Force Majeure in Covid-19 time

 

Since the Pandemic caused by the coronavirus, COVID-19, we have witnessed the continuous disruption on people's daily lives and business operations, especially businesses operating in China and the Greater China region ( including Hong Kong ), Taiwan, Singapore and Indonesia and for those with contracts governed by English law.


We understand the difficulties our clients are currently facing, not only for the safety of their families and employees, but also the significant impact the outbreak has caused, and continues to create to their business.

The unfortunate disruptions to our clients' business operations will unavoidably impact their ability to comply with their contractual obligations to their business partners, be it in the region or around the world. If your business and ability to perform your obligations have been or will be affected, it is, therefore, critical to understand your rights and obligations under ongoing contracts or negotiations as well as the options available to effectively address and cope with the current difficulties and minimize any negative impact of the crisis on your business.

In severe and challenging times like these, businesses should be aware of the possibility to invoke the doctrine of force majeure.

 

Force Majeure Under Different Governing Laws

 

Under Taiwan law : No Force Majeure Certificate Issued in Taiwan

 

Taiwanese companies may have been deeply impacted when Chinese companies fail to perform their contractual duties. As stated above, the reason is that the Taiwanese companies cannot produce or export their products when their factories or suppliers are located in China under quarantine. Unlike CCPIT giving support to the Chinese companies, the Taiwanese Government has not considered issuing similar force majeure certificates in a way to protect the Taiwanese companies from the risk of breaching international trade contracts. Thus, foreign companies doing business with the Taiwanese companies will not have extra difficulty

imposed by the Taiwanese Government.

Third Step: Checking Whether Coronavirus Directly causes the Non-Performance of Contractual Duties

 

However, in Taiwan, the Taiwanese companies may argue that their non-performance of the contractual duties or their delay is due to "change of circumstance" so that their contractual obligations can be excused to a certain extent. Article 227-2 of Taiwanese Civil Code provides that "if there is a change of circumstances which is not predictable then after the constitution of the contract, and if the performance of the original obligation arising from that place will become unfair, the party may apply to the court for increasing or reducing his payment, or altering the original obligation." Because Article 227-2 states that the party which is impacted by "change of circumstances" may request the court to "alter the original obligation", it seems that the impacted party may even assert that the contract at issue can be terminated to alter their original obligation therein. If this is the case, the so-called "change of circumstance" is a more powerful weapon than the force majeure clause in international trade contracts.
 

Change of Circumstance Arguments in Practice per Taiwanese Laws
 

When applying Article 227-2 of Taiwanese Civil Code, the Taiwanese courts take a relatively conservative perspective. That being said, although the influence of novel coronavirus may easily constitute "change of circumstance", the Taiwanese courts would carefully examine whether the impact of novel coronavirus can directly cause the non-performance of the contractual duties. The Taiwanese judgments in the SARS era could be excellent examples to understand the courts' view. In 94 Taiwan High Court Shang (上) No. 86 (2005), the court stated that the impact of SARS did not directly cause impracticability of the leasing contract concerning a parking lot so that the lessee could not terminate the agreement because of SARS. However, the court held that the liquidated damages might be reduced since SARS is unpredictable change of circumstances. Moreover, in 97 Taiwan High Court Chungshanggeng One (重上更一) No. 148 (2008), the court held that electric equipment supplier shall still be liable to the delay of delivering the equipment because the delivery date was prior to the date of SARS epidemic decided by the Ministry of Health of Taiwan.

Further to this, in 98 Taiwan High Court Tainan Branch Court Chungshang (重上) No. 29 (2009), the court rejected the impacted party's claim, stating that the income of business operation did not become better after World Health Organization removed Taiwan from the list of areas with the transmission of SARS. Hence, the impact of SARS was merely one of the causes of the bad income of business operation. Therefore, using "change of circumstance" under Article 227-2 is not very easy to convince the court to exempt the duties in a contract. A direct causal link between the influence of novel coronavirus and the non-performance of contractual obligations or delay must be established.

Conclusion
Not Easy to Use Force Majeure or Change of Circumstance Arguments per Taiwanese Laws.

Under the same logic, using the force majeure clause may also face the same problem. That being said, unless the international trade contracts at issue provide otherwise, the direct causal link still has to be established. Therefore, the foreign companies doing business with the Taiwanese companies can make counter-arguments that the Taiwanese companies bear the burden of proof that the force majeure clause covers the outbreak of novel coronavirus and that the direct causal link needs to be established. Further to this, you can point out that it is hard to satisfy the strict standard used by the Taiwanese courts. We hope these arguments can give foreign companies some useful tips for the negotiation in the era of the novel coronavirus.

 

 
Under Chinese law: force majeure (不可抗力) is a legal doctrine that is codified by legislation. 

 

Article 117 of PRC Contract Law and Article 180 of PRC General Rules of Civil Law define force majeure as any objective circumstances which are unforeseeable, unavoidable and insurmountable (不能预见、不能避免并不能克服的客观情况). It is worth noting that the spokesperson of the Legislative Affairs Commission of the National People's Congress Standing Committee (全国人大常委会法工委) has clarified on February 10, 2020, that the Government's preventative measures in the containment of the new coronavirus can constitute an unforeseeable, unavoidable and insurmountable force majeure event, if performance of a contract is prevented as a result of these measures.

The consequence of successful invocation of force majeure is that the invoking party will be exempted from liability in part or whole depending on the impact of force majeure. The parties affected by force majeure may also terminate the contract in question if the force majeure relied upon frustrates the purpose of the agreement.

If contracts do not contain a force majeure clause, the codified provisions will apply. For contracts with a force majeure clause, the contractual limitation will apply to the extent that it is not inconsistent with the general principles under PRC Contract Law, including the principles mentioned above.

To invoke force majeure under Chinese law, the following factors should be fulfilled:

  1. The invoking party must notify the other party in a timely manner to reduce possible losses caused to the other party. 

  2. The relevant contract must have been concluded before the force majeure event. 

  3. A causal link must be established between the invoking party's inability to perform the contract and the event of force majeure. In this regard, the invoking party bears the burden to prove the existence of force majeure and the impact on its performance of the contract. It is worth noting that companies can apply to the China Council for Promotion of International Trade (中国国际贸易促进委员会) for certificates of force majeure concerning international trade contracts.

 

 

Under Hong Kong law: there is no doctrine of force majeure under the respective local legislation

 

A party's right to invoke force majeure would depend on the construction and interpretation of the force majeure clause in the relevant contract.

It is therefore key to review your force majeure clause to understand (i) the definition and scope of force majeure, i.e., what events does the force majeure clause cover; (ii) the effect of the force majeure clause, i.e., does the force majeure clause exempt a party's obligation to perform the contract in full or in part, or does it only delay the performance; and (iii) the steps required to invoke the force majeure clause, e.g. is written notice required, or are there any mitigation measures to take.

Under the United Nation's Convention on Contracts for the International Sale of Goods ("CISG"), which is the governing law often used for the international sale of goods contracts, force majeure is codified explicitly under Article 79 as an impediment beyond a party's control. Based on this provision, a party's liability for a failure to perform any of its obligations can be exempted if the failure was due to an impediment beyond the party's control and that the party 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. To invoke the force majeure doctrine under Article 79 of the CISG, a notice of the impediment and its effect on the party's ability to perform must be given to the other party.
 
In English law, 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. English common law has no general concept of force majeure (save for the limited doctrine of contractual frustration, which is addressed below). A party's ability to claim relief for a force majeure event, therefore, depends upon the terms of the contract, and the force majeure provision in particular. Force majeure provisions are express terms and will not ordinarily be implied into contracts governed by English law.

A party affected by such an event of force majeure will typically be relieved from performing the obligation affected for the duration and to the extent affected and may be entitled to compensation.

As with all matters dependent upon the terms of the contract, each force majeure provision must necessarily be considered on its precise terms and in its specific context. There are nonetheless some features common to most force majeure provisions, which we consider below.

Events Capable of Constituting Force Majeure
The "test" for force majeure usually requires the satisfaction of three distinct criteria:

  • the event must be beyond the reasonable control of the affected party;

  • 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.
    These criteria will be considered in turn.

The Event

It is common to see force majeure events split into two categories which set out a specific list of events which are deemed to be events of force majeure: political force majeure, which deal with risks related to changes in the political or legal environments and non-political force majeure (or natural force majeure), which deal with physical risks that might impact a business or a project. These different categories often provide different remedies—an extension of time and increased costs (for cases of political force majeure) or an extension of the time for completion and relief from termination (for cases of natural force majeure).

Many contractual provisions set out a specific list of force majeure events which are deemed to be events of force majeure beyond the control of the parties, such as "pandemics," "epidemics" or "diseases." A specific reference to a "pandemic" will make it easier to bring a force majeure claim but will still require the other criteria for a force majeure test to be satisfied.

However, if the provision does not include language to that effect, then it will be necessary to consider whether COVID-19 or its impact on a business or a project, is captured by a different concept, such as an "Act of God," "action by government" or a catch-all provision. Most force majeure provisions contain "catch-all" language in respect of events which are "outside the reasonable control of the party affected". It seems reasonably clear that a pandemic such as COVID-19 would qualify as force majeure under such a provision.

It is essential to bear in mind; however, that the relevant force majeure event need not be COVID-19 itself. It is the consequences of COVID-19 and its impact upon the ability of the affected party to fulfil its contractual obligations that will be relevant.

Performance
The second criterion will be affected by the degree of impairment of the affected party's ability to perform its contractual obligations required to trigger the operation of the force majeure provision. A force majeure provision typically relieves a party from what would otherwise be a breach of contract—i.e. its failure to perform any obligation due to the effects of the event of force majeure in question. The party must establish the causal link between the event and its inability to perform. A provision that requires a party to be "prevented" by the force majeure event from fulfilling its obligations will likely be more difficult to rely upon than one which only requires the party to be "impeded" or "hindered" in the performance of its obligations.

A highly likely scenario with COVID-19 would be the inability to perform a contract due to having to self-isolate an office or a team due to the outbreak of COVID-19 at the workplace. Under many force majeure clauses, this would likely have the necessary impact and causal link to qualify as a force majeure event, subject to the party affected having taken all reasonable measures. A disruption that merely impacts the profitability of a contract may not be sufficient for a force majeure claim unless there is express contractual provision for such a situation. Nor would an economic downturn or other general adverse business conditions likely be sufficient, even if it could clearly be shown that a critical trigger for the decline was COVID-19.

 

Duty to Mitigate
Finally, a party seeking to rely upon a force majeure provision will usually have to show that it has taken reasonable steps to avoid or mitigate the event and its consequence and that there are no alternative means for performing under the contract. What constitutes a reasonable mitigation measure is fact-specific and depends upon the nature and subject matter of the contract in question.

For example, a supplier could consider using alternative manufacturing lines in a different location, or a project owner could seek alternative suppliers. However, the reasonableness of a mitigation measure will be considered in light of any additional burdens and costs that the party incurs, as well as the availability of alternative manufacturing lines and suppliers at that time and the overall impact of any delays that a mitigation measure could have upon the project schedule.

Given the continued impact that the spread of COVID-19 is having upon global businesses, there may be fewer mitigation measures available to parties than in other potential events of force majeure. However, it will be necessary for employers to follow all relevant official guidelines and to consider all reasonable measures to contain or limit the spread of the virus in the workplace to allow contractual performance to continue. Short-term steps, such as home-working may be necessary.

Notice Requirements
Typically, the affected party's right to relief for force majeure under the contract will be conditional upon the issuance of a notice by it to the other party, supported by the required evidence. The contract may additionally require the notice to state the anticipated consequences and duration of the force majeure event. Some contracts, especially construction contracts, include a "time-bar" clause that requires notice to be provided within a specified period from when the affected party first became aware of the force majeure event, failure of which will result in a loss of entitlement to claim.

Unlike a one-off event such as a natural disaster, which is usually limited in time and confined to a particular geographical locale, the COVID-19 outbreak has been dynamic. It has been characterized by its ability to proliferate rapidly and unexpectedly across multiple countries and geographic regions. Parties have therefore adopted the approach of issuing "protective" or "rolling" force majeure notices that take into account the developing impact that the COVID-19 outbreak has upon the performance of their obligations under the contract.

Consequences of Force Majeure Claims
The implications for the parties where a  force majeure event has occurred will depend on the nature of the affected party's obligations under the contract, as well as the consequences and remedies expressly contemplated by the force majeure provision.

Contractual remedies for force majeure typically include an extension of time to perform those obligations or suspension of contractual performance for the duration of the force majeure event. If the force majeure event extends over a more extended period, some provisions may entitle the parties to terminate the contract.

Doctrine of Frustration
In the absence of an express force majeure provision within an English law contract, parties may be able to rely upon the doctrine of frustration. By contrast, the doctrine of frustration is not available if the agreement contains an express force majeure provision, since the provision will be regarded as the agreed allocation of risk between the parties.

The doctrine of frustration will apply if:

  • the underlying event is not the fault of any party to the contract;

  • the event or circumstance occurs after the formation of the contract and was not foreseen by the parties; and

  • it becomes physically or commercially impossible to fulfil the contract, or transforms the obligation to perform into a radically different obligation from that undertaken initially.

The doctrine of frustration results in the contract automatically coming to an end. The parties to the agreement will no longer be bound to perform their future obligations. Because of the dramatic consequences contractual frustration, the threshold for proving frustration is much higher than that for most force majeure provisions since it must be shown that the obligations impacted by the event or circumstance are fundamental to the contract.

Some contracts may also contain a "change in law" provision, which addresses circumstances where there has been a change in law that makes it impossible for the party to perform its contractual obligations. As a result, parties may incur increased costs to reimburse the affected parties, and in some cases, the right to terminate the contract. Given the continued global spread of the outbreak, it is possible that laws may be passed in order to contain the spread of the virus, but which also prevent that party from performing its contractual obligations (eg, travel restrictions or nationwide quarantine and self-isolation measures, as recently implemented across Italy). A party's entitlement to remedies will depend upon the scope of a "change in law" provision.

 

 

Under Indonesian law: the concept of force majeure is recognized in the Indonesian Civil Code (the "ICC").

 

 

However, the concept as formulated in the ICC is relatively unspecific in comparison to what is generally found in contemporary international legal practice. As a result, parties will want to negotiate their own rules of force majeure when drafting their contract.

The principal rules of law relevant to the concept of force majeure are found in Articles 1244 and 1245 of the ICC, which read as follows: 

Article 1244:
"An obligor shall be ordered to compensate for costs, losses and profit if he/she cannot prove that the non-performance of a legal obligation or the late performance of such legal obligation, is caused by something which is unforeseen, for which he/she cannot be held responsible, even in the absence of bad faith on his/her part."

Article 1245:
"There is no compensation for costs, losses or profit if because of uncontrollable circumstances or because of happenstance, the obligor is prevented from delivering or performing something which is obligatory, or commits an act which is prohibited for him/her."

The Indonesian for the phrase "uncontrollable circumstance," or "keadaan memaksa," found in Article 1245 above, is commonly used as the Indonesian translation for "force majeure" or "act of God" in English. There is thus no doubt that the concept of force majeure exists in Indonesian law. However, neither Article 1244 nor Article 1245 provide any examples of force majeure or give much granularity to the concept.

In the absence of a rigid statutory formulation, many Indonesian legal scholars rely on common law formulations in broadly describing force majeure as an event which: (i) causes the party claiming the force majeure to be unable to perform an obligation; (ii) results from an occurrence for which the claiming party cannot be faulted; and (iii) could not have been foreseen by the claiming party at the time the obligation was formed. However, one should not assume that an Indonesian court will follow this or any other formulation of the concept.

In specific sectors, regulatory pronouncements and legal practices may also be relevant. For example, government-formulated rules for emergencies in the petroleum industry make particular provision for pandemics, among others.

Finally, employment law is also relevant. An employer is not generally permitted to terminate an employee on force majeure grounds, except in limited situations provided by statute and after paying compensation in an amount mandated by law. Neither may an employer suspend or reduce an employee's salary and other compensation, except with the employee's permission.

Is it only available if it is specified in a contract?
Indonesia is part of the civil law tradition. Articles 1244 and 1245 of the ICC thus apply generally in circumstances where the parties themselves have not addressed the issue of force majeure in their legal relations. However, Indonesia also honours the principle of freedom of contract found in Article 1338 of the ICC. Consequently, parties may supplement or opt-out of the ICC provisions governing force majeure by instead including bespoke force majeure clauses in their written contracts. This is highly recommended.

What are the essential requirements, such as notification, to claim force majeure?
The ICC does not stipulate any specific requirements for a party to claim force majeure, including notice. As with the substantive formulation of force majeure, the parties are also free to agree to procedural requirements in their contract, and both the substantive and procedural requirements may generally be expected to prevail in legal proceedings.

 

What is the effect of a force majeure certificate issued by a government body?
Indonesian law does not presently provide a mechanism by which the Government will issue a force majeure certificate or its equivalent. However, government agencies can and often do comment on natural disasters and other instances of force majeure. Nothing in Indonesian law prevents a court from considering these declarations or pronouncements in determining whether specified circumstances of unclear origin are to be treated as natural disasters or other acts of God.

There is also one instance, quite controversial, in which the Government issued a regulation directing that a particular disaster of questionable origin be treated as an act of God in legal proceedings, and the courts have honoured this regulation.

There are presently no reports that the Government will issue any regulation, guidelines or another pronouncement for the effect of the COVID-19 Pandemic on private contractual relations. Should there be any such pronouncement, one may expect the Indonesian courts to give it significant weight.

What remedies are available if there is a force majeure event?
Where the parties have themselves provided for remedies in the case of a force majeure event, one may expect that those remedies will generally prevail. In the absence of contractually specified remedies, Articles 1244 and 1245 of the ICC provide that a party which is successful in claiming force majeure is relieved of the obligation to pay damages. In effect, the party is excused from the performance to which the force majeure relates.

In the context of a sale of goods, Article 1264(3) of the ICC provides that if goods, due to no fault of the seller, depreciate while awaiting the satisfaction of conditions precedent for their delivery, the buyer shall have the option either to cancel the agreement or to require delivery of the goods in their existing condition without any reduction in the agreed price.

In the context of the employer-employee relationship, Indonesian law does not allow employers unilaterally to suspend and/or reduce the salary or other compensation of employees except with the express consent of the employee, irrespective of any force majeure event.

What are the risks of claiming force majeure incorrectly?
If a party claims force majeure incorrectly and discontinues performance of a contract unilaterally, that party may be held in breach of its obligations, and the other party may be successful in seeking damages for non-performance. Although the ICC provides for specific performance a breached obligation in Article 1267, it is generally understood that courts are reluctant to award specific performance. Where they do so, the judgment is challenging to enforce. Damages are thus, usually the preferred remedy.

Are there alternatives to force majeure such as the frustration of contract or "change in circumstances"?
Although the ICC does not recognize "frustration of contract" or "change in circumstances" as express legal doctrines, there may be alternative concepts which may accommodate these concepts with effective legal advocacy. For example, Article 1254 of the ICC provides:
"All conditions that are intended to do something that cannot be done, something that is contrary to morality, or something that is prohibited by law are void and render agreements conditioned upon them, not in effect."

The circumstances captured by the phrase "cannot be done" in the above provision are open to interpretation.
Another example may be found in Article 1381 of the ICC, which provides in relevant part:
"Obligations shall cease … by reason of the destruction of the goods that were owed."

How can you find out if courts or other types of tribunals have been closed or suspended?
The Supreme Court of the Republic of Indonesia has issued Circular Letter Number 1 of 2020, dated March 23, 2020, following the earlier promulgation of the same Circular Letter, regarding the Adjustment of the Working System for Judges and Court Apparatus in Efforts to Prevent the Spread of COVID-19 at the Supreme Court and Subordinate Courts (the "Circular Letter").

The Circular Letter gives to court tribunals the discretion to determine any postponement of hearings or restrictions on visitors attending hearings. The Circular Letter also encourages parties in civil, religious, and state administrative proceedings to utilize the e-litigation application system which the courts have recently activated.

As of the date of this writing, several courts in Indonesia have announced that hearings in civil matters are postponed for two weeks to accommodate the Government's efforts to battle the COVID-19 outbreak.

These and similar court announcements are generally made public and need to be monitored continuously.

Are arbitration proceedings in the Indonesian jurisdiction being suspended?
We have been informed verbally that proceedings administered by the Indonesian National Arbitration Board (BANI) are suspended until March 27, 2020. This date is subject to change and requires continuous monitoring.

 

 

Under Singapore law: "Force majeure" refers to contractual terms that contracting parties have agreed upon to deal with situations that might arise, over which the parties have little or no control, that might impede or obstruct the performance of the contract. 

 

In Singapore, the courts have held that there is no general rule as to what constitutes a situation of force majeure. Whether such a force majeure situation arises would all depend on what the parties, in their contract, have agreed.

In the construction of a force majeure clause, the courts will apply the presumption that the expression "force majeure" is likely to be restricted to supervening events which arise without the fault of either contracting party and for which neither of them has undertaken responsibility[8].

Where one party seeks to rely on a force majeure clause, the burden is on that party to show that it falls within the scope and ambit of that clause. That party must also show that there was indeed nothing it could have done to avoid the operation of the force majeure event or to mitigate its results. This is because a party must be strictly held to its contractual obligations and should only be released from those obligations where supervening events make it impossible, and not merely difficult, to fulfil them.

The remedies of each party in the event of a force majeure situation depend on the wording of theforce majeure clause. For instance, the clause may provide that in the circumstances constitutingforce majeure, an extension of time may be granted, or there may be the cancellation of the contract at the option of either party.
 
Does the current COVID-19 outbreak constitute a force majeure situation?
It is paramount to note that the applicability of force majeure would be strictly dependent on the precise scope and ambit of the particular contractual clause. In other words, whether or not the current COVID-19 outbreak constitutes a force majeure situation would depend on the wording of the clause.

If the force majeure clause expressly lists an "epidemic", "global health emergency" or an event that "poses a risk to the health or safety of participants" as examples of force majeure situations, the current COVID-19 outbreak would very likely fall within such categories.

If the force majeure clause in the contract does not list such examples but for instance, definesforce majeure situations as events "making it impossible for parties to fulfil their contractual obligations", the party seeking to invoke the clause must show that the outbreak has made it impossible, and not merely more financially onerous (due to increased costs or expenses) for it to fulfil its obligations under the contract.
 
Events in Singapore
In light of the COVID-19 outbreak in Singapore, event organizers might be considering whether to cancel their upcoming events in Singapore and whether their contracts with various vendors can be terminated.

What is helpful to note is that the Ministry of Health in Singapore ("MOH") has issued an advisory on February 8 2020 advising event organizers to cancel or defer non-essential large-scale events. For event organizers who choose to proceed, necessary precautionary measures are to be taken. Subsequently, the Ministry of Trade and Industry in Singapore ("MTI") also issued an advisory on February 15 2020 stating that businesses should maintain normalcy, as long as the necessary precautions are taken. Companies are advised to cancel or defer non-essential large-scale events to reduce the risk of community transmission of COVID-19. According to the MTI, large-scale events refer to events with more than 1,000 attendees, and non-essential large-scale events refer to events like Dinner and Dance and Family Day with more than 1,000 attendees. Smaller-scale events such as training and development courses and internal townhall meetings could continue.

While the government advisories can support the position that non-essential large-scale events should be cancelled, do note that such announcements are not government laws or regulations that strictly prohibit such activities. The advisories contemplate the option for organizers to proceed with non-essential large-scale events, albeit with proper precautionary measures, or at least, deferring them to a subsequent date. More crucially, as at the date of this article, the alert level has not been raised to DORSCON Red where people should practice social distancing and avoid crowded areas.

If, as a result of the outbreak and the travel restrictions imposed by Singapore and other countries, the number of registrants for the event will fall below the minimum number required under the contracts, this can go towards showing that the organizer can't fulfil its contractual obligations. What if the agreement is silent on the minimum number required for the event? Would the parties construe this to mean the minimum number necessary for the event to carry on meaningfully or the minimum number by reference to past-year events?  We take the view that whether a failure to meet the minimum attendance constitutes a force majeure event ultimately depends on the scope of the force majeure clause and whether the contract already provides for parties' rights and remedies in the event of such a failure to meet the minimum attendance.
 
What if the contract does not contain a force majeure clause?
Ideally, parties should provide for contracts to contain a force majeure clause. Nevertheless, if a contract does not contain a force majeure clause, a contracting party can seek to rely on the doctrine of frustration, which discharges both parties from the agreement.

Frustration occurs when, without the default of either party, a supervening event has rendered the performance of a party's contractual obligations radically different from that which was contemplated by both parties at the time of the contract. One example would be circumstances which have caused the performance of a contract to be impossible, e.g. if a particular source from which the subject matter of the contract is derived is unavailable. Another example would be the frustration of the purpose of the agreement, which would be the cessation of an express condition, which go to the root of the contract, and is essential to its performance. From a business perspective, would the fact that either contracting party may incur huge unexpected costs be a factor in determining frustration of the contract?
 
Conclusion
Parties should seek legal advice on whether the current COVID-19 outbreak in Singapore constitutes a force majeure event within the scope and ambit of the relevant clause in their contracts, or a frustrating event which discharges parties from the performance of their contracts.

 
Steps You Should Take Now

 

 We recommend that our clients take the following steps if they are encountering difficulty in performing their contracts due to the coronavirus outbreak:
 

  1. Review your contracts, in particular the governing law clause, dispute resolution clause, and the force majeure clause (if any).

  2. Analyze the likelihood of success of invoking force majeure based on the applicable governing law and the force majeure clause in the contract (if any). If the agreement contains a force majeure clause, check the relevant scope of the force majeure clause and the effect of the force majeure clause, as well as the prescribed steps to invoke the force majeure clause.

  3. Keep detailed documentation when any failure to perform occurs, such as the time of occurrence of the force majeure event, and the impact you have suffered due to the force majeure event.

  4. Notify your overseas business partners promptly of any situations that cause your non-performance and consider negotiating with your business partners for possible modifications or cancellation of the existing contracts on a without-prejudice basis.

  5. When entering into new contracts, ensure that relevant provisions cover situations like the current coronavirus outbreak.

 

How we can help

 

We have a great depth of experience in helping clients in managing crisis situations and negotiating solutions to save the business and minimize financial loss and the impact of the crisis.

We can, therefore, best assist our clients in navigating this crisis by reviewing the relevant contracts and formulating strategies to safely and effectively address the difficulties our clients are facing.

If you have encountered any problem in performing your contracts due to the current coronavirus outbreak or any other related issues, or simply have questions about the legal situation you are facing in these challenging times, please do not hesitate to reach out to us. Some scenarios are considered below :
 
Practical Suggestions for Clients
To be prepared for different scenarios as the situation continues to unfold, we recommend that clients consider taking the following proactive steps.

  • Review your contract to determine whether the agreement includes a force majeure provision and, if so:

- Carefully review the definition of force majeure in that contract to

  determine whether there is any specific event incorporating events

  such as COVID-19 and, if not, whether the general language is

  sufficient to include COVID-19 and its consequences. If in doubt, it

  may be helpful to seek legal advice early in the process.-

 

- Consider those aspects of the relevant contract that you are not able

  to perform and satisfy yourself that the inability to perform is due to

  the consequences (direct or indirect) of COVID-19 and not a different

  reason.

 

- Consider and review what steps you are taking as a business to avoid

  or at least reduce so far as possible the effects of COVID-19 upon

  your workforce and your ability to continue to perform contracts. It will

  be essential to be able to show that you have taken all reasonable

  measures and followed all official guidance. Remote working and other

  steps, such as adopting a "clean" team structure may be helpful in this

  regard.


- Consider whether there are any notice requirements to trigger

  entitlement to relief, including what type of supporting documents

  must be provided and whether there is any time limit for that notice to

  be issued.

 

- Consider what the consequences of a successful claim for force

  majeure are.

  • Review the financing or other related documents to determine whether any notice provisions must be complied with concerning anticipated or actual force majeure claims
     

  • Determine whether insurances, such as business interruption insurance or force majeure insurance, may cover any of the expected losses.

 
Parties Receiving Notices of Force Majeure

  • A party receiving notice of force majeure should carefully examine the claim to determine:

- if it is consistent with the scope of protection conferred by the force
  majeure provision;
- if the process for giving notice has been complied with; and

- Whether the relevant supporting documentation or information has 

  been provided.

  • A party involved in back-to-back contracts or a network of interrelated agreements will need to take a strategic approach, taking into account the overall impact of the claim for force majeure on its obligations under the related contracts.
     

  • A party embedded within a chain of contracts is involved must also consider whether to issue protective notices of force majeure under the linked contracts as a protective measure.
     

  • Where different laws govern back-to-back contracts, the differing interpretations of force majeure under those laws requires careful consideration.
    - For example, an affected subcontractor under a PRC governed law supply contract may have a valid claim under that contract, while the contractor, with an English law governed commercial arrangement with the owner, may not.

Parties Making Claims of Force Majeure

  • A party affected by the COVID-19 outbreak should take steps to record and document the steps it is taking to prevent or mitigate the impact of the COVID-19 epidemic on its ability to perform its obligations under the contract.
     

  • A party looking to make a force majeure claim should consider carefully how the force majeure event is framed, and the consequences that are said to flow from that event.
    - For example, a party could claim that the COVID-19 outbreak constitutes the force majeure event, or it could rely upon a supervening government regulation or a disruption in its supply chain or the supply of labour.

     

  • A party should only make a force majeure claim with care, because a wrongful claim could have serious consequences, including amounting to a breach of contract or a repudiation of the contract. In such circumstances, the other party may be entitled to claim damages or to terminate the agreement.

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