Member Article

The coronavirus outbreak, and its current exponential spreading, is significantly impacting companies worldwide, with disruption occurring at almost all levels, from the workforce to the supply chain. Governments in the region where the outbreak originated and worldwide have imposed a series of containment measures, including lockdown of certain cities in the People’s Republic of China Mainland, extension of public holidays, closure of public services, unprecedented “work from home” arrangements, as well as international travel restrictions or quarantine measures. These measures are likely to have a knock-on effect on businesses on a global scale, given their impact on manufacturing processes, construction, freight shipping and, of course, the Chinese workforce itself.

Force majeure?

Force majeure clauses set out, in general terms, unexpected circumstances that fall beyond the contracting party’s reasonable control that, having arisen, prevent it from fulfilling its contractual obligations. Where a contract contains a force majeure clause, which includes a reference to illnesses, the key issue is whether the novel coronavirus outbreak falls within the scope of the said clause. If the contract does not include a force majeure clause or if the novel coronavirus outbreak falls outside the scope of that clause, the parties will have to ascertain whether the common law doctrine of frustration is applicable to discharge them from their contractual obligations. It can, however, be difficult to establish frustration, depending on the specific circumstances and, primarily, the foreseeability thereof. Furthermore, the financial consequences of a contract that has been frustrated, can be increasingly complicated.

The coronavirus outbreak could affect not only the ability of a contracted party to fulfill its obligations under contract, but also its overall financial condition, which could in itself constitute a material adverse change, whether in its financial condition, its business or its prospects. The many unknown parameters related to the outbreak at present, mean that it is difficult to determine the magnitude and time-frame of its consequences, making establishing a material adverse change a very complicated process. The ensuing financial problems that may be suffered by a company, as a result of the outbreak, are likely to generate other related contractual problems, such as breach of a financial covenant or payment default.

Things to consider

Given the potential for disruption to businesses across the world, as a result of the outbreak, the following should be considered:

• Checking contracts for protection of the parties’ interests, with specific reference to force majeure events
• Adding specific clauses for infectious diseases or epidemics to contracts
• Enhanced due diligence requirements addressed where necessary – e.g., to assess the impact on, or the disruption to, a company’s business or those of its suppliers and/or customers
• Revisit insurance arrangements, taking into account delays and/or rerouting of cargo to be delivered, for example.
  
  

Our lawyers are closely monitoring all developments in relation to the outbreak and can advise you if your business has been affected or you wish to take protective measures.

(The content in this news item is provided for general information purposes only and does not constitute legal or other professional advice or an opinion of any kind).