Does Coronavirus Justify Disruption of Delivery?
6 March 2020
Restructuring & Insolvency teams of Hannes Snellman Helsinki and Stockholm recently spent a couple of days in London visiting local law, auditing, and advisory firms. During the visits, there was one topic that could not be avoided: the impact of coronavirus on the global economy. At the same time, Brexit, which has dominated the discussions in recent months, was only briefly touched upon.
It is inevitable that the outbreak and spread of coronavirus (COVID-19) will have a considerable impact on the global manufacturing, transportation, and cross-border supply chains. Companies that are negotiating commercial agreements today should consider - and many of them have already done so - the appropriate allocation of risk and consequences of further business deterioration as a result of the coronavirus outbreak.
In addition to the anticipated substantial economic consequences, there are many challenging legal issues related to coronavirus that all companies should take into consideration in their operations and decision-making processes. Companies should, among other things, analyse if coronavirus constitutes a force majeure (in Finnish: suorituseste) or a financial hardship (in Finnish: taloudellinen liikavaikeus) preventing the performance of contractual obligations either by the company itself or its contracting party.
Force majeure refers to an impediment to the performance of a contract as a result of an unforeseeable event which has occurred only after the conclusion of the contract and which is beyond the control or influence of the contracting parties. The purpose of force majeure is to release the party from contractual liability, if it has become impossible or unreasonably difficult to execute the contract because of the occurrence of an event constituting force majeure. In a supply relationship, the question is whether the supplier is released from its duty to supply at the agreed time or within the agreed time frame due to an unforeseeable event.
Before analysing the potential existence of a force majeure event, the relevant contract needs to be closely reviewed. The first thing to find out is whether there is an express force majeure clause in the contract and what law governs the contract. Generally, most commercial supply agreements do include force majeure clauses. However, the content and scope of such clauses vary considerably. Should coronavirus expressly, or for instance diseases in general, be defined as force majeure, a party claiming the existence of an impediment would be well positioned. The matter becomes much more complicated if no such clause is included in the contract.
Even in the absence of an express force majeure clause, Finnish law still recognises force majeure as a general legal principle. In such a scenario, an essential criterion in the analysis of the existence of force majeure is whether the performance of the contract has been rendered impossible due to coronavirus. However, force majeure does not always require that the performance of the contract be absolutely impossible, but rather a situation in which the performance of the contract would require a completely disproportionate sacrifice of resources could also be sufficient.
Thus, if, as a result of coronavirus, the delivery is actually disrupted, it may be considered an unforeseeable event constituting force majeure even if no directly applicable clause is included in the contract. For instance, if a factory of the supplier’s sub-contractor is closed down because of a regulation imposed by a state authority due to an outbreak of coronavirus, such a scenario could arguably constitute a force majeure event. However, there are obviously also some valid arguments to the contrary.
Regardless of whether the contract so provides, the party claiming force majeure is always required to notify the contracting party of the disruption of delivery as soon as reasonably possible. Moreover, the same party is always obliged to take due precautions for possible interruptions that may harm the contractual performance and to mitigate, to the extent possible, the implications of force majeure.
Under Finnish law, it may also be possible for a supplier to claim financial hardship preventing the performance of the contract. It is not always possible to draw a distinction between financial hardship and force majeure. Financial hardship refers to a change in the circumstances, meaning that the contractual performance would cause significant expenses for the seller that could not have been foreseen at the time of conclusion of the agreement even if the performance (i.e. delivery) would still, as such, be possible. Unlike in the case of force majeure, financial hardship does not give the seller the right to completely waive its contractual liability, but it may require that the original agreement be amended. However, amending commercial agreements concluded by two business entities is generally speaking rather rare.
Parties seeking to serve a notice of force majeure or financial hardship or parties on whom such a notice is sought to be served should also consider the effect the notice is likely to have on other agreements or legal obligations, such as financing agreements and disclosure obligations. Furthermore, it is important to contact the party’s insurance company without delay and to investigate whether any insurance covers the losses arising from the party’s inability to meet its obligations as a result of the coronavirus outbreak. Possible coverage will be determined based on the policy’s express terms and conditions, which should be carefully reviewed.
As a conclusion, it can be said that when a party to a contract is faced with the fact that the coronavirus outbreak has already resulted or there is a risk that it will result in a disruption of delivery, the supplier must take immediate action and thoroughly analyse the factual consequences in line with the legal framework. Also, the party who is notified by the contracting party of a force majeure event or a financial hardship should properly analyse, together with its counsel, whether the notice is justified or not. In fact, all the companies concerned should undertake a review under their various agreements, financial instruments, and applicable law, not forgetting the notice requirements, the potential impact on other agreements, insurance coverage, and disclosure.
The coming weeks and months will show how serious an impact coronavirus will have on the cross-border supply chains. All companies should in any case make sure that they are well prepared for any possible future delivery disruptions.