Image by Tauno Tõhk. Available on Flickr under Creative Commons 2.0.
The recent outbreak of COVID-19 has, at present, claimed over 3,000 lives and reported cases have surpassed 100,000 globally. Inevitably, this economic shock has resulted in businesses being unable to fulfill certain contractual duties and this has had a big impact on global supply chains. With no foreseeable improvement in the situation, a potential option for affected businesses is to proceed with the use of a force majeure clause – otherwise known as an Act of God clause.
A force majeure event is something that is unforeseeable at the time of entering into the contract, unavoidable and its impact is impossible to overcome. The purpose of this clause is to offer a way out of the contract by excusing one (or both) parties from performance in the case of such events. The parts of the contract that can still reasonably be performed and are unaffected by the event are still expected to be upheld. When this clause becomes applicable, the affected parties are excused from civil liability (such as paying damages for non-performance). Alternately, either party can terminate the contract given that the force majeure event has prevented performance of the main purpose of the contract.
By March 3rd, China had already issued over 4,800 force majeure certificates due to the COVID-19 epidemic – excusing contracts worth over $53 billion USD in total. These government certificates are necessary in some cases because certain contracts outline that attaining one is required in order to bring a force majeure claim. Although the rate at which new COVID-19 cases reported in China is decreasing, China will still likely need to issue more force majeure certificates since public health measures (such as quarantines) are still being implemented, and thus affecting Chinese businesses. In coming months, other countries are also likely to adopt similar measures and businesses worldwide will need to rely on their force majeure clauses.
Although the use of force majeure clauses are likely to offer Chinese companies temporary relief, it is equally likely to have a damaging effect on the demand of Chinese goods and services in the future. This is because the COVID-19 outbreak has proven the pitfalls of relying primarily on the import of one country’s goods and services. Instead, businesses are likely to diversify their source of supply to perhaps mitigate the risk of something similar happening in future – where business comes to a halt because they are dependent solely on one country’s exports.