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Coronavirus has taken Wuhan by storm when the outbreak was first discovered in one of central China’s most important industrial cities in December 2019. In less than three months as at the time of writing, the coronavirus disease COVID-19 has affected numerous countries and territories around the world which resulted in the quarantine of hundreds of millions of people and resulted in a death toll of over 60,000, and rising.[1]
From the perspective of the global economy, the coronavirus outbreak has disrupted supply chains, rattled the position of international companies and dampened global economic activity. Though the full impact is yet to be determined, the outbreak is certainly causing economic uncertainties. For companies whose contractual obligations are obstructed by the outbreak, they are left wondering whether the coronavirus can be considered as a force majeure event that would allow them to delay or terminate their binding contractual obligations. To answer that, we will have to first go through the following questions.
What is Force Majeure?
In plain terms, force majeure is an extraordinary occurrence or circumstance which could not have been foreseen or guarded against.[2] The force majeure occurrence might impede or obstruct the performance of the contract of either party. The intention of having a force majeure clause in any contract is to save the performing party from the consequences of anything, over which he has no control.[3]
A typical list of force majeure events might include war, riots, fire, flood, hurricane, typhoon, earthquake, lighting, explosion, strikes, lockouts, slowdowns, prolonged shortage of energy supplies, acts of state or governmental action prohibiting or impeding any party from performing its respective obligations under the contract and act of God. What are the consequences of invoking a force majeure clause? This depends on the contract itself but normally, the contract may provide that neither party is liable for a failure to perform its contractual obligations where that failure is caused by the force majeure event. Parties may be conferred with the immediate entitlement to terminate or suspension of obligation to perform for a period of time. So, does coronavirus outbreak constitute a force majeure event? It is time to look at your contract.
What does Your Contract Say?
Force majeure is a creation of contracts. In most contracts, there will be a force majeure clause. What is referred to as force majeure in our law depends on the contractual terms that the parties have agreed upon.[4] Generally, the force majeure clause in contracts will specify the situations of force majeure and the rights and obligations that follow.
As per Lord Morris, a force majeure clause should be construed in each case with a close attention to the words which precede or follow it, and with a due regard to the nature and general terms of the contract. The effect of the clause may vary with each instrument.[5] That means it is open for you to argue whether the coronavirus outbreak constitutes a force majeure event based on the terms of the force majeure clause in your contract. It may fall under the term of “disease” or “epidemic” or “act of God” or else any catch-all provision that may be wide enough to encompass unforeseen occurrences such as the coronavirus outbreak. However, it does not mean it would automatically trigger the force majeure clause.
The critical part for the party relying on the force majeure clause is to prove that, as a result of the coronavirus outbreak, the party could not perform his part of the obligations in the agreement. In other words, if you or your company is impacted by the coronavirus outbreak, it is necessary to show that the outbreak affects the entire operation of your company and for that, you are not able to continue to perform your obligations in any given contract. Ask yourself this question – how has the virus prevented, hindered or delayed performance of contract? Bear in mind that economic reasons, for example, that the contract has become more expensive to perform, does not constitute a force majeure event. Answering this question will require careful consideration.
What if There is No Force Majeure Clause in Your Contract?
In the absence of an express and unambiguous force majeure clause, parties to a contract are left to the mercy of the narrow common law doctrine of frustration. The doctrine of frustration is only a special case to discharge a contract by an impossibility of performance after the contract was entered into. A contract is frustrated when subsequent to its formation, a change of circumstances renders the contract legally or physically impossible to be performed. A contract does not become frustrated merely because it becomes difficult to perform. If a party has no money to pay his debt, it cannot be considered impossible to perform as it is not frustration.[6]
Similar to the force majeure clause, this doctrine does not apply just because your obligation has become, because of the coronavirus outbreak, more onerous than what you have contracted for. To rely on the doctrine of frustration, it must be proven that the coronavirus outbreak has rendered the contract legally and physically impossible of performance. The Court will have a wide discretion on determining the parties’ rights, obligations and remedies.
Ultimately, is Coronavirus Outbreak a Force Majeure Event?
As discussed above, whether a coronavirus outbreak may be considered as a force majeure event that can trigger the force majeure clause will depend on the proper interpretation of the clause and the applicable law governing the contract. COVID-19 may or may not constitute a force majeure event. Hence, it is advisable to take legal advice prior to asserting that the coronavirus outbreak triggers either the force majeure clause or doctrine of frustration. If your operation or contractual obligations are affected by the coronavirus outbreak, we are ready to assist with any queries you have.
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1 Coronavirus Update (Live): https://www.worldo-meters.info/coronavirus/
2 Kwan Sun Ming v Chak Chee Hing [1965] 1 MLJ 236
3 D Govindram v Shamji K & Co AIR 1961 SC 1285
4 Magenta Resources (S) Pte Ltd v China Resources (S) Pte Ltd [1996] 3 SLR 62 at 78 Per S Rajendran J
5 Hong Guan & Co Ltd v R Jumabhoy & Sons Ltd [1960] 2 All ER 100 at 105
6 Pacific Forest Industries Sdn Bhd & Anor v Lin Wen-Chih & Anor [2009] 6 MLJ 293
Prepared by: Abu Daud Abd Rahim & Dayang Roziekah Ussin