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The coronavirus is also infecting international contracts

Businesses prevented by current circumstances from meeting commitments should consider issuing a Force Majeure notice as soon as possible

The coronavirus outbreak is a global event with uncertain implications. The medical crisis quickly became an economic crisis affecting most segments of the economy. In addition, practically unnoticed, the coronavirus began “infecting” commercial contracts, dramatically affecting international contracts, particularly contracts with Chinese parties. Considering the volume of trade between China and Israel (over US$7 billion over the first half of 2019), the virus is already “infecting” Israeli contracts with Chinese parties. The expected chain effect may well result in tremendous losses even to parties in the third and fourth cycles to the originally-“infected” contract, including local parties, in a wide variety of fields.

In February 2020, Chinese corporations began issuing Force Majeure notices to the other parties in international contracts. This follows the halt of supply and manufacture in the three districts responsible for most of China’s export. Beyond the expected impact upon the supply and manufacture of products and components (and workers) from China, the world’s manufacturing hub, there is already an apparent impact upon the goods that China imports from other countries across the globe, such as liquid gas.

The Chinese Government, through the China Chamber of International Commerce, has been issuing Force Majeure certificates upon which Chinese corporations are relying, and Chinese courts are already publishing guidelines on the subject and preparing for the expected lawsuits.

Chinese Law includes a Force Majeure doctrine, which states that if a contract may not be fulfilled due to objective circumstances that could not have been foreseen or avoided, a party may be fully or partially exempt from its commitments without remuneration. It can be assumed that Chinese courts will apply the doctrine to the coronavirus, as they did in the case of the SARS virus in 2003.

Israeli Law also recognizes a Force Majeure defense, stating that if a contract was breached under circumstances that could not have been foreseen or avoided, the other party will not be entitled to remuneration or enforcement of the contract. The court may order the return of paid funds and reimbursement for reasonable expenses [Section 18, Contracts (Remedies for Breach of Contract) Law, 1970]. While Israeli law is quite similar to Chinese Law, Israeli courts interpreted the section in a narrow and restrictive manner. Suffice to note the Supreme Court ruling in the Nizhoni-Mizrahi case, on the backdrop of the Yom Kippur war, which ruled that war in Israel is an expected risk and, therefore, not a Force Majeure.

Many international agreements contain a Force Majeure clause with varying conditions, which usually do not include an epidemic.

Force Majeure is in essence a defense argument for refraining from fulfilling a commitment without penalty, thus transferring the risk and damage to the second party to the contract. The second party usually has its own commitments to third parties under other contracts, which it may now find difficult to fulfill, in a sort of “secondary infection”. For example, an Israeli entity whose Chinese supplier failed to provide a necessary component for its product, could still obligated to sell the product to its own buyers. Even if the Chinese entity enjoys a Force Majeure defense and is exempt in China, it is uncertain that the Israeli entity will enjoy a similar exemption in Israel or another country.

So, what can be done? As always, each case must be examined according to its unique circumstances, and there is no single answer for all cases.

Legally, anyone who due to the circumstances is prevented from meeting her commitments, should consider issuing a Force Majeure notice at the earliest convenience. Anyone who receives a Force Majeure notice from another party (such as a Chinese party) should weigh her response – whether to reject the notice; issue third-party Force Majeure notices to other persons or entities impacted by the notice; or negotiate with the issuing party and reach commercial agreements that would be more effective under the circumstances, such as prioritizing her orders once the issuing party resumes manufacturing.

In addition, it is important to examine whether the contract includes a Force Majeure clause, and what are its terms. An expert should be consulted regarding the meaning of the clause in the specific case, as well as the contract’s applicable law and the jurisdiction where potential legal proceedings will be held. These technical clauses may have an essential impact upon the end result. Each party will attempt to hold the dispute in a jurisdiction in which it has a relative advantage.

Commercially, it is recommended to try and minimize losses by locating alternate supply routes to those halted by the coronavirus, both for the duration of the manufacturing freeze and for the period immediately thereafter, which is expected to see a significant backlog in supply.

As in Chess, the impact of each move upon all pieces on the board should be considered carefully. She who fails to plan ahead may find herself out of the game.

About the Author
Ms. Herzog is a partner at the leading Israeli firm of Goldfarb Seligman. Ms. Herzog handles a variety of Israeli and cross-border merger and acquisition transactions, for public and private companies, and private equity transactions. She advises many Israeli and foreign clients on corporate governance matters. Ms. Herzog was recommended by Legal 500 and IFLR for many years as one of the top lawyers in Israel in Corporate and M&A. She was chosen by "Melumadot" as the most influential and outstanding female lawyer in Israel in the field of M&A. She served as an Adjunct Professor of Law at Georgetown University Law Center, teaching a course on multi-jurisdictional corporate governance. She lectures on various legal matters to professional groups of lawyers. Ms. Herzog publishes numerous articles in Israel’s leading financial newspapers and is frequently interviewed in the media, on areas of her expertise. Ms. Herzog is admitted to practice in Israel and in New York. She was an associate in the Corporate and Banking department of Simpson Thacher & Bartlett in New York.
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