March 4, 2020

Legal consequences due to the Covid-19 virus

The ongoing spread of the Covid-19 virus is having an impact on the health and lives of many. It may also have legal implications, among them the possibility of invoking force majeure clauses and other extraordinary grounds for relief in existing agreements, insurance policy impacts etc. Mannheimer Swartling has a dedicated taskforce which is currently advising on legal and strategical matters related to the Covid-19 outbreak. This information note provides a few initial pointers and areas to be aware of in the present situation.

Applicability of force majeure
Whether the spread of the Covid-19 virus and the resulting consequences are grounds for force majeure or not must be assessed on a case-by-case basis and it depends on several different circumstances, inter alia:

  • the wording of the force majeure clause, e.g. whether events such as epidemics, pandemics, quarantines etc. are mentioned and if the clause has "catch-all" language,
  • applicable law, as the interpretation, application and existence of force majeure as a general principle of law varies between jurisdictions,
  • the concrete underlying cause of a disruption, e.g. direct illness among personnel, governmental or authority decisions due to the virus, shortfall of deliveries from suppliers, transportation shortages etc.,
  • whether there is an actual disruption, e.g. merely increased costs and difficulties to perform are not always sufficient in and of themselves, and
  • the invoking party's possibilities to mitigate the effects, e.g. by using other suppliers, alternate means of performing etc.

As an example, it is not certain that the issuing of "force majeure-certificates" by the China Council for the Promotion of International Trade will entail that force majeure is always at hand. Further, it has also been mentioned in various sources that for agreements concluded after the SARS outbreak in 2003 it can be argued that it has been foreseeable that a similar virus outbreak could occur again, meaning that such a situation might not entitle a party to relief in some jurisdictions. Consequently, when determining the right to invoke force majeure, it is vital to analyse the agreement, applicable law and factual circumstances in each case.

Implications of force majeure
Depending on the wording of the specific force majeure clause and applicable mandatory legislation, a party may e.g. delay performance, be partially excused or entirely relieved from performances. A party could also be entitled to terminate the agreement, if the situation persists. The parties may also agree on renegotiation to create a solution. Furthermore, some agreements contain so called "hardship clauses" which allow for renegotiation under certain circumstances.

Absence of force majeure clauses
What will apply in the absence of an explicit contractual regulation of force majeure varies depending on jurisdiction. Under Swedish law, in case of force majeure, it may be possible to apply the principle that a party can be excused for non-performance etc. if unforeseeable events outside the party's control are at hand. Whether this principle should be regarded as generally applicable is however yet to be clarified, and depends on the circumstances in each case. Thus, the absence of a contractual regulation relating to force majeure events leaves the possibility to claim relief uncertain. Depending on the severity of the consequences in the individual case, it is also conceivable that a party who is unable to fulfil their performance requests an adjustment of the contract with reference to the so-called general clause of the Swedish Contracts Act (which requires unconscionability).

Practical suggestions
Irrespective of whether you wish to invoke force majeure or if a counterparty has invoked it, we would recommend to:

  • review what your agreements state in relation to force majeure, including any notification and reporting requirements,
  • analyse applicable legislation in the relevant jurisdiction,
  • consider whether commitments can be fulfilled (wholly or partially) despite the situation, and how,
  • consider potential knock-on effects on other relationships due to the force majeure-situation,
  • review applicable insurance policies for the possibility of compensation and reporting requirements,
  • review if the company has any ongoing processes with local authorities that may be affected,
  • consider publishing necessary stock exchange notifications, and
  • be careful when drafting letters to counterparties and bear in mind that disputes may arise.

If you have questions or want to discuss legal issues relating to the spread of the Covid-19 virus you can always contact your existing relations at the firm, or alternatively contact Niklas Bogefors (niklas.bogefors@msa.se), Christian Pfeiff (christian.pfeiff@msa.se) or Anders Bergsten (anders.bergsten@msa.se), who are members of our Covid-19 taskforce.