Possible Impact Of A Coronavirus Disease (COVID-19) Pandemic On Contractual Obligations

COVID-19 has been declared a Public Health Emergency of International Concern by the World Health Organisation (WHO).1 There is now a global reach of the virus.2 What could that mean for existing obligations under contracts governed by laws of English common law jurisdictions such as England & Wales, Hong Kong, Australia, or Singapore?

Contractual obligations in the event of a pandemic

As the global impact of the outbreak worsens, causing disruption to international trade and other commercial activities, the risk of businesses being unable to perform their contractual obligations increases. When a breach of contract arises, the innocent party would normally sue the defaulting party for compensation. However, if the failure to perform the contract is caused by a pandemic, the defaulting party might be relieved by invoking the following as a defence:

the pandemic has triggered the force majeure clause under the contract; or the contract has been frustrated by the pandemic, such that the innocent party will not receive compensation for non-performance of the contract.

The scope and operation of a force majeure clause in the event of a pandemic

The purpose of a force majeure clause is to relieve the defaulting party (or all parties) from performing the contract or the remainder of the contract when an exceptional event or circumstances beyond the reasonable control of the parties prevents or hinders the performance of the contract. Sometimes, a force majeure clause does not seek to relieve the parties from the contract entirely, but only suspend its performance until after that event or circumstances.

There are two ways in which a force majeure clause could cover a pandemic:

the contractual definition of a force majeure event expressly includes a pandemic - adding a pandemic to the list of force majeure events can ensure clarity as to whether a viral outbreak would trigger a force majeure clause in a contract. In that situation, if the WHO or a state agency declares the outbreak to be a pandemic, there will usually be no question that a force majeure event has occurred; or the force majeure clause covers extraordinary events or circumstances beyond the reasonable control of the parties - such general, catch-all wording may be sufficient if it is determined that the factual circumstances caused by the pandemic are beyond the reasonable control of the parties.3 It is also possible that the consequences of or relating to a pandemic (e.g...