*cough* I’m sorry *cough* but I’m invoking… FORCE MAJEURE BECAUSE OF COVID-19

UPDATE #1 FROM THE RHTLAW CRISIS RESPONSE TEAM:

*cough* I’m sorry *cough* but I’m invoking … *cough cough*

FORCE MAJEURE 
BECAUSE OF THE CORONAVIRUS / COVID-19

The outbreak of the novel coronavirus  / COVID-19 is not necessarily a carte blanche to back out of agreements. Force majeure clauses are a contractual allocation of risk. To rely on one:
(1) the agreement must have one;
(2) the party seeking to rely on it must show it has been triggered (i.e. the clause must sufficiently cover the scope and ambit of the triggering event); and
(3) depending on how the clause is drafted, there may be a requirement to show that reasonable steps were taken to avoid its operation or mitigate its results.

If the agreement does not contain a force majeure clause, a party may seek to rely on the doctrine of “frustration” but that is only available in very limited circumstances.

Introduction

The outbreak of the novel coronavirus (now officially known as “COVID-19”) was first detected on 31 December 2019. Since then, it has spread rapidly and continues to do so. While SARS sickened over 8,000 and killed over 800 in 9 months, COVID-19 has already infected over 60,000 with a death toll over 1,300.

To counter the upsurge of COVID-19, the Chinese government has implemented several draconian measures, including the lockdown of major cities (as at the date hereof, over 98% of cases are in China). Meanwhile, the Emergency Committee of the World Health Organisation has declared COVID-19 a global health emergency, marking the 6th time one was declared since it was given powers do so. Several countries, including Singapore, have suspended flights to and from China, and banned visitors who have recently travelled there (in an ironic twist, certain countries are now recommending that their residents avoid coming here).

The cumulative effect of the fear of death, and the restrictions in and upon the world’s second largest economy (and globally), have severely affected economies, labour markets and supply chains. As businesses scramble to deal with COVID-19, executed agreements are being dusted off and read cover-to-cover. While it is unlikely that these executed agreements have a clause dealing with COVID-19 specifically, many will have a force majeure clause.

Force Majeure Clauses

Force majeure is the French term for “superior force”. As its name implies, a force majeure clause seeks to deal with events of superior force, ones which are beyond the control of parties. Force majeure clauses “contractually allocate the risks between the contracting parties with regard to the occurrence of future events in specific circumstances, all of which are stipulated within the clause itself” (RDC Concrete Pte Ltd v Sato Kogyo (S) Pte Ltd [2007] 4 SLR(R) 413 (“RDC”)).

The crucial thing to remember about force majeure clauses is that they are contractual. In other words, parties must have agreed upon its inclusion in an agreement, and thus, “the precise construction of the clause is paramount as it would define the scope and ambit of the clause itself. The court is, in accordance with the principle of freedom of contract, to give full effect to the intention of the parties” ([54] of RDC). Indeed, in Holcim (Singapore) Pte Ltd v Precise Development Pte Ltd and another application [2011] SGCA 1 (“Holcim”), the Court of Appeal had to grapple with whether the 2007 Indonesian sand ban had in fact “disrupted” the supply of concrete, and in so doing, it considered the meaning of “disrupt”. Accordingly, it should be noted that where a force majeure clause has been drafted to provide for a more nuanced response (for example, an extension of time pursuant to the occurrence of an event of force majeure), a contract may not automatically be brought to an end.

Duty to Avoid or Mitigate the Event of Force Majeure or its Consequences

Contrary to popular belief, there is no blanket principle that there is a requirement to take all reasonable steps before a force majeure clause can be relied upon. In Holcim, the Court of Appeal found that such a proposition is too wide, and whether there is indeed such a requirement depends on the language of the force majeure clause.

There, the learned judges considered that where the clause provides that the event of force majeure must be “beyond the control” of the parties, the concerned party ought to take reasonable steps to avoid the event (the rationale being that to the extent such steps were not taken, it cannot be said that the occurrence was beyond that party’s control). However, where the clause does not so provide, there is no blanket requirement.

COVID-19 as an Event of Force Majeure

As COVID-19 continues to bear down, those adversely affected will try to minimise its effects and their losses. Just last week, it was reported in the Straits Times that French oil major, Total, mentioned at the company’s full-year results presentation that it had, further to the outbreak, received a force majeure notice from a Chinese customer (which it rejected). On the other hand, it was also reported that the China National Offshore Oil Corporation had declared force majeure on certain deliveries.

The China Council for the Promotion of International Trade (a trade promotion agency affiliated with China’s Ministry of Commerce) has started issuing force majeure certificates to struggling companies (upon proof of the impact of COVID-19 upon their businesses). While the intended effect of such certificates is to excuse companies from performance of their obligations as a result of COVID-19, counterparties may not necessarily recognise the same, particularly in the context of cross-border deals and/or where the governing law is not Chinese law. With regard to Singapore, it is unclear whether our courts will attribute any evidential value to these certificates, or even recognise them. Above all, these certificates would be of no utility where the relevant force majeure clause does not contemplate outbreak of diseases. As we have made clear, the inclusion of a force majeure clause does not guarantee successful reliance, and much will turn on the facts with the party seeking to rely on it having to prove that the outbreak is an event of force majeure (as contemplated by the clause).

Closer to home, our beloved Singapore Post had on 3 February 2020 put out a service notice informing the public to expect delays in the processing and delivery of shipments to and from China pursuant to, amongst others, flight suspensions. Shortly thereafter, on 4 February 2020, Singapore Post suspended all international shipments destined for Hubei Province. In this regard, it is worth noting that Singapore Post’s existing General Terms and Conditions contains the following:

“SingPost shall not be liable for any loss or damage arising from its failure to perform any of its obligations under these General Terms & Conditions and/or Specific Service Terms & Conditions if such failure is the result of circumstances outside its control including but not limited to the outbreak of war, any governmental act, act of war, explosion, accident, civil commotion, riot, industrial dispute, strike, lockout, stoppages or restraint of labour from whatever cause, whether partial or general, weather conditions, traffic congestion, mechanical breakdown, obstruction of any public or private road or highway or outbreak of any communicable disease or any other force majeure, fire, flood or any other act of God.”

Prima facie, it would appear that the outbreak of COVID-19 would trigger the operation of this clause.  However, in the event of a claim against it, Singapore Post would still have to show: (1) that the outbreak of COVID-19 was properly contemplated by the clause; and (2) that it had taken reasonable steps to avoid or mitigate against the outbreak and its effects.

What if there is No Force Majeure Clause?

If there is no force majeure clause, parties may be able to rely on the doctrine of “frustration”, which will discharge parties from their contract automatically by operation of law (Solomon Alliance Management Pte Ltd v Pang Chee Kuan [2019] 4 SLR 577) (“Solomon”). The doctrine applies where, through no fault of the parties, a supervening event occurs which renders the contractual obligation fundamentally or radically different from what had been agreed (Alliance Concrete Singapore Pte Ltd v Sato Kogyo (S) Pte Ltd [2014] SGCA 35). That said, it is easier said than done, and in Solomon, it was affirmed that the doctrine is applied strictly and allowed only in exceptional cases, based on a multi-factorial assessment (taking into account amongst others, knowledge, expectations, terms of the agreement, assumptions and contemplations, in particular as to risk). A “mere incidence of expense or delay or onerousness is not sufficient” to invoke the doctrine of frustration ([87] of Solomon). Whether COVID-19 will amount to a supervening event which renders a particular contractual obligation fundamentally or radically different will depend on the facts of each case.

Closing Suggestions

Whether or not an agreement contains a force majeure clause, it is worth keeping in mind that a total exit is an extreme position to take. In the same way that a force majeure clause can provide for a more nuanced approach on the occurrence of an event of force majeure, parties should also consider expedient and cost-efficient alternatives. For example, just hours ago, the Restaurant Association of Singapore asked shopping mall landlords to extend rental rebates to help the food and beverage industry, which has seen a sharp drop in business further to the outbreak.

Notwithstanding the foregoing, it would be wise for parties to pay close attention to the drafting of force majeure clauses. As the learned judges in Holcim observed, the case could have been efficaciously resolved had there been a more specific clarification of its terms, and the case “illustrates the importance of drafting contractual clauses in general and force majeure clauses in particular with clarity and precision. Although force majeure clauses often take the form of “boilerplate” clauses, lawyers and their clients would do well to pay more attention to the precise language used in drafting the clause(s) concerned” ([101] of Holcim).