The outbreak of coronavirus (also known as COVID-19) first reported in Wuhan, China on 31 December 2019 has progressively spread, causing serious concerns for the wellbeing of individuals in mainland China and countries across the globe. The economic impact being experienced across industries in China has had flow-on effects to supply chains around the world, resulting in companies not being able to comply with their contractual obligations and questioning whether the force majeure clauses in their contracts will come to the rescue.
This article considers how force majeure may be interpreted in the case of serious viral outbreaks such as the coronavirus and provides some advice on how to make your force majeure clauses more effective in the case of unforeseeable events.
What is force majeure?
The literal translation of force majeure is ‘superior force’.
A force majeure clause will ordinarily provide that the party affected by a force majeure event will be relieved from having to perform a contractual obligation or have the timeframe for the performance of the relevant obligation extended. A force majeure clause will almost certainly have a list of specific triggering events, and usually will always contain a catch-all expression such as ‘and any causes beyond the reasonable control of the party’.
The relevant force majeure event will require a causal link with the party’s inability to perform its contractual obligations and an affected party will usually be required to give notice of the relevant force majeure event and do what it can to mitigate the effects of the force majeure event.
It is important to remember that force majeure is not a common law doctrine but rather a commercial construct.1 In other words, it will only operate if your contract specifically provides for it.2
Is your force majeure clause adequate to cover an event such as the coronavirus outbreak?
The reality is that many force majeure clauses have not been given the attention they deserve, despite the crucial role that they play when unforeseen events occur. Because a force majeure clause will be strictly construed against the party seeking to rely on it,3 parties should not underestimate the importance of getting these provisions right when negotiating their contracts.
It is likely that most contracts will not have listed serious viral outbreaks, epidemics or pandemics as causes of force majeure events, given their relative rarity. As such, a party relying on a force majeure clause would most likely need to determine whether the coronavirus outbreak falls within a general descriptor used in the definition of force majeure event, such as an ‘act of God’ or ‘natural disaster’, or alternatively, within a ‘catch-all’ category of “anything beyond the reasonable control of a party”.
Let’s look at these options.
The ‘catch-all’ phrase
Often parties think that they are safe because the force majeure clauses in their contracts include a ‘catch-all’ phrase (anything ‘beyond the reasonable control’ of a party). However, case law has shown that this is not always a fool proof solution because the ‘catch-all’ phrase may be interpreted in light of the specific events which surround it.4 This has been referred to as the ‘list’ principle because the specific listed events will be used to interpret the general event (i.e. the ‘catch-all’ clause). For example, a force majeure clause may state that force majeure relief will apply in the case of war, flood, fire, storm or ‘any other cause beyond their control’. Applying the list principle, the ‘catch-all’ clause is likely to be interpreted as applying to events that are similar to the events that are described within that clause.
However, a court may determine that the ‘catch-all’ clause together with specific events is operative outside the list principle depending on the way it was drafted. In the case of Ambatielos v Anton Jurgens Margarine Works [1923] AC 175 (Ambatielos), the catch-all phrase was not interpreted according to the subsequent specific words. The force majeure clause stated as follows:
“Should the vessel be detained by causes over which the charterers have no control, viz., quarantine, ice, hurricanes, blockade, clearing the steamer after the last cargo is taken over, etc., no demurrage is to be charged and lay days not to count.”
The majority in Ambatielos held that because the clause started with the ‘catch-all’ wording, followed by ‘viz’ and ended with ‘etc.’, the intent of the drafter was to give examples of what the general clause covered, and by using the word ‘etc.’, that those examples were not intended to be exhaustive, and therefore could include other scenarios.5
Despite the finding in Ambatielos, there is a risk that a ‘catch-all’ clause will not always be seen as being independent from the specific listed events. As such, commentators have suggested to use the ‘catch-all’ clause with caution and to qualify the provision by adding the words “whether or not similar to the foregoing” (or rather, the plain language alternative, ‘whether or not similar to the above / the following / these examples”).6
What does an ‘act of God’ mean in a force majeure clause, and would it capture the coronavirus outbreak?
Force majeure clauses will normally include an ‘act of God’ (or ‘natural disasters’) in the force majeure definition. According to the case of Nugent v Smith (1876) 1 CPD 423 (Nugent), an act of God is regarded as an event ‘that it is due to natural causes, without human intervention, and that could not have been prevented by any amount of reasonable foresight or care‘.7
Applying the case of Nugent to the coronavirus outbreak, there is certainly a strong argument that it would be regarded as an ‘act of God’. The fact that we are still learning about the characteristics of the virus is a strong indicator that it could not have been prevented by reasonable care or foresight. This was echoed by the WHO Director-General’s opening remarks at the media briefing on the coronavirus outbreak, where he stated:
“We are in unchartered territory. We have never before seen a respiratory pathogen that is capable of community transmission, but which can also be contained with the right measures.” 8
When will a party be relieved from its obligations?
A force majeure clause will ordinarily state that a party will be relieved from its obligations under a contract to the extent that its performance of those obligations is “prevented” or “hindered” as a result of a force majeure event. But what if there are alternative methods or options that the affected party could use to honour its contractual obligations? Is the affected party required to exhaust all of those other options, even if they are considerably more costly?
According to case law if a force majeure clause uses the words ‘is prevented from’ in the context of an affected party’s ability to perform, the affected party will likely need to demonstrate that it was physically or legally impossible for it to carry out the obligation before force majeure relief can be sought. In contrast if the word ‘hindered’ is used, it is likely that the affected party will only need to show that it was impeded by the force majeure event from carrying out its obligations before it can seek relief.
For example, in the case of South32 Aluminium (Raa) Pty Ltd v Altina Sales Pty Ltd [2015] WASC 450, the defendant entered into a contract to sell natural gas to the plaintiff. One of the gas facilities which the defendant used to source gas exploded, leading to the shutdown of the plant for a number of months. As a result, the defendant did not supply the plaintiff with the quantity of natural gas required under the contract. The plaintiff had to source natural gas from other parties as a result, and claimed that the defendant breached the agreement. The defendant argued that the explosion of the gas facility invoked the force majeure clause, relieving it from having to honour its obligation to supply natural gas to the plaintiff. The force majeure clause in the contract with the seller was as follow:
“Force majeure means any event or circumstance not within the control of the affected party and which that party by the exercise of the standards of a reasonable and prudent person is not able to prevent or overcome including but not limited to:
- acts of God including fire, explosion, earthquake, landslide, flood, washout, lightening and cyclones;
- shortages of necessary equipment, materials or labour; and
- failure of the participants, from time to time, or any of them in North West Self Joint Venture, or any of the Seller’s other suppliers, to supply some or any Gas by reason of an event that constitutes an event of force majeure within the meaning of the gas supply contract between the Seller and those participants or any such supplier.”
The court rejected the defendant’s argument that it was prevented from supplying natural gas to the plaintiffs as it provided no evidence that the gas was not available to it from sources other than the gas facility that exploded.
In the case of Tennants (Lancashire) Ltd v CS Wilson & Co Ltd [1917] AC 495 the force majeure clause included the word “hindrance”. In that case, the outbreak of the First World War meant that the appellant could no longer source magnesium chloride from Germany, but could source it, at an increased price, from England. As a result, the appellant invoked the force majeure clause to suspend its obligations to supply magnesium chloride. The force majeure clause included the following words:
“be suspended pending any contingency beyond the control of the sellers … (such as … war) causing a short supply of … raw material or manufactured produce, or otherwise preventing or hindering the manufacture or delivery of the article.”
The House of Lords held that because of the shortage of supply which required the appellant to have to source the magnesium chloride from England in order to supply the respondent, it was effectively hindered from being able to perform its obligations. This meant that the appellant could rely on the force majeure clause. If the word “prevented” had been used on its own, the outcome may likely have been different.
As the case law reveals, a force majeure clause qualified by the word ‘prevention’ will be interpreted as meaning that further performance of the contract is a legal and physical impossibility.9 If, on the other hand, the word ‘hindered’ is used, an affected party will likely only need to show that the obligation was impeded, impaired, or interfered with.10
Takeaways
It is a timely reminder to review your contracts and pay particular attention to your force majeure clauses and definitions. Does your force majeure clause expand to events that ‘hinder’ your ability to honour your obligations, or is it limited to ‘prevention’? As noted above, the use of the word “hinder” will give the affected party more scope to rely on the force majeure clause as it is not required to prove that the further performance of its obligations under the contract is a legal and physical impossibility. Accordingly, you should ensure that your force majeure clause includes this term.
The drafting of your force majeure clause is crucial to its interpretation. In light of the coronavirus outbreak, it may be a good idea to include ‘epidemics’ and ‘pandemics’ as force majeure events in your contracts.
Finally, to avoid any application of the ‘list’ rule applying to your force majeure clause, it is worth adding the wording ‘whether or not similar to the above / the following / these examples’ to your catch-all clauses. This will give your catch-all clause a wider interpretation and increase your chances of being able to obtain relief under your force majeure clause, if the event in question is not listed in your force majeure definition.
This article was written by Teresa Torcasio, Partner and Basimah Memon, Solicitor.
1 Codelfa Construction Pty Ltd v State Rail Authority of New South Wales (1982) 149 CLR 337.
2 Force majeure should be distinguished from frustration, which is a common law doctrine that relieves parties of liability to one another where there has been a supervening event beyond the control of the parties resulting in a radical change in the circumstances in which a contract is to be performed.
3 Lebeaupin v Richard Crispin & Co [1920] 2 KB 714.
4 Ibid.
5 Ambatielos v Anton Jurgens Margarine Works [1923] AC 175 , para 183.
6 M Parker and E McKendrick, ‘Drafting Force Majeure Clauses: Some Practical Considerations’ (2000) 11 ICCLR 132.
7 Nugent v Smith (1876) 1 CPR 423, para 441.
8 WHO Director-General’s opening remarks at the media briefing on COVID-19 – 2 March 2020 (https://www.who.int/dg/speeches/detail/who-director-general-s-opening-remarks-at-the-media-briefing-on-covid-19—2-march-2020)
9 Channel Island Ferries Ltd v Sealin Ltd [1988] 1 Lloyd’s Rep 323.
10 Tennants (Lancashire) Ltd v CS Wilson & Co Ltd [1917] AC 495 at 510, 522 and 526.
