Legal consequences of coronavirus outbreak on contracts: force majeure and frustration

Novel Coronavirus, also known as 2019-nCoV, Wuhan Coronavirus and most recently re-named COVID-19, was first notified to the World Health Organisation (WHO) in December 2019. Since then the WHO has declared COVID-19 a "public health emergency of international concern", however, at this stage it is yet to formally classify the pathogen as a pandemic.

Despite this, many nation states have reacted with robust mitigation measures, including closing borders, implementing a range of travel bans and engaging a myriad of internal domestic health and wellbeing procedures.

We are already seeing impacts of COVID-19 (and the mitigation measures), on domestic and international trade and commerce, capital flows, tourism, and migration. As a result, our firm is receiving questions about the contractual rights (force majeure) and common law / statutory rights (frustration) available to deal with the consequences of these mitigation measures and COVID-19. We expect these issues to intensify.

The outbreak

Since its initial notification, COVID-19 has spread from the Hubei province within China to over 30 other countries including Australia, Japan, the United Kingdom, Russia, France, Germany and the United States.

At this time globally, COVID-19 has infected more than 70,000 people and has caused more than 1,800 deaths. Recent media reports have suggested that two-thirds of the world population could ultimately be affected.1 This analysis is dynamic and changing daily. At this point, there is no vaccine, the timelines for one range from six months, to perhaps one-year to 18 months.

Economic Impact

While parallels are being drawn to the previous outbreaks of sudden acute respiratory syndrome (SARS) in 2003 and the influenza H1N1-2009, each of which had profound short term impacts, there are signs that COVID-19 may ignite significantly greater impacts (economically, socially and politically).

In a world where markets and economies are intrinsically linked, where corporations and supply chains operate across hundreds of borders, and where the world is connected financially, digitally and socially like never before, a pandemic (or anything close to that) presents as a significant financial and economic risk.

In 2006, the World Bank forecast that a pandemic could reduce world gross domestic product by around 5%2. The SARS outbreak is thought to have wiped 1% from China's GDP in 20033.

Surely, in 2020, a pandemic that has its epicentre in China - which has already resulted in the quarantine of approximately 60 million people - is likely to have an even greater global impact, particularly when (according to the IMF) as of 2019 China accounted for 39% of global economic expansion4? In Australia the impact may be even more marked, with the Asia-Pacific region accounting for over 70% of Australia's two-way trade5.

Impacted sectors

Significant markets that have been, and will continue to be, directly and immediately impacted include6:

Tourism: DFAT figures revealed that Chinese tourists spent A$11.3 billion during their Australian holidays in 2017-18. Education: International students bring A$32.4 billion to the Australian economy (or 8 per cent of the nation's exports). Commodities exports: Iron ore and coal are Australia's key exports, together worth more than A$120 billion (being 30 per cent of what is sold to foreign countries). These are key commodities purchased by China. As economic activity slows, so too will forward orders. In addition to markets, it is clear that there are already impacts on:

Productivity: There will be knock-on effects due to absenteeism and difficulties due to damaged supply lines. These impacts will be felt in various sectors. By way of example, we...