Coronavirus And Force Majeure: Addressing Epidemics In LNG And Other Commodities Contracts

On 30 January 2020, the Director-General of the World Health Organization declared that the outbreak of novel coronavirus (2019-nCoV) met the criteria for a Public Health Emergency of International Concern ("PHEIC").1 In order to qualify as a PHEIC, an event must: (i) be extraordinary; (ii) constitute a public health risk to other States through the international spread of disease; and (iii) potentially require a coordinated international response.2 Since the PHEIC regulations were enacted 15 years ago, a PHEIC has been declared only on five previous occasions: swine flu (2009); polio (2014); zika (2016); and ebola (2014 and 2019).3

Coronavirus is taking a tremendous human toll and our thoughts go out to those affected. Recent reports also suggest that coronavirus is beginning to impact commercial operations as facilities are shut down or production is curtailed, workforces are sent home, and demand falls. In particular, recent press coverage suggests that this issue has arisen in the LNG market, with Chinese buyers citing the impact of coronavirus in connection with the failure to take delivery of LNG.4

Coverage also suggests that there are concerns about a tightening of demand and the potential effect of coronavirus on the supply chain for other critical commodities such as coal and iron ore.5

As the effects of coronavirus continue to impact the markets, contractual counterparties will look to the terms of their contracts where they are unable to perform. One possibility that has already been reported in the LNG markets (and is being discussed in the iron ore markets) is a declaration of force majeure.

This client alert examines common formulations used in force majeure provisions in LNG sale and purchase agreements ("SPAs"), considers the scope of force majeure clauses under English and New York law, and identifies points that clients should consider when negotiating and seeking to enforce force majeure clauses.

Force Majeure Clauses in LNG Sale and Purchase Agreements

The concept of a communicable disease crisis (we address the distinction between "epidemics" and "pandemics" below) is sometimes included in force majeure clauses in LNG SPAs and has been seen in contracts for delivery into various global markets, including Europe and Asia. Where included, however, it is typically still set out as part of a non-exhaustive list of events which may constitute force majeure provided that the general requirements for force majeure are also met. These usually require performance to have been prevented, hindered (or impaired), or delayed due to an event not within the reasonable control of the party seeking to claim force majeure, acting as a reasonable and prudent operator. They may also require that the event be unforeseen and that the claiming party has endeavoured to overcome or to mitigate the force majeure event, using reasonable diligence. In addition, some LNG SPAs require the event to have affected the relevant facilities in a specific way, such that the facilities are damaged or not capable of being operated due to the relevant event, in order for force majeure to be available as a remedy. Finally, since a force majeure clause is typically drafted as a general test with (more often than not) a non-exhaustive list of examples, the LNG SPA will contain a long list of excluded events (such as financial hardship, lack of demand or economic downturns). These types of qualifiers and exclusions mean that the occurrence of an epidemic, on its own, may not trigger force majeure relief.

References to "quarantine restrictions" are also sometimes included in non-exhaustive lists of force majeure events. Whilst we expect such clauses were likely intended to cover the quarantine of vessels, it remains to be seen whether this may also be relied upon where a party is unable to operate a facility due to quarantine restrictions affecting its workforce.

Under LNG SPAs there may also be limitations on the period or the quantities of LNG in...