Businesses around the globe are feeling the commercial effects of the COVID-19 pandemic. They are struggling to perform their contractual obligations in light of government-mandated closures, stay-at-home orders, and travel restrictions that have put a significant strain on the global economy and supply chain. As a result, businesses are looking to their existing contracts for a force majeure clause that may excuse them of their contractual obligations.

Force Majeure in Commercial Contracts

Force majeure operates as an affirmative defense to a party’s nonperformance under a contract. A force majeure clause establishes circumstances under which a party’s obligations under a contract may be excused or otherwise altered due to events that are beyond the affected party’s control.¹ Natural disasters, acts of terrorism, war, acts of God, labor disruptions, and even pandemics can constitute force majeure events.²

In light of current circumstances, many businesses are left wondering if COVID-19 is a force majeure event. If so, does the presence of a force majeure clause in their contract relieve them the duty to perform due to COVID-19-related reasons?

The answer: it depends. It is the precise wording used in the clause to describe the type of events or circumstances that constitute a force majeure event and the allocation of risks between the parties to the contract that determine whether a party is excused from performance. Depending on the clause’s language, the occurrence of a force majeure event can result in numerous effects on a contract, such as: temporary suspension of contract obligations, exemption from performing certain contract obligations, modifications to contract terms, compliance with notification requirements, or termination of the contract altogether. Furthermore, a party seeking to enforce force majeure must show a causal link between the force majeure event and the party’s failure to perform.³

Frequently, force majeure clauses are included in contracts. In a study on force majeure clauses, 130 Chinese contracts were examined and 94 of them (72 percent) contained force majeure clauses. Of those 94 contracts, only 13 included language defining public health-related events, such as the flu, epidemic, serious illness or plague, disease, emergency, or outbreak as force majeure events. A larger portion of the contracts included “catch-all” language for any other events that could not be predicted and were unpreventable and unavoidable. Accordingly, 82 percent of the contracts with force majeure clauses incorporated either broad language or identified public health-related events that would likely cover COVID-19. Furthermore, 44 percent of the contracts listed acts of government as a force majeure event, covering the government mandated closures and travel restrictions due to COVID-19.⁴

China’s Approach to Declaring COVID-19 a Force Majeure Event

As the first country to face the pandemic, China has already initiated its approach to force majeure clauses in light of COVID-19.  

The China Council for the Promotion of International Trade (CCPIT), a national foreign trade and investment promotion agency, began issuing force majeure certificates to Chinese companies experiencing difficulty performing contracts due to the pandemic’s effects on the global supply chain. The force majeure certificates exonerate companies from non-performance or partial performance of contractual obligations by establishing that they are suffering from circumstances beyond their control.⁵ The CCIPT issued the first force majeure certificate on Feb. 2, 2020, and, as of April 20, 2020, 7,004 certificates have been issued, affecting nearly $97 billion in international contracts.⁶

The Commission of Legislative Affairs of the National People’s Congress also announced that COVID-19 or COVID-19-related prevention and control measures taken by Chinese authorities constitute a force majeure event under Chinese contract law.⁷

Most notably, on April 16, 2020, the Supreme People’s Court of China (SPC) issued a Guidance Opinion addressing several issues concerning the proper hearing of civil cases related to the COVID-19 pandemic, including the handling of force majeure clauses.⁸ The SPC officially recognized COVID-19 and government-mandated prevention and control measures as force majeure events.⁹ The SPC’s Guidance adopted a pro-contract performance approach.¹⁰ Parties are encouraged to negotiate a revision to the contract to allow for performance under the circumstances rather than terminating the contract right away. The Guidance indicates that courts should encourage contract termination only when the force majeure event leads to frustration of the purpose of the contract, not solely due to difficulty in performance.¹¹

Conclusion

As COVID-19-related lawsuits start to flood U.S. courts, parties may invoke force majeure clauses as an affirmative defense. It is possible that COVID-19 and the government-mandated closures, stay-at-home orders, and travel restrictions implemented to control the spread of the virus will constitute force majeure events, depending on how the clause was drafted. However, the presence of a force majeure clause in a contract does not give a party free range to walk away from its contractual obligations just because a force majeure event has occurred. Parties should be sure to carefully review their force majeure clauses as some may require that the party give notice, consult and discuss with one another, or mitigate damages before modification or termination of the contract is warranted. 

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¹Kira Systems, The Impacts of COVID-19 on Contracts – What We Learned About Force Majeure in Chinese Contracts (March 24, 2020) Webinar.

²Id.

³ Id.

⁴ Id.

⁵CCPIT Commercial Certification Center Provides Force Majeure Certificates of Novel Coronavirus Pneumonia Service (2/21/2020).

⁶CCPIT Carries out International Communications on Force Majeure Certificates (4/30/2020).

⁷CCPIT Commercial Certification Center Provides Force Majeure Certificates of Novel Coronavirus Pneumonia Service (2/21/2020).

⁸Edward M. Lebow, Liza L.S. Mark, and Jierong Yang, A Look at China’s version of the US Defense Production Act, Law360 Expert Analysis (May 7, 2020).

⁹ Id.

¹⁰Sara Xia, China Supreme Court Guidance on COVID-19 Civil Cases, LexBlog (April 27, 2020).

¹¹Id.