Businesses around the world are affected by the COVID-19 outbreak.
The fact that manufacturing has ground to a halt in China is likely to have an impact on the global supply chain along with a consequential impact on construction projects and other downstream industries. The disruption may spread indirectly to other markets, including key commodity markets like copper, iron ore, zinc, nickel, lithium, oil and LNG.
The shipping industry is likely to be impacted in several ways: not only through disruption to voyages to and from China, but also from delays in other countries as a result of quarantine and port checks due to cases, or suspected cases, of COVID-19 amongst crew on board vessels. Delivery of cargo may be delayed, or cargo may need to be discharged at alternative ports, with significant logistical and insurance implications. The construction of newbuilding vessels and scheduled ship repairs are also being delayed which could adversely affect operating schedules.
We consider below some of the relevant contractual provisions and risk management strategies which may be invoked in the wake of the crisis.
Does your contract contain a force majeure clause?
Affected parties should consider whether their contracts make provision for force majeure clauses and whether the outbreak falls within the protection offered by the relevant clause. Force majeure events are, broadly speaking, unexpected circumstances outside of a contracting party’s reasonable control that, having arisen, prevent it from performing its contractual obligations.
Release from performance as a result of force majeure is not recognized as a standalone principle under Singapore law. It is therefore a matter for parties to deal with expressly in their contracts and the protection afforded by the clause will depend on the precise drafting. In the event of a dispute as to the scope of the clause, the Singapore courts will apply the usual principles of contractual interpretation.
In the shipbuilding industry, there have already been reports that Chinese yards have declared force majeure under some of their shipbuilding contracts as a result of the delays caused by the outbreak. The force majeure clause and the surrounding circumstances will need to be evaluated on a case by case basis, as will the effect of any resulting disruption in planned employment for the vessel.
Not all contracts will have force majeure provisions: for example charterparties may not have these clauses, although they will contain other provisions specifically drafted to deal with situations where the voyage is affected by an infectious disease (such as the BIMCO Infectious or Contagious Diseases Clause) which
be triggered and/or relevant as a result of the outbreak. These contracts will require additional consideration as to the nature of the impact of the outbreak on the contract and the effect that this might have on the parties.
Can the outbreak amount to frustration of the contract?
Under Singapore law, if a contract becomes impossible to perform as a consequence of the outbreak, it may be open for a party to argue that it has been frustrated. The financial consequences of a contract being frustrated are complicated but the parties are discharged from further performance of their obligations. However, it is very difficult to establish frustration. In particular, it cannot be used (a) where the parties have contractually agreed the consequences of the supervening event, for example, by the use of a force majeure clause, (b) an alternative method of performance is possible, (c) because performance has become more expensive, or (d) because a party has been let down by one of its suppliers.
Implications under funding arrangements
Businesses affected by the outbreak will also need to review their credit agreements with funders to assess the implications under the terms of these agreements. It is likely that funders will require the provision of information under their often widely drafted information undertakings. If the loan is not fully drawn, the parties will be examining whether the circumstances will result in a draw-stop, particularly if force majeure has been triggered under key contracts for the business or project. Ongoing analysis will be required to determine whether any event of default has been triggered.
Practical steps that businesses can take
The potential business disruptions from the outbreak cannot be underestimated given the importance of Chinese exports, labour and demand for goods to the global economy.
Risk management measures which businesses should consider include:
- Inserting express infection disease/epidemic wording into new contracts (and amending existing contracts if possible).
- Checking the terms of existing contracts for protection, including force majeure clauses.
Check insurance arrangements, especially where cargo needs to be delivered to an alternative port.