The repercussions of COVID-19 on the world economy are proving to be of significant concern, and the fashion industry is in no way immune. The lockdown of cities and the cancellation of large events means many businesses cannot operate as usual. Governments around the world have started to put in place measures to prevent the spread of the virus, while also working to protect businesses. The Chinese government, for instance, has already issued over 1600 “force majeure” certificates purporting to excuse businesses for failing to uphold their end of their contractual obligations.
The impact on fashion and retail brands – and the retail market more generally – is expected to be significant, with some recent reports suggesting that the fashion industry, alone, could suffer losses of up to $43 billion in 2020. Heavily dependent upon contracts with garment and accessories manufacturers, many of which are located in China and for some luxury brands, in Italy, two countries that have been hit hardest by the novel virus.
Given the current landscape, supply chain issues are front of mind for many businesses. At the center of this current – and confusing – reality is a legal doctrine called force majeure. In accordance with force majeure provisions, which are commonly found in contracts (usually as boilerplate terms included in the case of emergency), a party may be relieved from liability for non-performance if circumstances beyond the party’s control prevent the party from fulfilling its obligations under a contract.
Much like contract law, itself, force majeure operates differently throughout the world. As a result, whether a brand can rely on – or dispute another party’s reliance on – a force majeure clause will depend very much on the jurisdiction of the parties and the terms of the contract (if any) they entered into.
The following is a high-level overview of how force majeure provisions may play out in the United Kingdom, Italy, and China (with a U.S.-specific article to follow) …
The position in the United Kingdom
Unlike civil law jurisdictions, there is no general doctrine of force majeure in English law so if a contract does not have an express force majeure clause then a brand 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, a brand has a contract which contains a force majeure clause then provided the clause is sufficiently certain, it may be able to use it if the impact of coronavirus on its business means it is unable to perform some of its 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.
As for whether a standard force majeure clause would cover coronavirus is up for debate. Force majeure clauses typically list a number of force majeure events. As the coronavirus outbreak is new, these lists will probably not include this. However, a list may refer to events, such as “disease” or “epidemic,” which would likely capture this outbreak. Moreover, 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. This means that the brand aiming to invoke the clause must prove that: one of the force majeure events has occurred and it is beyond the brand’s control; that the brand has been prevented, hindered or delayed from performing some or all of its contractual obligations because of the coronavirus; and there were no reasonable steps it 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.
As such, it is arguable 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 are force majeure events regulated in China?
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 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 defense 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 defense, 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.
Ultimately and no matter the jurisdiction, the applicability of force majeure clauses must be determined on a case-by-case basis.
Withersworldwide is an international law firm headquartered in London, United Kingdom, with offices in the United States, Europe, Asia, and the Caribbean. (Edits courtesy of TFL)
Share
