Coronavirus guidance – how can luxury brands manage commercial risk?

4 March 2020

It has been over a month since the Chinese government announced the outbreak of COVID-19 in the city of Wuhan, and it remains a top story in global news.

This week has seen the spread of the virus into Europe and in particular, into Italy where several small towns in Lombardy and Veneto have been placed in lockdown.

The repercussions of this on businesses and the world economy are already proving to be of significant concern. The lockdown of towns and cancellation of large events means businesses cannot operate as usual. Governments around the world have started to put in place measures to prevent the spread of the virus, and they have also been putting in place measures to protect businesses. For example, the Chinese government has already issued over 1600 ‘force majeure’ certificates purporting to excuse businesses for non-compliance with their contractual obligations. This has left many people wondering whether parties really can rely on the virus outbreak to cancel their contracts without consequence, and for those who have been let down by suppliers, whether they will be left without recourse.

Force majeure operates differently throughout the world. For example, common law jurisdictions (such as the UK) have different rules and considerations compared to civil law jurisdictions (such as Italy). Whether you can rely on, or dispute a party’s reliance on, a force majeure clause will depend very much therefore on where in the world the parties do business and the terms of the contract (if any) entered into between them.

Withers has a long history of looking after Italian interests in the UK and vice versa, particularly in the luxury brands sector which is heavily reliant on both the Chinese manufacturing industry and Asia’s buying power at the consumer level (in 2018 China's luxury goods retail sales value was 111 billion euros). The impact on luxury brands is therefore likely to be significant with some recent reports suggesting that the industry could suffer losses of up to $43 billion in 2020.

Supply chain issues are front of mind for many businesses and in particular whether, and how, a business or individual might be able to avail itself of a force majeure claim (or defend a counterparty’s reliance on it) in England or Italy. We have produced a series of other articles for other industry specific concerns, links to which feature at the end of this article.

The position in the UK

Unlike civil law jurisdictions, there is no general doctrine of force majeure in English law so if your contract does not have an express force majeure clause then you will not be able to claim it.

Alternative options are also limited, though a party may seek to use the common law doctrine of ‘frustration’.

If, however, you have a contract which contains a force majeure clause then provided the clause is sufficiently certain, you may be able to use it if the impact of coronavirus on your business means you are unable to perform some of your obligations under that contract.

A standard force majeure clause in an English law contract generally allows one or both parties, on the occurrence of certain events, to cancel the contract, or be excused from or entitled to delay performance of some or all of its contractual obligations.

Would a standard force majeure clause cover coronavirus?

Force majeure clauses typically list a number of force majeure events. As the coronavirus outbreak is new, your list will probably not include this. Your list may refer events such as ‘disease’ or ‘epidemic’ which would likely capture this outbreak.

Force majeure clauses generally contain some sweep-up words such as ‘or any other causes beyond our control’ which may be a good way to rely on the clause in the absence of a defined force majeure event covering coronavirus.

The burden of proof is on the party seeking to rely on the force majeure clause. You must therefore prove:

  1. one of the force majeure events has occurred which is beyond your control;
  2. that you have been prevented, hindered or delayed from performing some or all of your contractual obligations because of coronavirus; and
  3. there were no reasonable steps you could have taken to avoid or mitigate coronavirus or its consequences.

What is the position in Italy?

As far as Italian law is concerned, although the specific concept of force majeure is not expressly regulated by the Civil Code, it is arguably covered by Article 1256, which governs the broader category of ‘Unforeseen Circumstances’ which is applicable to all contracts.

Case law in Italy also defines force majeure as “an unforeseeable, unavoidable external event not attributable to the party which consists of a force to which it is not possible to oppose, whose effects cannot be removed and which prevents the technical execution of the performance”, including natural events and acts of the Public Administration.

It is arguable therefore that the emergency presented by the Coronavirus, and the consequent administrative measures put in place by the Italian government and public bodies, have made it impossible for some people and business to comply with their contractual obligations due to force majeure. This opens the door to a number of solutions that may prove to be of a temporary or definitive nature.

The main challenge under Italian law relates to the burden of proof – namely, it is the contract breaker (i.e. the person for whom performance of the service has become impossible) who has to prove that force majeure applies. Each case will turn on its own facts and merits and therefore requires specific legal advice in order to verify (and, therefore, prove) whether the impact of the Coronavirus actually made the contractual performance impossible, as well as to assess the outcome (and costs) of any litigation that might ensue.

How will it impact your business in Hong Kong?

Under Hong Kong law, force majeure applies only if such a clause had been included in a contract. The term "force majeure" has to be expressly defined (often by setting out a list of force majeure events) to take effect. Parties therefore need to express it specifically in their contracts and the protection afforded by the clause will depend on the precise drafting.

Even if epidemics or pandemics of a general description are covered as force majeure events, the affected party still has to prove (depending on the precise drafting of the contract) that:

  • it has been "prevented" from performing the obligations under the contract •its non-performance or default was solely caused by the force majeure event or circumstances beyond its control but through the fault or negligence of the affected party; and
  • there were no reasonable steps that one could have taken to avoid or mitigate the event or its consequences.

Finally, businesses should also bear in mind the consequences of invoking a force majeure clause. Depending on the actual wording, most force majeure clauses only suspend performance of the affected party's obligations to perform for so long as the relevant event subsists with an extension of time to perform, whereas others may provide for variation of terms or termination of contract.

Are there alternative clauses that businesses may rely on to absolve themselves of the liability in Hong Kong?

The principle of frustration may be relevant when a significant change of circumstances renders the performance of a contract radically different from the obligations originally undertaken. Such a change in circumstances must be due to an external event or change of situation that occurs through no fault fault of the affected party. It is worth noting that the threshold for frustration is even higher than that of force majeure.

In terms of the parties' contractual obligations under a lease agreement, case law in Hong Kong says that the affected party needs to prove that the frustrating event is expected to last at least for a long period of the unexpired term of the lease. For example, the closure order made by the Hong Kong authorities in response to the SARS epidemic lasted for only 10 days out of a two year lease and was not considered capable of frustrating the lease.

If a contract has been frustrated, the parties are excused from their future obligations. However, the doctrine of frustration does not rescind the contract nor restore the parties to their respective pre-contract positions.

How are force majeure events regulated in China under PRC laws?

The starting point is always the relevant provisions in the contracts.

In the absence of expressed contractual provisions, whether an event can be considered to be force majeure depends on the relevant PRC laws and regulations such as the General Principles of Civil Law and the PRC Contract Law. Both of these define force majeure as a circumstance that is "objectively unforeseeable, unavoidable, and insurmountable". A party prevented from performing a contractual obligation because of a force majeure event can be partially or fully exempted from contractual liability in proportion to the circumstances of the force majeure. Furthermore, either the defaulting or the innocent party can rescind the commercial contract if the force majeure event renders the purpose of the contract unachievable.

Whereas the Supreme People’s Court ("SPC") has not yet issued opinions or judicial interpretation on civil and commercial trials related to the coronavirus outbreak, it confirmed in 2003 that the legal rules governing force majeure are applicable when litigants asserted that they were prevented from performing relevant contracts as a result of the SARS pandemic or consequential measures imposed by the government. The People's High Courts in Shanghai and Zhejiang have recently confirmed that force majeure could apply in similar terms with respect to the COVID-19 outbreak.

That said, the party invoking the defence still has to prove the actual effects of the force majeure events. Case reports in or shortly after 2003 showed that many litigants failed to establish the defence, as the relevant government actions only partially affected their business activities and did not directly trigger the non-fulfillment. In addition, the party seeking to invoke force majeure also needs to promptly notify the other party of its inability to perform and furnish evidence proving the force occurrence and existence of force majeure.

The China Council for the Promotion of International Trade (CCPIT) is now offering force majeure certificates to companies struggling to combat the impact of the COVID-19 outbreak on their business with oversea partners, and CCPIT's certificates has generally been well accepted internationally in the past.

What should you do next?

Undoubtedly, the virus has caused significant disruption to businesses and supply chains, but breaking contracts without consequence by relying on the coronavirus is unlikely to be as easy as it sounds.

Whether you can legitimately claim force majeure will depend on a number of things including the wording of your contract, the law which governs your relationship and the specific facts of your case.

We recommend seeking advice as early as possible so you understand the options available to you, so that you can take swift action where it is needed to protect your business and reputation.

This document (and any information accessed through links in this document) is provided for information purposes only and does not constitute legal advice. Professional legal advice should be obtained before taking or refraining from any action as a result of the contents of this document.


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