Coronavirus (COVID-19) - Force Majeure Event in Business Contract?

A force majeure event refers to the occurrence of an event which is outside the reasonable control of a party and which prevents that party from performing its obligations under a contract. 

Whether a party affected by the Coronavirus Pandemic (COVID-19) can rely on the force majeure clause to release itself from the performing of its contractual obligations would depend upon the terms of the contract, and each force majeure clause must be considered on its precise terms and in its specific context taking into account the wordings of the entire contract.

The general test for the application of force majeure usually requires the satisfaction of 3 conditions:

• the event must be beyond the affected party’s reasonable control;
• the affected party’s ability to perform its obligations under the contract must have been prevented, impeded or hindered by the event; and
• the affected party must have taken all reasonable steps to seek to avoid or mitigate the event or its consequences.

In considering whether the force majeure clause can be applied and relied upon, the non-performing party should take into account the following:

1) Whether the contract contains a force majeure provisions.

2) If yes, whether the Coronavirus pandemic is included within the definition of force majeure. This might be the case if the definition refers to:

• Epidemic, pandemic or disease;
• Acts of parliament or political interference; or
• General wording which might be applicable, for instance a reference to circumstances beyond the parties’ control.

3) Whether the failure to perform the contract is caused by the Coronavirus pandemic. If it has become substantially more inconvenient or expensive for a party to perform the contract, then it is unlikely to be considered as a valid ground to relieve the party from performance.

4) To rely on a force majeure clause, the event must have rendered the party Unable to carry out its obligations and not just uneconomical or inconvenient for the party to do so. The non-performing party has to prove that that the circumstances existed beyond its reasonable control which have prevented (or delayed) performance of the contract.

5) The non-performing party should consider how and when it needs to notify the other party and what steps to take to avoid or mitigate its loss.

6) The usual wordings of force majeure clause would set out the consequences of the occurrence of the force majeure event, such as suspension of the contract, time extension for performance, or in the most serious scenario, termination of the contract.

7) The non-performing party should also check whether there are other means to perform the contract despite the triggering event (COVID-19 pandemic).

8) The non-performing party seeking to claim protection of the force majeure clause should strictly follow the reporting obligations stipulated in the contract and monitor the development of the triggering event after invoking the force majeure clause.

 

For legal advice or services on corporate & commercial disputes and matters, please contact CHOW & CHEUNG, Hong Kong Solicitors & Notary Public [Tel: +852 2856 3799 or Email: cac@ccsn.hk ]

Website: www.ccsn.hk

 

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