Coronavirus — managing interruptions to trading

The impact of the coronavirus has already been devastating. At least 564 people have died and almost 30,000 confirmed cases worldwide. Governments, in China and around the world, have responded with extreme measures to contain the spread of the virus. In New Zealand, the Government has temporarily banned entry into New Zealand by any foreign travellers who leave from, or transit through, China.

The threat to life and wellbeing is naturally the most pressing concern. However, global economic disruption is also a key concern given the increasingly integrated nature of global supply chains. Hyundai has been forced to temporarily cease production at its factories in South Korea because of a shortage of Chinese parts. And Apple’s Chinese manufacturer, Foxconn, has closed its Zhengzhou factory, potentially delaying release of the new iPhone.

The effect on New Zealand is particularly strong, given that China has now become our top trading partner. We expect many New Zealand companies with suppliers or customers in China to be adversely affected by the response to the coronavirus. These companies will be looking to their contractual and insurance positions in terms of events outside their control.

Supply contracts and force majeure clauses

Companies should pay close attention to the wording of their supply contracts. Disruptions caused by the novel coronavirus—or, rather, government responses to it—may well be covered by force majeure clauses.  These provisions enable a party to escape liability for inability to meet their obligations where that non-performance was caused by an event outside the party’s control. They can cover ‘acts of government' which prevent a party from meeting their obligations.

However, whether the contract in question provides relief will very much turn on the words used and their interpretation. Generically defined force majeure clauses, with no reference to particular events, may well not provide cover as typically courts have interpreted these narrowly. A standard force majeure clause might read as follows:

Neither party will be liable for any failure or delay in the performance an obligation under this Agreement if that failure or delay is due to a Force Majeure Event and the obligations of either party under this Agreement are suspended to the extent to which they are affected by the relevant event as long as it continues, provided that both parties will take all reasonable steps to minimise and work around such an event.

Whether a company is entitled to rely on a force majeure clause will usually turn on the definition of ‘Force Majeure Event' (or equivalent) in the contract. Most contracts will expressly list the circumstances amounting to a force majeure event, for example:

‘Force Majeure Event' means any flood, storm or other natural disaster, fire, labour dispute, war, riot or terrorism, act of God, act of government or state, communications or equipment failure or any other circumstances beyond the parties’ reasonable control.

Businesses looking to invoke force majeure should consider carefully whether they are able to do so under their particular contract. If businesses fail to meet their obligations and cannot rely on force majeure, they could be in breach of contract, risk termination and potentially damages claims.  If businesses successfully invoke force majeure, they will need to ensure compliance with any other connected obligations, such as giving prompt and correct notice and mitigating any loss that might otherwise be suffered.

On the other hand, businesses seeking to recover losses for non-performance by companies affected by the novel coronavirus should review the ambit of any force majeure clauses in their agreements. Careful consideration of the protections afforded to the defaulting party will inform the extent to which they can push for performance or recover damages for losses suffered.

Possible insurance cover

Even if a company can escape a contractual obligation by relying on a force majeure clause, in many cases this will not fully restore the company to the position it would have been in absent the coronavirus.

For example, a New Zealand manufacturer which relies upon imported Chinese components might avoid liability for paying for those parts and be prevented from pursuing the supplier for non-performance. But the inability to manufacture an end product may well cause loss far beyond the cost of the relevant inputs, including lost profits.

In such cases, businesses should look closely at their insurance cover. There may well be cover available under a business interruption policy.

If you have any questions in relation to these issues or have other concerns about your business’s position in relation to the novel coronavirus, please contact one of our experts:

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