COVID-19's Impact On Construction Contracts – Will Force Majeure Relief Or Other Rights Be Available?

Author:Ms Emma Kratochvilova and Michelle Li
Profession:Herbert Smith Freehills
 
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As the human cost of the novel coronavirus (2019-nCOV) continues to escalate, so too does the commercial and economic impact. The economic effects are not confined to mainland China. Supply chain disruption is being felt worldwide, including in the construction industry as China plays a major role in parts manufacturing. We are having an increasing number of enquiries from clients as to how to manage force majeure risk, both in terms of whether they should claim force majeure protection and in anticipation of receiving force majeure notices up the chain.

At the time of writing, it has been widely reported that CNOOC's force majeure notices to seek relief from taking delivery of some LNG cargoes have been rejected by Shell and Total, leaving CNOOC to consider whether to go ahead and cancel the contracts in any event. With many construction projects around the world reliant on Chinese contractors and suppliers, we anticipate that similar disputes as to the availability of force majeure relief will become commonplace.

Here are some top tips to help navigate your way around the issues:

Check the scope of the force majeure clause

Under English law, force majeure is a creature of contract, so it will be imperative that the event in question falls within the scope of the defined term in the contract. It is not uncommon to see a non-exhaustive list of events that could constitute force majeure so long as other conditions are satisfied, such as it being an "exceptional" event that is beyond the party's control, which it could not have avoided, and is not attributed to the other party (to summarise FIDIC/1999 19.1). Where the list of events is exhaustive, it will be necessary for the event to fall squarely within the scope of a listed item - therefore, if the clause covers 'pandemics' then, as the coronavirus is currently defined by the WHO as a 'public health emergency of international concern', the relief would not yet apply.

In China, the China Council for the Promotion of International Trade (a Chinese State body) now accepts applications from affected parties to certify facts relating to the virus outbreak. Whilst this would commonly be thought to be powerful evidence of the occurrence of force majeure if your contract is governed by Chinese law, or if the question is considered by the Chinese courts, it will not necessarily be the case if your contract is governed by another law or has a different dispute forum.

Check whether other...

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