Corona Virus and Contractual Obligations

The corona virus presents a unique and an unprecedented situation. Though its occurrence was unforeseeable and unpredictable, could measures have been taken to limit its spread right from the moment when it came to be known, in view of its impact on people’s health, the business and economic sector? The difficulty arises, as China waited, according to available information, 40 days before disclosing the virus to the world. And it was only on 30 January 2020 that the World Health Organisation declared the Covid 19 “a public health emergency of international concern”.

 Was it open to countries to take necessary measures from the moment of disclosure to prevent   its spread which could have avoided a total lockdown in many jurisdictions? In countries around the world, including Mauritius, it was business as usual. Gradually the grim reality hit the world and countries had to resort to the extreme measures of a complete lockdown and curfews to prevent the spread of the pandemic and to save lives. The health of the population, and not the economy, became the priority in the initial stage.

It is beyond dispute that the corona virus has brought about a real turmoil in many sectors of personal life and economic activities. In the midst of the health crisis, many individuals, business people and professionals are asking questions about the fulfilment of their obligations, whether contractual or not. Some may feel they are covered for any breach of their obligations because of the epidemic, whereas others may be grinding their minds at the idea of not being able to execute a contract as planned. But the one question that has to be addressed is whether the corona virus can be a cause of exemption in the event of a breach of a contractual obligation?

In contractual matters, there are two types of exemptions that would allow a party to a contract to escape liability. Some are legal while others are conventional. The legal exoneration cases are the force majeure for a total or partial exemption of liability. Conventional cases are limiting liability clauses and penal clauses.

A party who fails to fulfil his obligations will be held liable for the breach of the contract in the absence of good grounds to justify the breach. In the context of the corona virus, one of the grounds that may be raised is force majeure resulting from the mandatory lockdown decided by the government.

Force majeure is a legal concept that is known in many legal systems. In Mauritius it is provided for in the Civil Code under the chapter dealing with contracts. As a general rule contracts will have a force majeure clause and list out the different events that may amount to force majeure, like natural cataclysms or epidemics. Whether contracts would have included a clause on complete lockdowns as a force majeure remains to be seen. And it would be important to decide whether the government restrictions made performance under a contract impossible.

Force majeure has been explained as an event which is reasonably unforeseeable [imprévisible] at the time the contract was entered, irresistible [irrésistible] during the performance of the contract, and beyond the control of the person who is invoking it as he cannot no longer perform his obligations. In a very interesting decision in 2011, the Full Bench of the Supreme Court, five judges, held in relation to force majeure, that “It is not enough to stop at the element of prévisibilité or imprévisibilité to determine force majeure. One should move one step further. Prévisible or imprévisible, the question to ask is whether the event was irresistible either by its occurrence or by the manner in which the dire consequences of its occurrence were managed.  What is irrésistible is judged from the objective point of view to decide whether it is so overpowering as to go beyond the means of humans to resist or manage its consequences.” 

The situation created by the corona virus is not comparable to other epidemics and pandemics. The lockdown and curfews are having an impact on businesses. For example, supply chains may have been affected. As the situation is uncertain, a party to a contract may seek to rely on force majeure to avoid liability for non-performance of his contractual obligations.

Can force majeure therefore be successfully invoked on the ground that the measures taken following the corona virus were unforeseeable, irresistible and beyond the control of a contractual party and over which he could not have any control and performance was impossible? There cannot be a definite or straightforward answer. The strain on businesses will no doubt give rise to all types of legal issues or disputes.

Could the virus have prevented contractual obligations from being implemented? There was a gap between the outbreak of the virus and the measures taken by the government on lockdown and curfews. During his gap could businesses still have   functioned?

Epidemics by themselves cannot amount to force majeure. Courts are usually reluctant to uphold the force majeure defence when there is a breach of a contractual obligation. In a very interesting article that appeared in Business Magazine, issue 1435,  15 to 21 April 2020,  Barrister Bilshan Nursimulu after analysing the case law in Mauritius on force majeure,  concludes that “The court’s analysis… did not consider whether the epidemic in itself constituted force majeure, but rather the relationship of cause and effect between the epidemic and the non-performance of a specific contractual obligation”.

French courts, English courts and courts in the United States, just like the Supreme Court in Mauritius, have ruled that a pandemic or an epidemic is not sufficient by itself to constitute force majeure. In a recent decision given on 12 March 2020, the Cour d’Appel of Colmar held that the absence of an asylum seeker at a hearing « était justifiée en raison des circonstances exceptionnelles et insurmontables revêtant le caractère de force majeure liées à l’épidémie en cours de Covid-1». This is a very interesting decision and it remains to be seen to what extent it can be used in contractual obligations.

The following epidemics were held not to constitute force majeure by the French Courts: H1N1 influenza; the plague bacillus; the dengue virus; the chikungunya virus; SARS; Ebola. The major difference between the corona virus and the other epidemics or pandemics is that the coronavirus (COVID-19) pandemic has led to complete lockdown and the imposition of curfews with a number of persons being quarantined. With the onset of other epidemics or pandemics, there was no total lockdown and businesses continued their activities.

In 1918, the Spanish Flu infected millions of people worldwide. Many events were cancelled. People were quarantined.  Many died. The situation was no more different from what we are experiencing with the corona virus. The United States imposed restrictions on activities and people were quarantined. In such a context the question arose whether employers were bound to pay their workers. Two courts reached different conclusions on this point.  One court held  that an employer who did not pay its employees during this time was excused from performance, Another court concluded that  the restriction on activities could not excuse non-performance of obligations because an employer knew that the government “had authority to shut down facilities and, thus, the employer should have included a provision in the contract explicitly excusing performance in the event of a government shutdown”. 

A party invoking force majeure will have to establish that there was a causal link between the inability to perform contractual obligations and the measures taken by the government to combat the spread of the virus. If working from home was an option following the mandatory lockdown, can force majeure be invoked? Could alternative measures have allowed the execution of the contractual obligation?

Businesses today are conducted transnationally and many, if not, all around the world, are suffering from the effects of lockdowns.  Many parties to such contracts may be unable to execute their contractual obligations due to coronavirus lockdown and they may invoke force majeure. To what extent will a force majeure clause in such transnational contracts be successfully invoked in different jurisdictions remains to be seen? It has been reported, for example, that in China, the Council for the Promotion of International Trade, has issued several force majeure certificates to companies to enable them to avoid execution of their contracts. These certificates may work between Chinese companies but it is not certain they would in relation to international contracts.  One such example is the rejection by the French oil giant Total of a force majeure notice from a liquefied natural gas buyer in China. There is no doubt that this is an area where difficulties will crop up.  

Given that unprecedented situation where contracting parties may find themselves in uncertain waters legally, views expressed at international level, advise that parties should seek ways and means to mitigate damages. One advice that been given is that “downturn in revenue will have a huge impact on working capital, and those businesses without sufficient reserves may find themselves suffering cash-flow issues. If this occurs, business operators should seek assistance immediately to try to minimise the impact”.

Contracting parties, who find themselves in that situation, would be well advised to send notices to their counterpart to explain and discuss the difficulties they may be facing or will face. Negotiations must be started to see whether the execution of the obligations can be suspended during the pandemic and whether the contract can be renegotiated. In contracts where time is of the essence there would be no point in suspending its operation and the contract will have to be terminated subject to conditions.

English law encourages parties to enter into negotiations. The French Civil Code enables parties to renegotiate the contract if there is a change in circumstances that was unforeseeable at the time of signing of the contract and which renders performance excessively onerous for a party who had not accepted the risk of such a change. If negotiations fail the parties may agree to the termination of the contract, on a date and under the conditions to be determined, or request the court by mutual agreement to adjust the content the contract. If no agreement is reached within a reasonable time, the court may, at the request of a party, revise or terminate the contract, on the date and on the conditions it chooses.

Thank you.
1^st May 2020