Coronavirus, Supply Contacts and Force Majeure
Spread of coronavirus highlights need for force majeure clauses
Virus-related shutdowns likely aren’t covered by insurance
More than 82,000 people worldwide have been reported infected with the coronavirus (COVID-19), the illness that brought China’s manufacturing sector to its knees this month. The realities of the lost production in China combined with fears other regions will be similarly impacted, resulting in the worst period since 2008 for stock markets around the world.
As more businesses are shuttered, and meetings are cancelled, companies need to assess their contractual options and liabilities. While business interruption insurance may be an option in some circumstances, historically there has been a "widespread exclusion of infectious diseases" from property and casualty insurance policies—which includes business interruption—by insurers in the US and Europe.1
Companies should also check their contracts, and those with their suppliers, for force majeure clauses. “Force majeure” is Latin for “superior force.” A force majeure clause is sometimes included in contracts to address unforeseeable circumstances that prevent a party from fulfilling their contractual obligations. The clauses generally take two forms. The most general form excuses performance under the contract when it is due to any circumstances outside the party’s control, which presumably would include performance prevented by coronavirus. The second type of force majeure clause lists specific events that trigger the clause.
In most cases, force majeure events are contemplated to cover acts of God, extreme weather events, riot, war or invasion, government or regulatory action including strikes, terrorism, or the imposition of an embargo. It is less common to see force majeure clauses that expressly contemplate a global health emergency, pandemic or epidemic as a force majeure event.
In addition to the force majeure event, many courts also require a showing that the party attempted to perform the contract regardless of the event, perhaps by finding an alternative source of supply.2
Contracting parties must be cautious in declaring a force majeure event on the basis of the recent coronavirus outbreak and ceasing performance of their obligations. Incorrectly declaring a force majeure event may result in a contracting party repudiating the contract and may provide the other party with a right to damages.
The Chinese trade agency has apparently already issued over 3,000 force majeure certificates. However, these certificates are not dispositive. Instead companies, and ultimately arbitrators and courts, will have to examine each contract and specific circumstances to determine if a force majeure clause applies and performance under the contract is excused.
1Fortune, The coronavirus is crushing business. Could insurance lessen the blow. February 26, 2020.
2See, e.g. Gulf Oil Corp. v. F.E.R.C., 706 F.2d 444, 452 (3d Cir. 1983)