It seems certain that businesses will be preoccupied by COVID-19, force majeure and arbitration (or litigation) over the coming year. The present ability of businesses to fulfill their contractual obligations has been significantly impacted by the rapid spread of the new coronavirus, so-called COVID-19, which was officially declared a pandemic by the World Health Organization on 11 March 2020, and the unprecedented measures taken by countries in response (travel restrictions, closure of businesses, quarantines) to restrict the further spread of the disease.
In this blog, we will consider whether and under which circumstances the concept of force majeure and the related legal doctrines of frustration and hardship can be employed by COVID-19-affected parties to claim partial or complete exemption from liability of non-performance of their contractual obligations in arbitrations (and litigations).
Force Majeure and Frustration under English law
Force majeure, which has French origins, is not a recognized legal principle under English law.
Nevertheless, non-performance due to COVID-19 can be excused if there is a force majeure clause in a contract governed by English law, whose wording is wide or explicit enough to cover the COVID-19 outbreak; for example, if there is a particular reference to “pandemics”, “epidemics” or “quarantines” in that clause, as is commonly the case.
If no force majeure clause exists, the common law concept of frustration may be invoked instead. Under English law, a contract may be discharged on the ground of frustration when something occurs after the formation of the contract, i.e., an outside event or extraneous change of situation not contributed to by the party seeking to rely on it, which renders it physically or commercially impossible to fulfill the contract.
Even though the doctrine operates within narrow confines (examples of the kind of events which have been held to bring the doctrine into operation include explosion, seizure of a ship and expropriation of the subject matter of the contract by a foreign government), the COVID-19 outbreak could, arguably, qualify as a frustrating event.
However, it is to be noted that mere inconvenience, hardship, financial loss involved in performing the contract or delay, which is within the commercial risk undertaken by the parties, has been held insufficient to frustrate contracts, as a matter of English law.
Force Majeure and Hardship under French Law
Parties to French law-governed contracts affected by the COVID-19 outbreak may seek to rely on codified doctrines of force majeure and/or hardship to be excused from non-performance of their obligations.
Article 1218 of the French Civil Code defines force majeure as an event preventing the performance of the debtor’s obligations, which is:
- beyond the control of the debtor,
- which could not reasonably have been foreseen at the time of the conclusion of the contract (the unforeseeability factor) and
- whose effects could not be avoided by appropriate measures (the mitigation factor).
If the prevention is temporary, performance of the obligation is merely suspended, unless the delay which results justifies termination of the contract.
If the prevention is permanent, the contract is terminated by operation of law and the parties are discharged from their continuing obligations, under the conditions provided for in Articles 1351 and 1351-1, i.e., mainly if they have not agreed to bear the risk of the event or they have not previously been given notice to perform.
Even though the COVID-19 virus undoubtedly constitutes an external event, beyond the parties’ control, the unforeseeability and mitigation factors, as well as whether the prevention is temporary or permanent, will have to be proven by the party seeking to invoke Article 1218, based on the particular circumstances of each case.
Further, pursuant to the newly-inserted Article 1195 of the French Civil Code, hardship may be invoked, unless there is a contractual provision excluding its application, if:
- there is a change in circumstances,
- that was not foreseeable at the time of the conclusion of the contract,
- which renders performance of the contract excessively onerous and
- the party seeking relief has not contractually accepted to assume the risk of hardship.
The party suffering from such imbalance can then request its counterparty to renegotiate the contract. During the renegotiation period, the parties must, nevertheless, continue to comply with and perform their respective obligations.
If renegotiation fails, the parties may decide to terminate the contract or refer the matter to a judge/arbitrator so that it can be revised or terminated.
Even though the threshold for proving hardship is high and will largely depend on the facts of each case, arguably, the impact of COVID-19 is an unforeseeable change in circumstances that could render performance of certain contracts excessively onerous, and thereby, justify their revision or termination.
Force Majeure under Chinese Law
Pursuant to Articles 117 and 118 of the PRC Contract law, force majeure is defined as any objective circumstance which is unforeseeable, unavoidable and insurmountable, which exempts the affected party from liability in part or in whole, provided that the other party is notified and given sufficient proof within a reasonable period.
Interestingly, the China Council for the Promotion of International Trade, a quasi-governmental body, has been issuing force majeure certificates to Chinese businesses, to verify that COVID-19 constitutes a force majeure event.
These certificates, however, do not automatically exempt Chinese parties from fulfilling their obligations, especially when foreign counterparties are concerned. Even under Chinese law, a fact-specific analysis would have to be conducted to ascertain whether and to what extent the affected party can be excused.
While the COVID-19 outbreak continues to unfold, no conclusive answer in terms of its disruptive effect on contracts should be attempted. Force majeure clauses and related legal concepts, which are encountered under the laws of all nations in various guises, could indeed come to the rescue of certain businesses.
However, under most laws of most nations the threshold for invoking force majeure or hardship is high, the analysis required is largely fact-specific, and the outcome will eventually depend on the arbitral tribunal’s (or court’s) discretion while interpreting the related contractual provisions (if any), the facts and applicable legal principles.
Nevertheless, it seems certain that COVID-19, force majeure and arbitration will be of importance over the coming year.
 H. Beale, Chitty on Contracts, 32 ed. 2018, paras. 23-001 and 23-007.
 H. Beale, Chitty on Contracts, 32 ed. 2018, paras. 23-002 and 23-021.
 H. Beale, Chitty on Contracts, 32 ed. 2018, para. 23-021.
 Art. 1351 of French Civil Code reads: “Impossibility of performing the act of performance discharges the debtor to the extent of that impossibility where it results from an event of force majeure and is definitive, unless he had agreed to bear the risk of the event or had previously been given notice to perform.”
 Art. 1351-1 of French Civil Code reads: “Where the impossibility of performance is a result of the loss of the thing that is owed, the debtor who has been given notice to perform is still discharged, if he proves that the loss would equally have occurred, if his obligation had been performed. He must, however, assign to the creditor his rights and claims attached to the thing.”
 The law of the People’s Republic of China.