The coronavirus pandemic has been affecting both domestic and international trade and commerce around the world. States have reacted with robust mitigation measures, including closing borders, implementing a range of travel bans and engaging a myriad of internal domestic health and wellbeing procedures. These measures are causing unprecedented disruption to the trade, transport, labor market, production and supply chains.
COVID-19 and the construction industry
The impacts of COVID-19 and its mitigation measures on domestic and international trade and commerce is already palpable. Companies globally are being impacted through the labor market, production and their supply chain. The construction industry is heavily influenced worldwide by Chinese-made goods and materials, including everything from structural steel (China is the number one steel producer and exporter) and other building materials (copper, iron ore, zinc, nickel) to cabinet caseworks and fixtures. Next to these standard materials, China is also the largest producer of photovoltaic power since 2015. Finding and establishing alternative supply chains could mean higher material costs and potentially slower project completions. Given the facts that the construction industry heavily relies on human workforce and that China’s manufacturing output is declining, the possible consequence appears that many companies could find themselves either unable to perform their contractual obligations in time or at risk of not being able to do so at all in the future.
Force Majeure in general
Force Major (FM) clauses are included in long-term contracts as a way for the parties to delay or take a break in their performance obligations or to terminate the contract in extreme circumstances, typically extraordinary events beyond human control such as wars, riots, crimes, or natural calamities which would legitimately excuse their performance of the contract. Most building contracts have reasonably detailed definitions of what will amount to a FM event. Although the precise terms may vary, the general framework of FM in most construction contracts is similar. However, there are key differences in the treatment and recognition of FM across different jurisdictions.
Force Majeure in Civil Law Systems
Contrary to English law, where courts do not imply FM in the absence of an express contractual provision, civil law systems have a more developed concept of FM and may, in appropriate circumstances, excuse non-performance of a party based on FM, even in the absence of an express FM clause. In countries with a codified legal system, the civil code generally provides that a party will not be considered to be in breach of contract, and the performance of its contractual obligations will be suspended, if and to the extent that it has been prevented from carrying out those obligations by virtue of an event which was unforeseeable, is not attributable to any of the parties and was unavoidable. It is, therefore, important to consider the potential applicability of FM in the context of the governing law of the contract. Regardless of the law system, it is a mandatory requirement that the unforeseen FM event has to occur after the date of entry into force of the contract.
Force Majeure Certificates Issued in China
On 30 January 2020, the China Council for the Promotion of International Trade (“CCPIT”) announced that it would offer “force majeure certificates” to help affected enterprises minimize losses arising from COVID-19. The expectation was to help them in imminent disputes with foreign counterparties emerging because of the actions being taken then by the Chinese government. By the end of April 2020, more than 7,000 FM certificates covering contracts worth a combined USD 98 billion had been issued. To apply for the certificate, companies must provide legitimate documents such as proof of delays or cancellation of transportation to the agency. CCPIT has clarified that the clause does not excuse a party’s non-performance entirely but only suspends it for the duration of a period. However, there is no guarantee that a government certificate will make any difference, in fact, it might give Chinese companies a false sense of comfort. As to the future, it is likely that parties will continue to rely on FM certificates when invoking FM, and there appears to be some degree of international consensus that, while these certificates will have evidential weight, their issuance will not be determinative of the existence of a FM event.
Since FM clauses in general require that the event was unforeseeable at the time the contract was entered into, some commentators argue that after previous pandemics (e.g. SARS in 2003 or H1N1 in 2009), it may have been foreseeable that a similar virus could occur again and the parties may not be entitled to relief. It may be interesting to note that Hungarian courts had accepted the H5N1 (bird-flu) epidemic of 2006 as FM, e.g. where the party either could not deliver the animals due to transport restrictions, or simply had to slaughter them out of precaution.
It is important that even if the outbreak of epidemics may not be seen as an unforeseeable event, due to the unprecedented scale of the lockdowns it is likely that the courts will accept that this outbreak does not constitute a foreseeable contingency such that reasonable steps could have been taken by the party affected by it.
The party seeking to invoke a force majeure clause in its contract will need to prove that there are no alternative means for performing its obligations, or that it has taken all reasonable steps to avoid the operation of the clause. Increased costs or hindrances such as getting building materials from alternate sources, or hiring different manpower alone will not be sufficient to prevail on a claim of FM. Just because a contract has become more expensive or even uneconomic to perform, that will not constitute FM.
It is clear that this is a historical time from all aspects of life, including the consideration of pandemics as FM in the construction industry. With all the mitigation measures around the world, many cases may serve as precedents for the future and there will definitely be great lessons to be learned for future construction contracts.
By Gabriella Galik, Partner, and Denes Glavatity, Associate, KCG Partners Law Firm