Original post by the Consumer Choice Center
Confirmed cases of the novel coronavirus (COVID-19), which first appeared in China at the end of last year, are currently over 800,000 as of April 1st 2020. What was initially seen as a largely China-centric shock has now become a global pandemic.
Global consequences of the COVID-19 pandemic have included grounding of flights and limited international travel, closure of public markets, issuance of curfews and also lock-down of countries and cities where there has been rapid spread of the virus. Governments have advised employers to allow their staff to work from home, called for closures of schools and banned all social gatherings, including religious meetings. People have been urged to observe very high levels of hygiene and to thoroughly wash hands with soap and water and use sanitizers in the alternative.
The International business community has not been spared of the said shocks. With the end of the pandemic unclear, the economic impact is expected to be very severe globally. Considering the disruptions to international supply chains that have occurred as a result of the COVID-19 pandemic, it is expected that many players in the International Trade community will be caught up with non-performance of their contractual obligations, and lawsuits shall follow. Does the COVID-19 pandemic qualify for the operation of the Force Majeure clause as a relief to affected parties?
Ordinarily, when entities and individuals trade with each other, they sign contracts that legally bind them to their agreements. The contracts list obligations of the parties and also circumstances that would call for the termination or suspension of the said obligations. One of the circumstances that could excuse non-performance or termination of a contract is legally known as “Force Majeure”, one of the standard clauses of a contract.
Article 7.1.7 (1) of the UNIDROIT Principles defines Force Majeure as follows:
“Non-performance by a party is excused if that party proves that the non-performance was due to an impediment beyond its control and that it could not reasonably be expected to have taken the impediment into account at the time of the conclusion of the contract or to have avoided or overcome it or its consequences.”
If the said Impediment is temporary the defaulting party shall be excused for a reasonable period of time. The Force Majeure Clause only takes effect where the defaulting party gives notice to the other party explaining the impediment and the impact it has had on the expected performance, otherwise the defaulting party shall be liable for damages. In order for a party to rely on the Force Majeure defense, the clause must be included in their contract contract and the impediment causing non-performance of their obligation must be expressly stated.
An example of a Force Majeure clause in a Sale Contract reads as follows:
“Either party shall be relieved of all responsibility for any failure or delay for the carrying out of their obligations hereunder due to product discontinuation, manufacturer price changes, supplier price changes, changing market conditions, strikes, riots, civil unrest or an act of civil or military authority, combinations or restrictions of work, Act of God, war, insurrection, fire not caused by its act or omission or that of its servants or invitees on the property, tempest, industrial disputes, an act of a public enemy, a boycott, embargoes, failure of communications systems unavoidable accident or any other circumstances beyond its reasonable control whether or not the same be ejusedem generis with those above.”
Since Pandemics with such severe impacts are uncommon they are usually not expressly provided for in contracts. Events from the past month to date are a clear indication of a situation that is beyond control, and may lead to involuntary breach of contract by parties who fail to meet their contractual obligations. Parties that do not have Force Majeure clauses and are unable to meet their obligations can plead Frustration of Contract which defense does not require prior inclusion in their contracts.
Medical professionals around the world are working tirelessly to find a cure for the COVID-19 virus and are currently testing some combinations of medication. A fact is that we cannot forecast when things will be back to normal and the International trading markets restored. While policy focus by most affected governments has been to provide safety nets for their economies with measures such as food donations and grants to needy families, tax reductions and pay cuts for some officials, unfortunately businesses have been left to think fast and make tough decisions to remain afloat.
Time is of the essence for those who wish to rely on the Force Majeure and Frustration of contract defenses for their non-performance and a reminder that ignorance of the law is not a defense as a rule of thumb. Players of the International trade market and policy makers will all have to act in good faith for the sake of survival as we all anticipate the end of the pandemic, after-which a whole new world order shall begin.