“There is a need to balance legal obligations with sensible practicalities, in a scenario which we haven’t really seen before.”
COVID-19: better known as the coronavirus has been the latest concern of many people around the world. We would not delve into the medical impact, the symptoms or the ‘cure’ to such virus, but rather focus on the economical impact, the legal risks and protection measures which may be taken by businesses.
The coronavirus is not just a speculation. At the end of January, the World Health Organisation declared the outbreak of the coronavirus as a public health emergency. Since the outbreak, widespread disruption has been caused. You do not even have to justify whether such chaos is needed in an affected country, but measures were/are being taken which led/are leading to such disruption.
From a legal perspective this means that force majeure claims may arise.
Overview: Force Majeure relates to circumstances which are not foreseeable, and which prevent someone from fulfilling a control and/or obligation. Legally this means that in such instances, there can be a request for an exemption from certain obligations. So, what do you get? – The right to object in cases of exceptional circumstances.
When there is a contract, therefore it might be claimed that it was impossible to perform. A clause of force majeure functions to delay or absolve one or both parties to a contract of all or part performance of their obligations on the manifestation of certain events which are beyond their control. Such events may include acts of God, natural disasters, pandemics/ epidemics, war, strikes and actions taken by governments.
So, the question that may arise here would be whether or not the coronavirus will constitute a force majeure event. Hint: It Depends. The constitution of a force majeure events depends on the relevant contractual language and understanding.
Arbitral termination of a contract
If the outbreak of the coronavirus constitutes a force majeure event under a working contract, employers could be faced with contractors, sub-contractors and suppliers, claiming they are entitled to invoke provisions in their contracts and to suspend the performance thereof.
When it comes to contracts of work, Maltese Law, in particular, Article 1640(1) of the Civil Code states that, ‘it shall be lawful for the employer to dissolve the contract, even though the work has been commenced’.
Moreover, sub-article (3), reads as follows:
‘If the employer has valid reason for the dissolution, he is to pay the contractor only such sum which shall not exceed the expenses and work of the contractor, after taking into consideration the usefulness of such expenses and work to the employer as well as any damages which he may have suffered’.
Therefore, the court has 3 remedies at its disposal which it can grant to the creditor:
- authorise the creditor to carry out the primary obligations itself, at the expense of the debtor;
- order the debtor to fulfil the primary obligations itself; or
- payment for the damages suffered, in terms of losses incurred and profits which could have been made had the obligations been fulfilled.
If the contract contains cost protection measures that relate to force majeure events, employers could similarly be challenged with claims arising from the effect of the outbreak.
Depending on the terms of the agreement, the affected party may be under an obligation to mitigate the effects of the event, sourcing materials or workers from elsewhere.
Coronavirus – Claims for Force Majeure – Contracts
The China Council for the Promotion of International Trade, which is a trade body founded in 1952 announced that it shall issue force majeure certificates. Such certificates may be used in legitimising claims for force majeure. The burden, however, remains on the party claiming force majeure.
Considering the coronavirus, this means that party making such claim has the onus of proof in proving that the coronavirus falls within the wording of the contract and that the non-performance of a contract was a result of the outbreak. Such party needs to also show that there were no other means to perform its obligations and that all reasonable steps were taken to ensure the performance of the contract.
What to do now?
As the coronavirus disruption is set to continue all around the globe, companies should now:
- evaluate all contracts in which force majeure may be a reason – whether used by or against a company;
- consider time limits and notice for using a force majeure clause;
- consider possible alternative ways to perform contractual obligations and take appropriate mitigation steps;
- collect all evidence of disruption, including documents proving delay / cancellation;
- when and if entering into new contracts, clauses should sufficiently cover eventualities such as the coronavirus outbreak; and
- consider whether insurance cover applies.
Conclusion (and a Tip for your Company)
Yes, as an employer you should be concerned about protective measures which your company can take to prevent any sort of virus and not only the coronavirus, such as giving advice to the employees to clean and disinfect frequently touched objects and surfaces or to wash their hands often. It might sound obvious, but this is an important routine for every company. However, legally, as a company you should take care of your contracts and seek advice to minimise the impact of the outbreak on your company. In Malta, we might see such situations as being farfetched however, the coronavirus is a concern for many people around the world, and not only because of its medical implications but also of the legal implications thereof.
Disclaimer: The above-mentioned article is simply based on independent research carried out by Dr. Werner and Partner and cannot constitute any form of legal advice. If you would like to meet up with any of our representatives to seek further information, please contact us for an appointment.