By: Camila Rivero-Fernández
On January 30, 2020, the World Health Organization (“WHO”) declared that the coronavirus (“COVID-19”) outbreak is a Public Health Emergency of International Concern (“PHEIC”).[1] As defined by the WHO, a PHEIC is an extraordinary event which is determined “(i) to constitute a public health risk to other States through the international spread of disease and (ii) to potentially require a coordinated international response[.]”[2] As of February 24, 2020, there have been 79,331 confirmed COVID-19 cases globally.[3] Of those confirmed cases, there have been 2,595 deaths in China and 23 deaths outside of China.[4] COVID-19 has undoubtedly taken a tremendous toll on humanity; it has also taken a toll on the global economy.
China is the world’s largest manufacturer, thus companies that rely on their operations in this country are running into production delays.[5] Furthermore, China is also the world’s largest consumer of the most raw materials.[6] Therefore, the disruptions in China’s production as well as its purchases are wreaking havoc across global supply chains.[7] As the virus becomes more pervasive and the situation becomes more dire, more companies are likely to become negatively impacted as well. Thus, finding a way to minimize liability for contracts that cannot be fulfilled is an issue that many businesses will now be facing.
In order to tackle this inability to perform issue, COVID-19 and its devastating impacts may qualify as force majeure and provide relief to parties who are unable to fulfill their contractual obligations.[8] Force majeure clauses are included in contracts to excuse contractual obligations to the extent that they have been inhibited by certain unforeseeable events.[9] When drafting such clauses, the World Bank suggests considering the following complications: (ii) whether the event has a direct or indirect effect on performance, and the extent to which it affects performance, (iii) inability to perform versus desire to escape performance due to unprofitability, (iv) the types of mitigating actions that an affected party should undertake, and (v) the possibility of an extended force majeure event.[10]
Although its trajectory is not yet known, COVID-19’s current effects on the global supply chain have been vastly disruptive, especially when it comes to the commodity trade.[11] Businesses should be considering the World Bank’s suggested issues when drafting such force majeure clauses and weighing whether these provisions are right for their future agreements.
[1] World Health Organization, Statement on the second meeting of the International Health Regulations (2005) Emergency Committee regarding the outbreak of novel coronavirus (2019-nCoV) (Jan. 30, 2020), https://www.who.int/news-room/detail/30-01-2020-statement-on-the-second-meeting-of-the-international-health-regulations-(2005)-emergency-committee-regarding-the-outbreak-of-novel-coronavirus-(2019-ncov)
[2] International Health Regulations, 3 World Health Organization [WHO] 9 (2005).
[3] Situation Report, World Health Organization [WHO] (Feb. 24, 2020), https://www.who.int/docs/default-source/coronaviruse/situation-reports/20200224-sitrep-35-covid-19.pdf?sfvrsn=1ac4218d_2
[4] Id.
[5] Corona Virus Hits Companies in China, But They Still Have Reason to Stay, Wall St. J. (Feb. 21, 2020), https://www.wsj.com/video/coronavirus-hits-companies-in-china-but-they-still-have-reason-to-stay/8B2FC739-34DB-4147-9B5C-808B3BB03089.html
[6] See, Stephen Stapczynski, China LNG Force Majeure Rejected as Virus Chaos Sparks Dispute, Bloomberg, (Feb. 7, 2020) https://www.bloomberg.com/news/articles/2020-02-07/china-lng-force-majeure-rejected-as-virus-chaos-sparks-dispute
[7] Id.
[8] See, Alaric Nightingale & Alex Longley, When God Appears in Contracts, That’s ‘Force Majeure’: QuickTake, Bloomberg, (Feb. 13, 2020), https://www.bloomberg.com/news/articles/2020-02-06/when-god-appears-in-contracts-that-s-force-majeure-quicktake
[9] See, World Bank, Force Majeure Clauses – Checklist and Sample Wording 8–9, available at http://siteresources.worldbank.org/INTINFANDLAW/Resources/Forcemajeurechecklist.pdf (last visited Feb. 24, 2020).
[10] Id.
[11] See, Stephen Stapczynski, China LNG Force Majeure Rejected as Virus Chaos Sparks Dispute, Bloomberg, (Feb. 7, 2020) https://www.bloomberg.com/news/articles/2020-02-07/china-lng-force-majeure-rejected-as-virus-chaos-sparks-dispute (Stating that “the fallout in commodity trade is only worsening as Beijing restricts travel and keeps factories shut in an effort to halt the virus’s spread.”)
