China - Coronavirus: Force Majeure For Chinese Contractors Overseas.
Legal News & Analysis - Asia Pacific - China - Dispute Resolution
17 March, 2020
It will be important for contractors to be aware of the precise legal and contractual protections or relief available to them to reduce the commercial impact of the virus, and to take the steps necessary to exercise those options.
Contractors should review their position under their agreements with customers and with their supply chain to look for the following:
- does the governing law determine my rights or those of my supplier, or is it a matter of contract?
- how is a 'force majeure' event defined for the purpose of my claim? Should I be looking to claim for the occurrence of the outbreak, the consequent government action to contain the virus, or both?
- when do I need to issue a notice, and how much detail do I need to provide?
- what impact has the virus had on my performance and that of my supply chain? How should I describe that within my notice and my particulars of claim?
- what steps in mitigation can I reasonably take? What steps should I expect from my supply chain?
Impact of the coronavirus
Broadly, there are two ways in which the coronavirus, officially Covid-19, is likely to impact on the commercial activities of Chinese contractors operating abroad:
- the direct impact of the virus on the ability of the supply chain to service outbound contractors due to unavailability of labour and resources. The central government and municipal governments have extended the period of the Spring Festival holidays. Nevertheless, we expect that many of the domestic businesses on which Chinese contractors operating abroad rely will not be returning to work for a further prolonged period, or will be operating with much reduced labour. As a result, the production and movement of materials will be disrupted and delayed;
- the indirect impact arising from Chinese and foreign government efforts to contain the virus. For example, a ban might be put in place at a foreign port on the unloading of materials shipped from China, or Chinese labour and staff may find it difficult to obtain working visas to travel to the host country of a project or face prolonged periods of quarantine on arrival. This will have a major impact on the ability of contractors travelling abroad to carry out and complete works under contract.
Contractors will also have to consider how they address claims of force majeure from their suppliers and subcontractors, as well as how they pursue their own claims. The concept can vary from jurisdiction to jurisdiction, and from contract to contract.
We expect that many of the domestic businesses on which Chinese contractors operating abroad rely will not be returning to work for a further prolonged period, or will be operating with much reduced labour.
Sam Boyling, Partner, Joint Head of Office, China
You should not assume that your rights of relief and those with your supply chain are back to back. In fact, it is more prudent to assume that they are not.
The concept of 'force majeure' originates in French law and means "superior force". The application of force majeure principles can reduce or eliminate a party's liability where its performance is prevented or hindered by an event or circumstances that it cannot control.
It is important, however, to understand the different ways in which this concept is treated in civil law and common law systems, as Chinese contractors will find that their contracts abroad will be governed by one or the other and each one can produce different results.
As a general concept of civil law, including in China, the principles of force majeure are implied into contracts. Obtaining relief from obligations tends to require that the event or circumstance is beyond the party's control, and additionally:
- was not reasonably foreseeable at the time of entry into the contract;
- the effects cannot be avoided by appropriate measures; and
- prevents performance.
Common law jurisdictions such as England, Hong Kong and Singapore do not have a general concept or definition of force majeure. Rather, it is a creation of contract. For example, the FIDIC form of contract refers to "Force Majeure" in the 1999 forms; and to "Exceptional Events" in the 2017 forms. Careful study of the specific terms of the 'force majeure' clause will therefore be needed if your claim or the claim you receive from a supplier is under a contract governed by a common law jurisdiction. There is no one-size-fits-all approach.
Contactors must first consider what is the event giving rise to a claim for force majeure.
Most contracts will define the events by reference to broad criteria, with a non-exhaustive list of matters that constitute a qualifying event. Some will also specify events that are not qualifying events. Others will define force majeure events narrowly, only be reference to a specified list.
Commonly listed events of force majeure can include reference to "plague or epidemic". It is not certain, however at this stage whether the current outbreak would qualify as an "epidemic" when interpreted by a court or arbitral tribunal. As of 13 February, the World Health Organisation (WHO) has declared the outbreak a Public Health Emergency of International Concern, which is not synonymous with an "epidemic". In the aftermath of the 2003 SARS outbreak, courts in the PRC held that the outbreak was in the category of an epidemic for the purposes of force majeure, although that interpretation was not applied consistently elsewhere. Nevertheless, the presence of the term "epidemic" in the relevant clause would certainly be helpful to a claim that the coronavirus outbreak is, in itself, a force majeure event.
As set out above, however, there is also the potential for actions by governments and authorities in response to the outbreak to disrupt contractors' supply chains. This could come in the form of the closure of ports to materials shipped from China, or the imposition of lengthy periods of quarantine. Again, there is the potential for these matters to be specifically identified in a list of force majeure events.
In the absence of the identification of these specific force majeure events in the contract, a contractor might have to rely on a more general contractual definition - such as where the event or circumstance is defined as:
- beyond the affected party's reasonable control;
- the affected party could not reasonably have provided against the event or circumstance at the time of entering into the contract;
- the affected party could not reasonably have avoided or overcome the event or circumstance; or
- the event or circumstance is not substantially attributable to the other party.
On this sort of definition, the outbreak and the consequent measures could be said to qualify. However, the reference to "reasonable control" is a matter of interpretation in the courts and often considered together with the question of mitigation.
The mere identification of the event will not be the end of the matter. Further steps are required before a contractor will be able to obtain any relief from performance.
Notice requirements and conditions precedent
In international contracts, the incidence of a force majeure event and the right to relief will usually depend on the issue of a notice. For example, under the FIDIC Yellow Book 2017 clause 19.2, notice must be issued by the affected party within 14 days of it becoming aware, or when it should have become aware, of the notice "Exceptional Event" (i.e., the event of force majeure). Notice is also required under clause 20.2.1 where the contractor wishes to claim additional payment or an extension of time as a result of the Exceptional Event, which must be issued within 28 days of the same point as the clause 19.2 notice. Note that it is possible to combine these notices, provided the requirements of clauses 19.2 and 20.2.1 are all met in the same notice document.
In some contracts, failure to issue the notice within the prescribed period will result in the loss of relief and the barring of a claim under the force majeure clause. The notice period can be extended in certain circumstances to the submission of particulars of the impact of the force majeure event. This will, however, be a matter of the precise wording of the clause.
For example, a gas field in the North Sea was shut down for 3.5 years from 2011 to 2014. The sellers sought to rely on the terms of a force majeure clause that required "when claiming relief":
- within 10 days of the event the service of a notice and an interim report on the impact of the events and the estimate of the period of time to remedy it; and
- within 20 days of the notice, submission of "a detailed report which shall amplify the information contained in the interim report".
The sellers met the first of these criteria but not the second, the detailed report. The buyers claimed that both these provisions were conditions precedent to the sellers' entitlement to claim relief. The dispute went to the High Court in England which decided, on the specific terms, that the notice and reports were not conditions precedent. The distinction the court drew was that the contract stated that the notice and reports were to be issued "when claiming relief" rather than, for example, "in order to claim relief".
Other contracts will make it clear that the notice is a condition precedent to relief and that failure to serve it within the time limit will result in a loss of entitlement to claim. As a further alternative, the FIDIC Yellow Book provides that if the notice is served after the 14-day period, the affected party will only be excused from performance for the period after service of the notice.
It is clear that is it important for contractors to be aware of their specific obligations to issue notices of force majeure and particulars of the impact, as well as the requirements that they should expect suppliers and subcontractors to meet. Notices may be required under the force majeure/exceptional event clause, and also under general claim clauses.
The way in which the notice is drafted and the impact described will also depend on some other aspects of the specific terms.
'Hindered', 'prevented', 'delayed', 'disrupted'
Particular attention should be paid to the specific term that is used in the contract. Must the affected party be prevented from performing in order to claim, or is it merely enough that they are "hindered" in their performance? This is important because knowing and understanding the difference will be part of the way in which the notice and particulars are drafted and presented.
To be "prevented" from performing your obligations would mean that it has become physically or legally impossible to do so. "Hindering" performance would suggest that it has simply become more difficult. This distinction was well drawn by the UK House of Lords in a 1917 case: "Preventing delivery means … rendering delivery impossible and hindering delivery means … rendering delivery more or less difficult but not impossible".
Contractors are familiar with the terms "delay" and "disruption".
Thus, in a notice of force majeure where it is necessary to show "prevention", a contractor would be more inclined to describe itself as "unable" to perform or that it is "impossible". Where the contactor's right arises from being "hindered", the description can be that performance has become more difficult. That description should be more about the physical performance of the work, rather than the cost of doing so.
Most international contracts will require an affected party to take "reasonable steps" to mitigate the impact of events of force majeure. The test as to whether or not "reasonable steps" have been taken to mitigate will often be considered together with the question of "reasonable control". For example, in one well-known English case, a court held that a claiming party could only rely on a force majeure clause defining events beyond the party's "reasonable control" if that party had taken reasonable steps to avoid or mitigate the event and its consequences.
What could that mean in the context of the current coronavirus outbreak? For contractors working abroad, there will be materials and equipment that have been ordered that might not now be capable of delivery. It might not be possible to take steps to mitigate that impact. However, for future orders of certain materials and equipment, it might be possible to find new suppliers elsewhere unaffected by the virus. Contractors should be pressing their suppliers to take steps in mitigation as well.
Many employers will expect contractors to put in place their own measures to prevent the spread of the coronavirus amongst their project workforce, and some may even instruct contractors to take certain specific measures that they deem necessary. Contractors should consider whether any such employer instructions are within the scope of reasonable countermeasures that should be implemented in accordance with international practice regarding the coronavirus or whether they go further than this, particularly where their implementation may have a significant impact on project delivery - for example, a total ban on Chinese nationals travelling to the project country or site.
Where it can be argued that an instruction by the employer goes beyond what the contractor considers reasonable in the circumstances, contractors should consider whether there are opportunities to claim time and cost relief under their contracts other than under the force majeure provisions - for example, on the basis that such instructions constitute "changes", "variations" or "employer prevention". Provided the correct notices are submitted and procedures followed there may be opportunities to recover prolongation costs as well as extensions of time under such provisions. Cost recovery rights are not normally granted in respect of force majeure claims.
This article was published in Out-law here.
For further information, please contact:
Sam Boyling, Partner, Pinsent Masons