The effect of the corona virus on business agreements

2020-03-15

Newsfeeds all over the world are overflowing with updates on the effects of the covid-19 virus (the corona virus). The World Health Organization (WHO) has declared that the outbreak constitutes a public health emergency of international concern. The epidemic has already taken a toll on the global economy. Thankfully, the number of new cases in China – where the epidemic first started – has slowed down during the past few weeks. On the other hand, reports of new infections outside of China have accelerated. According to the Swedish Public Health Authority, by 10^th of March 2020, Sweden had 326 reported cases of infection by the corona virus.

The outbreak of the corona virus can lead to concerns and issues for a company in several different areas. One is the ability of companies to comply with their agreements. In this article, we address whether the corona virus can be classed as a force majeure situation that releases a contracting party from liability.

Can a contracting party claim force majeure due to the outbreak of the corona virus to avoid liability?

 The outbreak of the corona virus came as a shock to all of us and it has affected international trade in numerous ways. Companies that operate in high-risk areas are at particular risk of being affected by the consequences. For example, companies that manufacture goods in China for the European market have encountered supply problems as the Chinese state has shut down factories to prevent the spread of the virus.

“Force majeure” is a common clause in commercial contracts that essentially frees both parties from liability when an extraordinary event or circumstance beyond the control of the parties, such as a war, strike or epidemic, occurs. What constitutes force majeure is in most cases agreed by the contracting parties and must be assessed according to the wording of the contract.

But what happens – according to Swedish law – when there is no force majeure clause in a contract? Below we analyse the issue from the perspective of the seller of goods and the Swedish Sales of Goods Act 1990:931 (the Act).

According to section 27 of the Act  a seller of goods is able to claim force majeure if the following four requirements are met:

1. The seller has been unable to deliver the goods on time, i.e., the seller must show that it is effectively impossible to perform the contractual duties.
2. The delay must be due to an obstacle outside the seller’s control. Such obstacles fall within the scope of what is commonly known as ”force majeure”, for example war, strike, different types of government prohibitions, seizures and epidemics.
3. The obstacle must be of such a nature that the seller could not reasonably be expected to have foreseen the obstacle at the time of purchase.
4. The seller could not reasonably have avoided or overcome the obstacle through any positive action.

In other words, the Act provides businesses in certain circumstances with the opportunity to claim the principle of force majeure, even if there is no force majeure clause in the sales contract. Regarding the outbreak of the corona virus, provided that it is impossible for the company to perform its contractual duties, for example due to the concrete measures and restrictions in China and in other jurisdictions related to the corona virus outbreak, in our view the company should be able to claim force majeure, as such measures are obstacles outside of its control. However, it is never without risk to claim force majeure to avoid liability and the force majeure principle under the Act is given a strict interpretation.

It is important to note that, as stated in the Act, this applies only to agreements formed before the parties had any knowledge about the outbreak of the corona virus (see point 3 above). When entering into new agreements, we advise companies to carefully consider the effects of the corona virus outbreak on the performance of their obligations under the agreement.

Final comments

In this article, we consider just one of the issues that can arise as a result of the outbreak of the corona virus. We are available to provide legal advice on how your company should manage any corona virus related issues in all legal areas, including issues regarding labour law and insurance law, reviewing commercial contracts, analysing the consequences of cancelled events and advising how to best handle procurement in emergency situations, so to help ensure that your business is well placed to survive these difficult times and to thrive once the corona virus has been contained.