Force Majeure & Covid-19: Not so fast
Over the past two months, there have been many articles written about the current coronavirus pandemic and the doctrines of force majeure and frustration of contract. One such article, which helpfully explores a mock but very realistic and applicable scenario can be found here – https://www.dhirubhai.net/pulse/your-contract-during-pandemic-shang-neng-tan/.
It is not the intention of this article to suggest that any of the many aforementioned articles are flawed or misguided, and nothing in the following analysis should be construed as such. What this article seeks to point out is simply this – it is likely that for a significant amount of people, the doctrine of force majeure will be less useful than they think it is.
Force Majeure Clauses – Only if you have them
As a starting point, force majeure in English common law and also Malaysia law does not exist as a standalone concept. This point has been well canvassed, but in a nutshell, force majeure as we know it is a creature of contract and as such, any contractual force majeure clause means exactly what the wording of the clause says it means, no more and no less.
Two points follow from this. Firstly, if your contract does not have a force majeure clause, you cannot rely on the doctrine. This may seem harsh, but it is really no different from when a contractor is late with goods and the contract does not specify any form of recourse for late delivery.
Second, assuming that your contract does contain a force majeure clause, the wording of said clause then becomes paramount. Consider the following standard force majeure clauses, found by way of a quick internet search: -
Force Majeure – Example Clause 1
In no event shall the Trustee be responsible or liable for any failure or delay in the performance of its obligations hereunder arising out of or caused by, directly or indirectly, forces beyond its control, including, without limitation, strikes, work stoppages, accidents, acts of war or terrorism, civil or military disturbances, nuclear or natural catastrophes or acts of God, and interruptions, loss or malfunctions of utilities, communications or computer (software and hardware) services; it being understood that the Trustee shall use reasonable efforts which are consistent with accepted practices in the banking industry to resume performance as soon as practicable under the circumstances.
Force Majeure – Example Clause 2
Neither party shall be liable for any costs or damages due to delay or non-performance under this Data Access Services Addendum arising out of any cause or event beyond such party’s control, including, without limitation, cessation of services hereunder or any damages resulting therefrom to the other party as a result of work stoppage, power or other mechanical failure, computer virus, natural disaster, governmental action, or communication disruption.
Neither of these clauses contain anything to do with pandemics or viral epidemics. This is relevant because, as pointed out above, parties are bound by the wording of their force majeure clauses. One could of course argue that the words “natural catastrophes or acts of God” in Example Clause 1 and “natural disaster” in Example Clause 2 serve, but that is by no means self-evident.
What this really means is that the invoking of either Example Clause 1 or Example Clause 2 would likely result in litigation.
If your contractual force majeure clause does however contain wording to the effect of “flu, epidemic, serious illness or plagues, disease, emergency or outbreak”, you should immediately thank your drafter.
Indeed, in February, Kira Systems, an AI powered legal analytics service, analysed 130 commercial contracts which involved at least one Chinese entity, filed on the Electronic Data Gathering, Analysis, and Retrieval System (“EDGAR”) between February 2018 and February 2020. EDGAR is a repository for companies and others who are required by law to file forms with the American Securities and Exchange Commission.
This is of course a non-local example but the point stands – out of the 130 contracts, only 94 included a force majeure clause, and of the 94, only 13 included provisions explicitly stating that public health events such as the current Covid-19 pandemic constitutes a force majeure event. (1)
Ebola & Force Majeure (2)
Consider this too – there is a real possibility that even if you have a force majeure clause, Covid-19 might not be enough to trigger it.
Football fans might remember the controversy surrounding Morocco’s decision to postpone the African Cup of Nations (“AFCON”) which was supposed to happen from January to February 2015 in Morocco, due to the Ebola outbreak on the African continent.
In October 2014, the Moroccan Ministry of Health joined by a National Committee of Experts “stated that the risk of the virus spreading during the AFCON was extremely serious and non-manageable and advised the rescheduling of the competition. Public health constituted the reason for the decision of the Ministry of Health to postpone the competition. … In November, the Ministry of Youth & Sports decided to invoke the force majeure that constituted the Ebola virus. The Ministry announced that due to the very high risk of propagation of the virus, the competition should be postponed.”
The African Confederation of Football (“CAF”) disagreed with Morocco’s decision and awarded the hosting of the AFCON to Equatorial Guinea, who, crucially, managed to organise the AFCON on the dates previously agreed by Morocco. The CAF also sanctioned the Moroccan national team and football association heavily. This decision was then appealed before the Court of Arbitration of Sport (“CAS”), under Swiss law.
In brief, the CAS reduced the sanctions imposed on the Moroccan national team, but held that force majeure did not apply. Similar to Malaysia law, Swiss law recognises that the doctrine of force majeure requires that the performance of the contractual obligation becomes impossible, not merely more difficult or expensive.
Fatal to the Moroccan invocation of force majeure was that Equatorial Guinea was able to organise the AFCON, by taking, with the CAF’s assistance, appropriate sanitary measures.
The Moroccan AFCON CAS arbitral decision of course only deals with the 2015 Ebola epidemic, and it should not be treated as authority for our current circumstances, nor would it be considered as authority in a Malaysian court, but as with earlier, the point stands – if the viral pandemic or public health emergency such as Covid-19 renders your contract difficult, but possible to perform nonetheless with the appropriate sanitary measures, the defence of force majeure might not be as useful as you hope.
Indeed, whilst this is speculation and/or an educated guess at best, considering that the Malaysia authorities have decided to allow certain sectors to continue/resume operations during the Movement Control Order period, if a company operating in the same sector as yours was able to fulfil their contractual obligations by undertaking the appropriate measures, sanitary and otherwise, despite the additional costs involved, you may well find the Malaysian courts unsympathetic to your invocation of force majeure as to why you were unable to fulfil your own contractual obligations.
Conclusion
This article was inspired in part by a discussion with a family member who works in the palm oil industry. A number of said family member’s company’s contracts did not contain force majeure clauses, but due to the overwhelming prevalence of articles about force majeure on the internet and indeed, with force majeure being constantly talked about on radio talk shows, as was the case with said family member, they believed that they could invoke the doctrine. It took a rather lengthy discussion to persuade them otherwise.
This is not intended to be nor should it be taken as legal advice in any shape or form. Instead, what you should do instead if you do have any concerns, is to seek independent legal advice. Much better that than reading articles such as these!
References:
(2) The CAS’s full grounds for the Moroccan AFCON arbitral decision can be found at https://www.tas-cas.org/fileadmin/user_upload/Bulletin_2016_1.pdf, but as the author’s French is limited to the first two words of this article’s title, all details and quotes about said decision come from B?ne, Nicolas. (2017). CAS 2015/A/3920 Fédération Royale Marocaine de Football v. Confédération Africaine de Football, Award of 17 November 2015. 10.1007/15757_2017_3.
Partner at Messrs Pierre Chuah & Associates
4 年Well written Kin! Thoroughly enjoyed it!