Coronavirus Outbreak: Implications for Commercial and Finance Contracts

The coronavirus outbreak (officially known as ‘COVID-19’) that was first reported in Wuhan, China, on 31 December 2019, has been declared by the World Health Organisation as a Public Health Emergency of International Concern. The human cost of the outbreak has been significant and tragically continues.

A number of industries have also been adversely impacted by consequential manufacturing shutdowns, quarantines and export restrictions. In the oil and gas sector, China’s LNG demand has been forecast by the Independent Commodity Intelligence Service (ICIS) to fall by 2.9mtpa in 2020 due to the outbreak, putting strain on LNG import contracts. This has already seen some Chinese buyers of LNG seeking relief under LNG supply contracts by serving force majeure notices on sellers. A notable reduction in oil demand is also predicted. The mining sector is facing employee shortages due to a reliance on Chinese personnel who are restricted from travelling (which extends beyond China itself), which is having a knock-on impact on production in emerging markets. In shipping, port checks and other restrictions are causing substantial costs and delays.

More broadly, commodity prices are already experiencing widespread reductions due to the fall in demand from China, arguably the most important consumer of raw materials for industrial purposes. Meanwhile, the shutdown, or near-shutdown, of hundreds of factories is already having a significant effect on global supply chains, particularly in the technology and motor industries.

In this alert, we consider two key issues:

1. Force majeure under commercial contracts: Assessing whether the outbreak, and the consequential action by governments to contain the outbreak, could constitute force majeure events under a commercial contract and, if so, what contractual relief could be available; and
   
   
2. Covenants and Events of Default triggered in finance documents: Considering whether the outbreak or its effects could trigger a notification obligation, a covenant breach or an event of default pursuant to a finance document.
   
   

The analysis below focuses on the position under English law, but similar considerations apply in other common law jurisdictions, including under New York law.

Please click here for the full client alert: Coronavirus Outbreak: Implications for Commercial and Finance Contracts 

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