Mitsubishi Global Business Insight April 2020 Issue: “Force Majeure Clause in Case of Coronavirus Outbreak”

This article was issued by Mitsubishi UFJ Bank on April 1, 2020 in Japanese, and below is the English version.

Force Majeure Clause in case of the COVID-19 outbreak:

By Naoko Inoue Shatz

The coronavirus outbreak forced many businesses to shut down, and companies impacted by it are now trying to find ways to sustain their businesses.

A force majeure is a contract provision that often allows the businesses to extend the contractual obligations.
In this article, I will introduce some key legal issues to help businesses decide how they should proceed with their ongoing obligations under a force majeure clause during the coronavirus outbreak.
First, the concept of force majeure excuses contractual nonperformance when such nonperformance is caused by unforeseen events beyond the control of both parties, which makes contract performance impossible or impracticable or frustrates the purpose of such performance.

Although a force majeure clause is not generally an essential part of a contract, most contracts particularly in international transactions contain a force majeure clause.

In a force majeure clause, unforeseen events are broadly defined, and there is no generally accepted or implied definition of force majeure. For example, unforeseen events caused by “Acts of God” might refer to earthquakes, tornadoes, hurricanes, typhoons, floods, tsunami, riots, terrorism, strikes, or wards, but medical epidemic or pandemic events are not generally defined as an Act of God. Thus, whether the coronavirus outbreak is a force majeure event will depend on each contract and parties’ understandings of the event.
Next, the affected party by the events is generally required to provide notice to the other party as soon as practicable and show that it is making efforts to mitigate the effects of the force majeure event. If the event is so disruptive that it rises to the level of impossibility to perform the contract, then the affected party may be excused from its contractual obligation.
To avoid disputes between the parties, a force majeure clause may specify the degree of efforts the affected party should make to mitigate the effects. For example, the affected party may have to show it made “best effort,” “commercially reasonable effort” or “reasonable effort,“ before it invokes a force majeure clause. The standard of parties’ efforts varies depending on the nature of the industry and business practice, and it is important for businesses to set a clear standard when negotiating the standard of a force majeure.

In order to invoke a force majeure clause, a party must demonstrate a causal link between the force majeure event and the affected party’s failure to perform. The affected party may argue that it is more expensive or time consuming to perform than not performing. However, the other party may counterargue that the affected party’s reason is not enough so that it should perform partially to avoid nonperformance.

For example, in case of the emergency stay at home orders issued by the government, the affected party may still be required to deliver goods/products or provide services even if their deliveries or services are delayed. The party requiring performance may require that the services should be provided so long as the employees work remotely or distancing themselves from the others. In other words, the degree of efforts to mitigate the effects required from the affected party may be questioned, despite the force majeure event.

As another legal theory that would excuse performance, the affected party may invoke that performance has been rendered commercially impracticable. For performance to be impracticable, both parties may assume non-occurrence of the event at the time of forming the contract, and the event will frustrate the purpose of the contract. However, the affected party may still be required to make efforts to find alternatives. Even if alternatives are more expense, that may not give the party relief based on impracticability of performance.

For example, a party who was required to deliver the goods/products or provide services that will be used for the Tokyo Olympic Game by May 2020 may invoke impracticability of performance because the Olympic Game was extended to 2021. However, the other party may request an amendment of the agreement to extend the deadline for the delivery of the goods/products to May 2021 instead of terminating the existing contract.

Finally, a force majeure event and relief from performance may be analyzed and interpreted based on common law theory, even if a force majeure clause is not provided in a contract. Thus, it is possible for an affected party to invoke a force majeure without a force majeure clause, so long as the affected party can demonstrate that the force majeure event occurred without its fault and it was beyond its control.

Regardless of whether a force majeure clause is provided in a contract or not, the parties of the contract will end up being in court or arbitration if they have a dispute over their understandings of the force majeure event. If the dispute is handled by courts or arbitrations, the parties will have great risks in expending unnecessary cost and legal fees, because interpretations and applications of the law will be at the hand of the courts or arbitrators that have their independent decision making processes and analyses. Thus, the affected party should carefully analyze the situation of a force majeure before terminating its contractual obligation.