect people to implement their undertakings in a normal way. There are, nonetheless, many who abuse this situation against others; there are many unrelated chains that would be claimed adversely. Some may think that it’s best to hold their goods on ships for several weeks and sell them at a later date for a better price. They can argue before the courts and claim that the supply chain was broken, as evident, and that they were unable to deliver their duties duly.
In consideration of the pandemic status of COVID-19, how can courts and contract parties define and act upon obligations in such times?
Coronavirus is affecting parties’ contractual obligations and their performance and is greatly impacting international and domestic contract executions. According to UNCTAD, “We envisage a slowdown in the global economy to under two per cent for this year, and that will probably cost in the order of $1 trillion, compared with what people were forecasting back in September.” Furthermore, it seems that it has had an impact on the oil industry and also Islamic finance.
One of the most controversial issues is about the possibility of a party being excused from performing contractual obligations in accordance with reliance on force majeure clause, or alternatively the doctrine of frustration. Given the WHO’s recent announcement of the coronavirus as a pandemic, contract parties want to safeguard their positions by referencing such clauses.
According to Metalbulletin, “The China Council for the Promotion of International Trade (CCPIT) has issued many force majeure certificates to businesses in China affected by the novel coronavirus (2019-nCOV) outbreak”. It can help the burden of proof of the party relying on force majeure as a reason.
This article examines the possibility of whether the coronavirus can trigger force majeure clauses and the doctrine of frustration. Furthermore we will discuss certain construction contracts’ force majeure clauses.
1. Force majeure
According to the Law Dictionary, force majeure, mainly a contractual term in standard form of contracts, is “an event (as war, labor strike, or extreme weather) or effect that cannot be reasonably anticipated or controlled: fortuitous event compare act of god, inevitable accident.” The event is normally beyond control, making performance inadvisable, commercially impracticable, or impossible. Force majeure clause is commonly used in contracts in order to be excused from contractual obligations or to request for an extension of time. Since the Coronavirus is considered as a strange event that is beyond the control of contracting parties.
Essentially, notification obligation, mitigation requirement, and causation requirement are key concepts which should be taken into consideration. This means that notices need to be given within defined time periods and the party relying on the force majeure clause is required to prove the duty of mitigation and also the causal link between the spread of the virus and delay or non-performance.
A force majeure event and the legal remedies must be analyzed under the governing law of the contract to determine the availability and scope of such a defense. This means that it matters whether we are talking about common law or a civil law system. For instance, under Article 79 CISG, “if there is unforeseeable impediment beyond a party’s control that it could not have overcome, the party relying on the force majeure can be excused from performance”. In Iranian civil code, there is no reference to force majeure; however such concepts can be inferred in Articles 227 and 229.
It goes without saying that it is only when the parties have included a specific and explicit wording about force majeure in their contract that the clause will be applied. Accordingly, its drafting matters, in terms of whether the clause is drafted narrowly or broadly. Thus, the issue of force majeure should be analyzed on a case by case basis.
One may consider the applicability of the hardship (Imprévision) clause to the Coronavirus outbreak. Again, it is worth noting that the language and wording of the clause should be precisely analyzed. The remedies under the hardship clause normally contain a duty to renegotiate the contract in good faith and in an attempt to alleviate hardship, so hardship cannot frustrate the contract.
The applicability of force majeure is completely contractual in accordance with English law. As mentioned earlier, if the parties have not agreed to include force majeure clauses into their contract, then the doctrine of frustration may be applicable. Of course, the threshold for the application of frustration is usually high. The situation after obstacle removal should be examined.
It should be noted that frustration can only be applied if there is a significant change in the performance and cannot be implemented simply because of an additional burden on the performance. Nonetheless, law does not expect people to sacrifice themselves for their contractual duties, the fundamentality and the effects of the event in question is crucially important.
According to Ewan McKendrick in Contract Law , “a contract which is discharged on the ground of frustration is brought to an end automatically by the operation of a rule of law, irrespective of the wishes of the parties, as stated in Hirji Muliji v Cheong Yue SS Co 1926.”
The actual effect of force majeure and frustration are different. Application of the frustration can lead to termination, while a force majeure clause merely can excuse one party from performing obligations. In order to avoid further possible anticipatory breaches, it is recommended to seek legal advice before its referencing as the threshold of frustration is strict and high.
2.2.Examples in Standard Forms of Construction Contracts
Construction industry is famous for the creation and support of long term relationships among all involving parties through contractual mechanisms; engineers, contractors and subcontractors, supply chain members. Since that, almost all construction standard contracts embody one or some clauses relating to frustration of contract or subject matter of it.
One should keep in mind that this industry relies heavily on notices, and there is at least a one time bar clause for any notice in some standard formats . If this is not followed, there will be a loss of entitlement to refer to frustration and may contradict the contractual right of the claiming party. As a result, the claiming party cannot merely rely upon the prediamic of the situation as a court evidence and he must prove before the court whether their part acted reasonably to perform the contract including issuance of notice. This notice must refer to the related term in the contract and link the factual context with the contract stating how change of circumstances infected the implementation of the contract in particular. This could be health and safety considerations, shortage of labour, procurement issues that impacted the performance of work in the project and must include a compensation or remuneration plan that describes how this situation can be mastered.
Below are a few relevant articles related to circumstantial changes under some of the most famous UK contracts in the construction sector.
Article 5.2 of the SBC, 2016 on the concept of variation provides that,
“the impositions by the Employer of any obligations or restrictions in regard to the following matters or any addition to or alteration or omission of any such obligations or restrictions that are so imposed or are imposed by the Contract Bills or the Employers’ Requirements in regard to:
- Access to the site or use of any specific parts of the site;
- Limitations of working space
- Limitation of working hours’; or
- The execution or completion of the work in any specific order”
NEC4 is one of the UK’s famous standard construction contracts. This contract contains a clause about compensation events. According to section 60.1.19 of the said contract,
“An event which stops the Contractor completing the whole of the works or stops the Contractor completing the whole of the work by the date for planned Completion shown on the accepted Program, And which neither Party could prevent, an experienced contractor would have judged at the Contract Date to have such chance of occurring that it would have been unreasonable to have allowed for it and is not one of the other compensation events stated in the contract”.
In Article 2.26, the relevant events are defined as changes and any other matters or instructions which under these Conditions are to be treated as, or as requiring, a change. It is worth noting that force majeure or delay in receipt of any necessary permission or approval of any statutory body in which the contractor has taken all practicable steps to avoid or reduce are examples of the relevant events under this article.
According to Article 2.24, ”…The contractor shall give notice to the Employer of the material circumstances, including the cause or causes of delay, and shall identify in the notice any event which in his opinion is a Relevant Event”. Failure to send the notice can have negative effects on the contractors’ rights, since this is an obligation arising from the contract”
In the Red book (building and engineering works designed by the Employer) 2017 on the general conditions, the advance warning and extension of time (ETO) for completion are provided under sub clauses 8.4 and 8.5. Also, the requirement of giving a notice of claim is stated in sub clause 20.2.1 for describing the event or circumstance that gives rise to the cost, loss, delay, or extension of DNP for which the claim is made.
3 .MAC Clauses
MAC (material adverse change) or MAE (material adverse effect) clauses are usually included into merger agreements in order for buyers (lenders) to protect themselves against unforeseen changes which may have a significant and detrimental impact on the borrower’s business. It seems that the temporary deterioration is not enough to be covered under the said clause. However, it does not imply that all cases should include permanent changes, as some changes can have long term consequences on the ability of the parties to perform contractual obligations.
According to an article published by the Dentons team, “lenders generally want certainty before calling events of default, so rarely seek to enforce MAC clauses. A breach of financial covenants will in most cases be a greater risk for affected borrowers. For most borrowers, the MAC risk on account of COVID-19 is likely to be low, at least at this stage”. In fact, the effect of COVID-19 can fall within the ambit of MAC Clause, but the burden of proof is a key point here, since it is the lender who has to prove the actual effects on the business of the other side.
A MAC or MAE can grant the invoking party the ability to avoid performance or terminate the contract. Some examples are, “(a) breach or default under a related contract; (b) threatened litigation or arbitration; or (c) situations that would materially impact the operations or financial performance of the company.”
What can be concluded of Coronavirus force majeure?
Needless to say, parties are not entitled to rely on force majeure or the doctrine of frustration if their contract is concluded after the spread of COVID-19. The reason is due to the requirement of unforeseeability in the occurrence of events which are not met in the mentioned scenario.
The writer believes that the best method to enforce individuals in fulfilling their obligations and in prevention of illegitimate excuses is a robust and severe application of Pacta Sunt Servanda, whereas legally possible to apply the doctrine of good-faith–which is a challenging topic in English law. It can be summarised that although everyone’s lives under these miserable conditions, the presumption of courts should be the enforcement of undertakings unless there are precise reasons that hinder the delivery. This pushes all parties of contracts to collaborate together in order to solve problems or tackle barriers instead of relying on a widespread infection of COVID-19 as a globally-known excuse.
Accordingly, here are a few practical tips:
- Careful consideration should be given to the notice provisions under force majeure clause when drafting a contract.
- Parties can add specific and precise addendums to their present contracts related to Coronavirus uncertainties and its impacts on their business.
- If the parties have considered an arbitration clause in their contract, the ideal situation is to select the rules of an arbitral institution whose emergency arbitration mechanism is included.
- Businessmen should consult with their legal advisers, present all evidence about their non-performance, and should provide timely notice to the other contract parties about a delay or non-performance of their contractual obligations. There is no clear-cut formula for legal advice, as it depends on contractual clauses and the governing law.
- Other countries, in accordance with its specific and individual regulations, can consider China’s license structure that acts upon import and export regulations of force majeure, which can ultimately remove the burden of proof from the involved contract parties.
- It is advisable that the party that engages in a situation, which is unlikely to be able to perform its contractual duty, should issue a notice to the other party to describe the situation, the reason of non-performance, and applicable remedy.
- Depending upon their individual contract, more detailed information should be passed from the non-performing party in construction contracts.