Force majeure: Is Coronavirus an Act of God?
- AuthorDavid Wisbey
This is one of a number of questions I have been asked by a client about the impact of the coronavirus on supply chains.
Our client manufactures car components in factories in China. It also relies on suppliers of sub-components and raw materials that are based in China. It has contracts to supply leading car makers all over the World from those factories. Some of those supply contracts are governed by English law.
If it is unable to supply, or is late in supplying, because of the restrictions imposed on travel, work, and transport by the Chinese government, in an attempt to curb the spread of the virus, what are their liabilities under the contract?
The seriousness of the situation is illustrated by a warning from Fiat Chrysler this week that it may have to shut an assembly line in Europe because of the difficulties it is experiencing in getting components from China.
“Act of God” is a term often used in clauses that excuse failure to perform a contract for reasons beyond the reasonable control of a party to the contract (known in legal jargon as ‘force majeure’). The starting point, then, when trying to assess the position in English law, is to see whether there is a force majeure clause in the contract. If there is, does it help in this unique situation?
Force majeure clauses often list the types of things that can be treated as beyond the reasonable control of the parties. Sometimes the clause might actually specify that force majeure includes an epidemic or pandemic. If it does, then the supplier is likely to be protected by the clause from any claims against it for failing to carry out its obligations, if it is unable to do so because of the outbreak of coronavirus.
Fortunately for our client, its contract with one of the World’s largest car makers has a force majeure clause. It does not include epidemics and pandemics, but it does include acts of governments that prevent or restrict its ability to perform the contract. I am sure that the draftsman never envisaged wholesale shutdowns of cities when including those words, but travel bans and forced plant closures required by the Chinese government are acts that may prevent or restrict the ability to deliver, so the client will be protected.
If there had been no force majeure clause, the client may have been protected by the doctrine of ‘frustration’. Under English law, a contract may be discharged on the ground of frustration when something occurs after the formation of the contract which renders it physically or commercially impossible to fulfil the contract. The restrictions put in place to contain coronavirus probably fulfil the criteria required to show frustration and could enable a supplier to avoid liability for losses caused by its inability to perform the contract.
If you don’t have a force majeure clause in your supply terms, or if you have one but it doesn’t cover epidemics, pandemics or government acts, you can ask us for an update of your terms without delay.
If you are concerned about the impact of the situation in China on your supply chain, contact me on 01245 453817 or email email@example.com.