• 12 February 2020

The coronavirus and force majeure

The outbreak of the coronavirus in China and the risk of a global pandemic caused by the virus means that even companies whose operations are currently not affected by the virus should consider the potential implications of an outbreak. From a contractual perspective, if a company is forced to suspend its performance due to the virus, it is important to understand whether it is possible to invoke the existence of force majeure to escape from financial liability related to the suspension.

The recent outbreak of the coronavirus has already had an impact on the operations of companies doing business in China, and further outbreaks have the potential to cause significant disruption to business on a global scale. If companies are forced to suspend their operations due to an outbreak of the epidemic, it will be necessary to consider whether the coronavirus outbreak – or governmental restrictions or other measures in response to the outbreak – constitute force majeure that can be invoked as a defense against potential contractual claims for delayed performance by customers.

Existing contracts

The question of whether a contracting party is entitled to suspend performance due to force majeure is dependent on the law applicable to the contract in question. From a Nordic perspective, it is generally considered that a party can invoke force majeure as a ground for suspending performance even if the contract in question does not contain an explicit force majeure clause. If an explicit force majeure clause is included in the contract, the wording of the clause will naturally have a significant impact when assessing whether the coronavirus outbreak constitutes a force majeure event in that particular case.

It is clear that the outbreak of an epidemic is not a carte blanche for contracting parties to suspend their contractual performance. The suspending party will ultimately need to establish that the relatively high threshold for invoking force majeure has been met considering the individual circumstances of the case. If there is cause to believe that a disagreement may arise from the suspension, it is advisable for the suspending party to document the actual impact that the coronavirus outbreak has on the suspending party’s ability to continue performing the contract.

Negotiating new contracts

For contracts that are currently in the process of being negotiated, it should be considered whether a specific provision is necessary to cater for the possibility of a future suspension necessitated by the virus. Especially if the contract has a clear Chinese nexus, it can be argued that the contracting parties were aware of the risks related to the spread of the coronavirus at the time of entering into the contract. This, in turn, may impact a contracting party’s possibility to subsequently invoke force majeure due to a spread of the epidemic.

Potential further implications from a legal perspective

The potential risks related to the coronavirus span beyond the suspension of contractual performance. It may therefore be useful to assess what impact an outbreak will have on existing finance agreements, ongoing M&A transactions and occupational health and safety requirements, to name a few examples.

In respect of M&A and finance agreements, it should at least be evaluated whether potential larger disruptions to business can cause material adverse effect provisions to trigger or result in a breach of warranties. As concerns occupational health and safety, it is advisable to consider in advance what are the duties and rights of the employer if there is a concrete risk of the coronavirus spreading in the workplace. This includes considering whether local legislation provides that the employer has a duty to take active measures to prevent the virus from spreading, and whether the employer has the right to restrict access to the workplace for employees who are experiencing symptoms.

Roschier’s experts are happy to answer any queries you may have related to the legal implications of the coronavirus epidemic.

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Aapo Saarikivi