Coronavirus and Force Majeure

It has been widely reported that LNG receivers in China have recently declared force majeure on LNG contracts due to disruptions caused by the 2019 novel coronavirus (2019-nCoV) which has now been given the official name COVID-19 (“novel coronavirus”). This was done after force majeure certificates were issued from the China Council for the Promotion of International Trade (“CCPIT”), with the approval of China’s Ministry of Commerce.

News sources all over the world have reported on the impact the novel coronavirus has had on global trade and shipping. Reports say that five LNG cargoes headed for China have been diverted or are idling off-shore near China. As many as 50 cargoes, or 70 percent of the total imports for this month into China are reported to be at risk due to the lack of demand for LNG (and all fuels), as quarantine restrictions stunt the use of materials in China, along with a struggle to staff ports across the country. This seems to be a case of history repeating itself – during the SARS epidemic in 2002, the global demand for oil hit a low, particularly in the jet fuel sector.

Since the first reported outbreak of the novel coronavirus at the end of December 2019, there have been more than 40,000 confirmed infections worldwide and counting. On 30 January 2019, WHO declared the novel coronavirus a global emergency, with China putting its cities on lockdown to help reduce the spread of the virus.

Coronavirus – A force majeure event?

In general terms, force majeure operates so that a party is excused from its contractual obligations on the basis that performance is not possible due to circumstances beyond its control. Each force majeure clause will vary from contract to contract and will depend on the wording of the specific provision. Additionally, its effect will depend upon which jurisdiction governs the contract. However, four elements are commonly required to be satisfied in order for the clause to be engaged.

They include:

  • There must be an occurrence of a force majeure event; and
  • The party wishing to rely upon the clause must have been prevented, hindered or delayed by reason of that event; and
  • The non-performance of that party was due to circumstances beyond the parties control; and
  • There were no reasonable steps that the parties could have taken to avoid or mitigate the event or its consequences.

The force majeure provision in LNG SPAs/Master SPAs often expressly include “epidemic” or “epidemic and quarantine restriction”. In those cases, a party will try to rely on that force majeure clause due to the effects of the novel coronavirus. While there is no legal definition on what amounts to an “epidemic”, WHO has recently declared the outbreak as, “an epidemic with multiple locations”. Such a declaration, combined with the certificates issued by the CCPIT, is helpful evidence to anyone looking to show that the novel coronavirus can be classified as an epidemic for the purposes of operating a force majeure clause. This may relieve buyers and sellers from liability, and in some specific cases may give them the right to terminate or suspend duties under the contract.

If there is not an express reference to “epidemic” in the clause, then force majeure events such as “strike, lockout, labour dispute or other industrial disturbance” or “an act or order … of the Governmental Authority that will prevent, impede or delay the Affected parties performance” may be sufficient. This is especially so in circumstances where the CCPIT has issued force majeure certificates. Even if such wording is not included in the clause, the “Act of God” sweep up which is often found in these types of clauses may also cover the situation.

Applying Force Majeure to recent virus outbreaks

This is not the first time the world has seen a large scale virus interrupt and have an effect on business. In 2014, the outbreak of the Ebola virus in West Africa resulted in a range of contracts being terminated under force majeure clauses as a means of being precautionary toward risks exposed by such events. In 2003, the SARS virus was contracted by around 8,000 people, having dramatic effects on trade due to the operation of force majeure clauses. Since that time, we note that numerous Chinese courts have held that the SARS virus was a valid force majeure event: [2015] Tong Zhong Min Er Zhong Zi No. 00030; [2016] Zui Gao Fa Min Zai No. 220.

In comparison, the novel coronavirus has been contracted by over three times as many people as the SARS virus, and, like the Ebola virus, has been declared an international emergency by WHO. By analogy, therefore, we would expect there to be persuasive arguments under many of the force majeure provisions in the market, that the novel coronavirus is a force majeure event.

Interestingly, it has been reported that some sellers have rejected the declaration of force majeure. It may be that these sellers believe that receivers are simply wishing to profit from lower LNG prices, and therefore falsely calling on the operation of a force majeure clause to terminate contracts with higher prices. It is well established under English law that economic or market changes affecting the profitability of a contract is not a force majeure event: Thames Valley Power Ltd v Total Gas & Power Ltd [2005] EWHC 2208 (Comm).

This may well be an angle for sellers to pursue further where their contracts are disrupted by the coronavirus outbreak. Discovery/disclosure is likely to be needed to assess whether the outbreak has actually impacted a particular buyer’s operations or whether the buyer is simply relying on the epidemic as a cover for walking away from higher priced contracts. One could also challenge whether force majeure certificates issued by governmental, or quasi-governmental authorities such as CCPIT are sufficient evidence of a force majeure events in circumstances where state owned enterprises stand to gain from the issuance of those certificates.

The practical implications 

If it is determined that the force majeure clause was incorrectly relied upon, then the original buyer will likely be liable pursuant to the failure to take regime in the SPA. If so, sellers will probably claim damages relating to cargo value losses (including boil-off) and the shipping costs incurred, subject to any caps or specific recovery provisions in the SPA. Buyers, therefore, have to be confident when relying upon a force majeure clause.

Regardless of whether the receiver is legally entitled to rely upon the force majeure clause, sellers will not be able to discharge the cargo at its scheduled port and will need to find an alternative buyer (or wait off-shore for the issue to be resolved). In a slumping LNG market, this could be particularly difficult.

The situation may also have significant implications on sellers from a shipping perspective particularly if they have chartered a LNG carrier on a trip time or (one voyage) short term charter for the cargo in question.  Some long term time charters will contain force majeure clauses that can be relied upon by both parties in order to protect against situations like the effects of the novel coronavirus however, where the sellers have the ship on long-term charter, they are not at risk of breach in this situation. They can simply use the ship to deliver to an alternative buyer and continue to pay hire.

In contrast, in the context of a trip time or (one voyage) short term charters, having a vessel waiting while another buyer is found will mean that there might be a late redelivery of the vessel by charterers. For example, if a charter is for a period of 20 days +/- 2 days (being the expected duration of the voyage) and at the discharge port the buyers refuse to take the cargo, the likelihood is that the vessel will be unable to be redelivered to owners by the contractual redelivery date.

In this case, charterers may be able to rely upon the exceptions clause which is generally found in time charters. The standard form exceptions clause states that neither owners or charterers shall be liable for any loss or damage or delay or failure in performance arising or resulting from a number of incidents, including an act of God, quarantine restrictions and restraints of labour. As such, exceptions clauses do not mention epidemics expressly and are not “back-to-back” with a typical force majeure clause in a SPA. This might leave charterers exposed for late redelivery in the circumstances of a cargo being rejected due to novel coronavirus.

To defend a late redelivery claim, charterers may also seek to rely on the final voyage clause which is found in most time charters. This will commonly provide charterers a degree of flexibility in relation to the final voyage of a long-term charterparty. A commercial tribunal may be persuaded by arguments that the same flexibility should exist for short term charters incorporating a similar provision. Floyd Zadkovich will be publishing another article shortly on final voyage clauses in trip time and (one voyage) short term time charters.

Finally, it should also be noted that ship owners need to be careful because vessels may be quarantined following a call at a port affected by coronavirus.  This is likely to be an off-hire event under a charterparty. Accordingly, to mitigate this risk, owners may refuse to call at such ports on the basis they are  unsafe pursuant to the charter provisions. It is uncertain under English law if the virus will qualify a port to be unsafe, and the threshold would probably be high to satisfy a tribunal that this is the case. At the peak of the Ebola virus many ports in infected areas remained open and operated as usual, suggesting that the novel coronavirus may not allow an owner to reject orders to infected areas.

Find out more about coronavirus and force majeure

The novel coronavirus leaves the LNG trading and shipping market in a precarious and uncertain position. If you have any questions relating to the novel coronavirus in the context of LNG, please contact Damon Thompson.

This article is to be considered general commentary only. This is not to be relied upon as legal advice for any particular circumstances.