It has been over a month since the Chinese government announced the outbreak of COVID-19 in the city of Wuhan, and it remains a top story in global news.
This week has seen the spread of the virus into Europe and in particular, into Italy where several small towns in Lombardy and Veneto have been placed in lockdown.
The repercussions of this on businesses and the world economy are already proving to be of significant concern. The lockdown of towns and cancellation of large events means businesses cannot operate as usual. Governments around the world have started to put in place measures to prevent the spread of the virus, and they have also been putting in place measures to protect businesses. For example, the Chinese government has already issued over 1600 'force majeure' certificates purporting to excuse businesses for non-compliance with their contractual obligations. This has left many people wondering whether parties really can rely on the virus outbreak to cancel their contracts without consequence, and for those who have been let down by suppliers, whether they will be left without recourse.
Force majeure operates differently throughout the world. For example, common law jurisdictions (such as the UK) have different rules and considerations compared to civil law jurisdictions (such as Italy). Whether you can rely on, or dispute a party's reliance on, a force majeure clause will depend very much therefore on where in the world the parties do business and the terms of the contract (if any) entered into between them.
Withers has a long history of looking after Italian interests in the UK and vice versa, particularly in the luxury brands sector which is heavily reliant on both the Chinese manufacturing industry and Asia's buying power at the consumer level (Chinese buyers accounting for roughly 4% of the of the €281bn spent on luxury goods sales last year). The impact on luxury brands is therefore likely to be significant with some recent reports suggesting that the industry could suffer losses of up to $43 billion in 2020.
Supply chain issues are front of mind for many businesses and in particular whether, and how, a business or individual might be able to avail itself of a force majeure claim (or defend a counterparty's reliance on it) in England or Italy. We have produced a series of other articles for other industry specific concerns, links to which feature at the end of this article.
UK
Unlike civil law jurisdictions, there is no general doctrine of force majeure in English law so if your contract does not have an express force majeure clause then you will not be able to claim it.
Alternative options are also limited, though a party may seek to use the common law doctrine of 'frustration'.
If, however, you have a contract which contains a force majeure clause then provided the clause is sufficiently certain, you may be able to use it if the impact of coronavirus on your business means you are unable to perform some of your obligations under that contract.
A standard force majeure clause in an English law contract generally allows one or both parties, on the occurrence of certain events, to cancel the contract, or be excused from or entitled to delay performance of some or all of its contractual obligations.
Would a standard force majeure clause cover coronavirus?
Force majeure clauses typically list a number of force majeure events. As the coronavirus outbreak is new, your list will probably not include this. Your list may refer events such as 'disease' or 'epidemic' which would likely capture this outbreak.
Force majeure clauses generally contain some sweep-up words such as 'or any other causes beyond our control' which may be a good way to rely on the clause in the absence of a defined force majeure event covering coronavirus.
The burden of proof is on the party seeking to rely on the force majeure clause. You must therefore prove:
( a ) one of the force majeure events has occurred which is
beyond your control;
( b ) that you have been prevented, hindered or delayed from
performing some or all of your contractual obligations because of
coronavirus; and
( c ) there were no reasonable steps you could have taken to avoid
or mitigate coronavirus or its consequences.
What is the view in Italy?
As far as Italian law is concerned, although the specific concept of force majeure is not expressly regulated by the Civil Code, it is arguably covered by Article 1256, which governs the broader category of 'Unforeseen Circumstances' which is applicable to all contracts.
Case law in Italy also defines force majeure as "an unforeseeable, unavoidable external event not attributable to the party which consists of a force to which it is not possible to oppose, whose effects cannot be removed and which prevents the technical execution of the performance", including natural events and acts of the Public Administration.
It is arguable therefore that the emergency presented by the Coronavirus, and the consequent administrative measures put in place by the Italian government and public bodies, have made it impossible for some people and business to comply with their contractual obligations due to force majeure. This opens the door to a number of solutions that may prove to be of a temporary or definitive nature.
The main challenge under Italian law relates to the burden of proof – namely, it is the contract breaker (i.e. the person for whom performance of the service has become impossible) who has to prove that force majeure applies. Each case will turn on its own facts and merits and therefore requires specific legal advice in order to verify (and, therefore, prove) whether the impact of the Coronavirus actually made the contractual performance impossible, as well as to assess the outcome (and costs) of any litigation that might ensue.
What should you do next?
Undoubtedtly, the virus has caused signficant disruption to businesses and supply chains, but breaking contracts without consequence by relying on the coronovirus is unlikely to be as easy as it sounds.
Whether you can legitimately claim force majeure will depend on a number of things including the wording of your contract, the law which governs your relationship and the specific facts of your case.
We recommend seeking advice as early as possible so you understand the options available to you, so that you can take swift action where it is needed to protect your business and reputation.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
