Coronavirus: what’s next for your contracts

Is the coronavirus a force majeure event? How should you respond if your counterparty threatens to walk away from your contract as a result of the outbreak? Does the scale and severity of the outbreak mean that parties have to sit down and re-negotiate their contracts, or entitle them to walk away from their obligations? 

In answering these questions, the first port of call will usually be the terms of your contract (including your force majeure or material adverse change clause(s), if any). You’ll also want to consider the governing law, and whether it offers frustration, hardship, force majeure (which can apply under PRC law and some other civil laws even if the contract has no force majeure clause) or other suitable remedies. 

But the analysis does not stop there.

• If the coronavirus outbreak itself is not expressly covered by your force majeure clause, does the clause cover the knock-on effects of the outbreak, e.g. shortage of labour or raw materials or government-imposed quarantine measures?
• Are there other applicable law(s), such as the law of the place of performance? How do they interact with the terms and governing law of your contract?
• Exporters in China affected by the coronavirus outbreak can apply to the Chinese Council for the Promotion of International Trade for “force majeure certificates”. Does your contract or governing law require you to get one?  What are the implications of such certificates in the international context?
• If the outbreak has squeezed your resources, allowing you to perform some but not all of your contracts, be very careful about how you decide which contracts to perform. Do you perform each contract on a pro-rata basis? Can you perform certain contracts and declare a force majeure or frustrating event for the others? Can you pick and choose the most ‘lucrative’ contracts to perform?
• Consider whether your insurance policies cover the outbreak or its knock-on effects. Be aware of notice requirements which are preconditions to force majeure provisions and insurance protection.
• Consider the longer-term relationship with your counterparties, and whether your legal remedies (e.g. force majeure, frustration) can be leveraged to negotiate a sensible commercial way forward.
• Also consider other commercial and reputational risks that may arise from the outbreak, including HR/employment issues and the risk of counterparties becoming insolvent.

In all cases, it is critical that you keep a detailed record of how the coronavirus outbreak and its knock-on effects are impacting your contract – this is useful in any later dispute over liability. For the same reason, be circumspect in how you refer to the effects of the outbreak in discussions and in internal or external communications.

Like the U.S.-China trade war and the social unrest encountered in Hong Kong in recent months, the coronavirus outbreak has the potential to significantly disrupt businesses and markets in Asia and beyond. For more detailed analysis of the issues in this post, and other legal implications and practical considerations of the outbreak, please see our client briefing.