Coronavirus and force majeure: managing the business risk of the coronavirus epidemic

As this is a fast moving topic, please note that this article is current as at /03/20. For further information, please contact Reuben Berg and Ian Mendelsohn. 

The current outbreak of the coronavirus disease (COVID-19) began in December 2019 in the city of Wuhan in Hubei, China. The disease has now spread to all Chinese provinces, in addition to numerous other countries including the UK. Whilst reported cases now stand at almost 80,000 with over 2,600 cases resulting in fatalities, it is important to note that over 77,000 of these cases have been reported in China alone. Indeed, the number of reported cases in European countries is significantly lower as set out in the table below:

The spread of coronavirus has happened so quickly that it is now on the verge of being classified a ‘pandemic’, a term used to describe an epidemic which spreads into multiple continents simultaneously or, at its worst, worldwide. As a result, the coronavirus outbreak has led to increasing numbers of event cancellations both inside and outside of China. Examples include the recent cancellations of the Venice Carnival and Armani’s Milan Fashion Show in Italy as a direct result of the rise in Italian cases of coronavirus (which included 11 fatalities).

Coronavirus therefore poses a serious risk to businesses, as evidenced by the increasing numbers of companies that are choosing to cancel events due to the threat of coronavirus, relying on force majeure clauses in their contracts to do so. In turn, the invocation of force majeure clauses may have a devastating effect on smaller companies who will struggle to survive the combination of the huge sums of money lost after investing in the cancelled event and the lack of new business obtained as a result.

Force majeure clauses

The term force majeure derives from French law and does not have any officially recognised meaning in English law. As a result, a force majeure clause is usually defined to include a comprehensive list of all events or circumstances which are beyond the reasonable control of the party concerned and which, if they occur, will terminate the contract without any liability being owed to the party who loses out.

If a company wishes to rely on a force majeure clause, the burden of proving the following requirements will fall on the company in question:

1. The event falls within the scope of the force majeure clause
2. The event prevented performance of the contract
3. The event was not reasonably foreseeable at the time of entry into the contract
4. The company had taken all reasonable steps to avoid or mitigate the event or its consequences
5. The company had complied with any notice requirements set out in the contract relating to the invocation of a force majeure clause.

Practical steps for reducing risk

It is therefore imperative that businesses should take the following steps (in addition to protecting its employees against the danger to health posed by coronavirus) to protect themselves:

1. Review all contracts entered into to determine the rights of the company under any force majeure clauses (whether the company intends to invoke them against others or suspects that the clause may be invoked against itself)
2. Look to redraft any force majeure clauses to include provisions for coronavirus and resulting consequences e.g. the mandatory quarantine period of 14 days if a person is suspected to have caught the disease
3. Take note of any notice provisions relating to force majeure clauses and monitor compliance by the business and/or the other contracting party
4. If the company intends to invoke a force majeure clause or suspects it may need to do so in the near future, it should keep a detailed note of all steps taken to avoid and/or mitigate this occurrence.

However, whilst it is advisable for businesses to follow this guidance, it is important to bear in mind that there are currently very few cases of coronavirus in the UK and Europe (as evident from the table above). Consequently, there is little basis or justification at present for cancelling an event taking place outside China due to concerns over the spread of coronavirus.

Kennedys is actively advising companies on the consequences of the coronavirus outbreak. If you believe your business to be affected or at risk, please do not hesitate to contact Reuben Berg or Ian Mendelsohn in the Commercial Litigation team.

Related items:

• Coronavirus – impact on insurers
• Coronavirus Disease 2019 (COVID-19) – implications for EC and liability insurers
• Supply chain networks and Brexit