COVID-19 Coronavirus: The Consequences on Contract Performance and the Resolution of Disputes

March 09, 2020

Business operations, supply chains and the resolution of international disputes have experienced significant disruption as a result of the outbreak of the novel coronavirus (COVID-19) and actions taken by governments and companies around the world to contain its spread.

In this OnPoint, we consider the legal consequences that may arise from the COVID-19 outbreak in relation to the performance of contractual obligations and the conduct of international arbitrations. 


Legal consequences 

A.    Contracts
Many contracts incorporate mechanisms which allow the parties to adjust their obligations in light of changed circumstances.

i.       Force majeure clauses
No general right. There is no general right to claim a force majeure. It is something that has to be agreed within the terms of a contract. Thus, the circumstances in which a force majeure can be claimed and the relief that it will provide will depend on the precise terms of the contract agreed by the parties. 

Definition. Typically, a force majeure is defined in a contract as an event or circumstance that is beyond a party’s reasonable control and cannot be overcome through that party’s reasonable efforts. A contract may include a non-exhaustive list of events that constitute force majeure (which may include an epidemic outbreak). Careful consideration of the force majeure clause is required to determine whether the COVID-19 outbreak and/or any of the events caused by it (e.g. travel bans, cargo quarantines, factory closures, etc.) qualify as a force majeure.

Causation. A force majeure clause will often state what impact the event must have before a party will be excused from liability for a failure to perform. Questions may arise as to whether the force majeure clause applies when an obligation has not become impossible but merely more expensive, inconvenient and/or inadvisable to perform. For instance, can a party rely on a force majeure clause if its decision to cancel certain activities and/or close certain facilities are not mandated by law but self-imposed in an attempt to prevent the spread of the virus? To what extent is a party required to seek alternative suppliers if its original supply chain is disrupted? Is an unforeseeable drop in the demand for the goods being purchased by a party under a contract a sufficient basis for invoking force majeure? The answers will depend on the precise terms of the contract and the specific circumstances faced by the parties. 

Notice requirements. To invoke a force majeure clause, a party may be required to issue a formal notice to the other party within a certain period of time from the date the force majeure event occurred setting out certain information and particulars. In the wake of the confusion and uncertainty surrounding the COVID-19 outbreak, with many businesses initially taking a ‘wait and see’ approach, questions may arise as to whether the requisite notice requirements were observed and, if not, whether this might preclude a party from invoking the force majeure clause even if all other conditions were satisfied.

Consequences. Contracts typically specify the consequences of a force majeure. This may range from a temporary suspension of the affected obligation to a right to terminate the contract altogether (e.g. where the force majeure persists for a prolonged period). There may also be provisions for an extension of time or a right by one party to be compensated for additional costs incurred. The terms of the contract will have to be examined to determine what rights a party has and whether any adverse consequences might ensue from a declaration of force majeure.

ii.    Renegotiation clauses
Triggering a renegotiation clause. Some contracts have specific clauses that allow the renegotiation of certain key terms, such as the price or the volume of goods to be delivered, when various contractually-defined circumstances arise. Whether the COVID-19 outbreak will have triggered any such right to renegotiate will depend on the specific terms of the contract.

Enforcement mechanisms. Some contracts may also expressly include
enforcement mechanisms that allow the intervention of an independent third party (such as an expert, judge or arbitrator) to resolve disputes on whether the particular circumstances justify a renegotiation of the contract, and, if so, what amendments to the contract are allowed. Other contracts may merely require the parties to confer in good faith or to use reasonable / best efforts to agree on any changes to the contract, which may not be enforceable.

B.    General legal doctrines

Aside from any contractually agreed rights such as a force majeure or renegotiation clause, a party may be able to rely on general legal doctrines to suspend, revise or excuse further performance under a contract. While the specifics vary from one jurisdiction to another, the broad principles common to most legal systems are considered below. 

Fundamental change of circumstances. Parties are bound by the contracts they make. However, many legal systems allow parties to be excused from the strict performance of a contract if a supervening event occurs that fundamentally or radically affects the parties’ contractual obligations. Various terms are used to describe the operation of this or similar doctrines across different legal traditions, including rebus sic stantibus, frustration of contract, wegfall der geschäftsgrundlage and impossibility.

High threshold. Although the content and limits of these
legal doctrines differ, they generally require a high threshold to be crossed. Under English and Singapore law, for instance, a contract is deemed frustrated if an unforeseeable and unavoidable event occurs that renders performance physically or commercially impossible,1 or which radically transforms the parties’ obligations in a way they had not contemplated.2 Thus, before a party can rely on the doctrine of frustration to excuse contractual performance due to the COVID-19 outbreak, it will have to consider whether its obligations have been rendered impossible or merely harder to perform and whether reasonable steps could have been taken to avoid non-performance.

Consequences. The positive application of the common law doctrine of frustration results in the contract automatically coming to an end,3 but there may be room to renegotiate the contract under civil law. Under German law, for instance, the parties may be obliged to renegotiate the contract if unforeseen circumstances significantly change the contract such that the parties would not have entered into it if the change were foreseen.4 Similarly, French law allows a party to request the renegotiation of a contract if its performance is rendered ‘excessively onerous’, and if the parties cannot agree on how to do so, the court may step in to revise or terminate the contract.5 A party that wishes to invoke a fundamental change of circumstances in the wake of the COVID-19 outbreak will therefore have to consider if it will result in a termination or merely a modification of the contract, and the desirability of either outcome.

Procedural consequences

The COVID-19 outbreak is also having an impact on the resolution of disputes through international arbitration.

A.    Hearings

As COVID-19 continues to spread and more countries start to impose travel restrictions, parties, mediators and arbitrators may be unable or unwilling to travel for in-person meetings or arbitration hearings. Finding alternative dates may prove difficult given pre-existing commitments and uncertainty as to when the situation will improve. Bearing in mind arbitral tribunals have an obligation to resolve disputes expeditiously,6 the only viable option may be to conduct a hearing remotely with some or all of the attendees participating by video-conference. 

B.    Case preparation

The implementation of travel restrictions and business continuity plans (such as splitting of teams and work from home arrangements, etc.) will also make it more challenging for lawyers to meet with clients, witnesses and experts to prepare for hearings. Nonetheless, technology exists to allow hearing preparation to be conducted remotely. Lawyers practicing in international firms can also leverage their global network of offices by relying on colleagues based in a particular city to coordinate and/or assist with any business that needs to be conducted in that city.
 
Conclusion 

The COVID-19 outbreak has taken corporations, and the legal community, into uncharted waters. Appropriate reactions will be based on a careful consideration of contractual rights and applicable legal doctrines, balanced with a healthy dose of flexibility. A silver lining to the current challenging circumstances may be that the precautions being taken to arrest the spread of the virus should help promote the increased use of technology for the resolution of cross-border disputes, which should in turn reduce their cost and environmental impact. 
 
Footnotes

1) Krell v Henry [1903] 2 KB 740, at 749-751; RDC Concrete Pte Ltd v Sato Kogyo (S) Pte Ltd [2007] 4 SLR(R) 413 at [80].
2) Davis Contractors Ltd v Fareham Urban District Council [1956] AC 696, at 721; RDC Concrete Pte Ltd v Sato Kogyo (S) Pte Ltd [2007] 4 SLR(R) 413 at [59].
3) Hirji Mulji v Cheong Yue Steamship Co Ltd [1926] 1 AC 497, at 505.
4) Article 313, German Civil Code.
5) Article 1195, French Civil Code.
6) For instance, Rule 17 of the UNCITRAL Rules 2010 states: ‘Subject to these Rules, the arbitral tribunal may conduct the arbitration in such manner as it considers appropriate, provided that the parties are treated with equality and that at an appropriate stage of proceedings, each party is given a reasonable opportunity of presenting its case. The arbitral tribunal, in exercising its discretion, shall conduct proceedings so as to avoid unnecessary delay and expense and to provide a fair and efficient process for resolving the parties’ dispute.

This OnPoint was written by Mark Mangan, Lukas Lim and Daniel Gaw. For more information, please contact any member of the Dechert International Arbitration team, including the following partners and counsel: