Generally, there is no legal exemption for force majeure under the common law. Both parties of the contract can agree on what is the force majeure event and the corresponding consequences in the contract. If an extreme event is beyond the scope of the force majeure event stipulated in the contract, or the contract does not make any agreement on the force majeure, the party who is prevented from performing its obligations will not be able to invoke the agreed force majeure exemption. For example, under Hong Kong law, force majeure will only apply if there is an express force majeure clause in the contract. Nevertheless, the common law doctrine of frustration may provide parties with relief to certain extent in the absence of a specific express contract provision.
As abovementioned, unlike China Law, the common law jurisdictions (including but not limited to Hong Kong, the United Kingdom, Singapore and other countries/ regions) do not have the implied application of the principle of force majeure. Furthermore, the application and handling of force majeure cases are entirely dependent on the contract.
First, the parties who claim to delay or exempt themselves from performing their obligations because of COVID-19 need to consider whether the contract includes force majeure clauses. If so, whether COVID-19 is a force majeure event will depend to a considerable extent on the construction and interpretation of the relevant provisions of the contract. For example, force majeure clauses in some LNG sale and purchase contracts specifically include such expressions as "outbreak of disease", "epidemic", "civil emergency" or other similar expressions. Without such expressions, the party may consider whether it includes general expressions of “Acts of God”, “Acts of Government”, or "other than the situation of the parties’ control” and consider that the COVID-19 epidemic is related to such general expressions.
It is important that, generally, the parties who wish to invoke the force majeure clause under the common law shall prove that the force majeure event is the key reason for the failure of performance of the contract. That is to say, if it can be proved that other factors hinder or delay the performance of the contract (such as the delayed performance from the party whose performance is hindered, or the external force from the third party, etc.), the non-performing party may not be able to exempt or delay the performance according to the force majeure clause. It is worth noting that this is different from the application of legal force majeure under China Law. China Law excludes the legal force majeure from the scope of exemption. The common law is stricter in this perspective.
Issues worth taking into consideration
As LNG contracts are usually heavily negotiated and amended, there is a great variance in contractual provisions. Parties seeking to rely on or may be affected by the force majeure provision should carefully consider the wording of the clauses to determine what actions to take in response to any disruptions as a result of the COVID-19. For long-term LNG sale and purchase agreements, where annual contract quantity commitment can be postponed to later in the year, affected parties may still have to perform its contractual obligations albeit at a later point in the contract year.
Accordingly, description of force majeure provisions should be specific, clear and unambiguous, and be listed as far as possible according to previous industry experience. Especially in the LNG international purchase and sale contract using CIF or FOB trade terms, if the force majeure clause does not include the force majeure event that may occur at the receiving port, then when the force majeure event occurs at the receiving port, it will be difficult for the buyer to claim the existence of force majeure against the seller. In addition to the losses caused by the above events, the buyer would still need to perform its obligations under the contract.
In addition, the receiving port should be defined specifically. Take the COVID-19 epidemic as an example. If the terms do not clearly stipulate the scope of the receiving port in China, the buyer may not claim the existence of force majeure even if one or several (but not all) ports in China are closed due to the COVID-19 epidemic.
In addition, due to the chain characteristics of the natural gas industry, in order to achieve the safe transmission of the risk of force majeure, when determining the terms of force majeure, it is necessary to consider the situations where force majeure events occur in upstream and downstream that may affect the performance of the obligations of the LNG contract, such as whether the loss of downstream resources and facilities, serious accident damage or inability to operate should be force majeure.
It is also important to specify the form, submission method and time limit of the documents to be submitted by the party affected by the force majeure, and clearly stipulate the consequences of the force majeure, which is conducive to the adjustment of the rights and obligations of both parties after the occurrence of the force majeure event.
In the process of LNG contract negotiation and signing, sometimes it is hard to predict the potential risks of the contract. Parties should therefore pay extra attention to terms related to the force majeure in the contract, so as to systematically reduce the adverse consequences that the contract party may bear. The applicable legal situation of international trade and cooperation contracts especially in LNG area involving multiple jurisdictions is usually complex and consulting legal experts on such specific situations when dealing with legal issues is always important and crucial for major energy enterprises.
Note: This material has been prepared for general information purposes only and is not intended to be relied upon as professional advice for any cases. Should you need further information or legal advice, please contact our people below.