What Are “Force Majeure Certificates,” and Are They Legally Enforceable?
As the coronavirus pandemic continues to disrupt international supply chains, many American companies will receive “force majeure certificates” from Chinese suppliers who claim that these certificates excuse them from performing their contractual obligations. More than 4,000 such certificates, covering almost $50 billion in contracts, have already been issued by the Chinese government or government-related entities. What do these certificates mean, and are they legally enforceable?
Force majeure clauses are familiar in American law. These clauses, which parties often include in commercial contracts, excuse or suspend a party’s obligation to perform if certain events beyond the parties’ control occur. A force majeure clause will usually define those events to include extraordinary disruptions like war, natural disaster, and labor strikes. Parties use these clauses to share the risk of unanticipated, low-probability events. American courts interpret force majeure clauses narrowly, and engage in a fact-specific inquiry that depends heavily on the language used in the clause and the nature of the events that allegedly trigger it.
With the force majeure certificates, the Chinese Government aims to unilaterally decide that force majeure has occurred. However, when parties included a force majeure clause in their contract, they likely expected that a court would resolve any dispute over its application fairly and impartially after hearing their arguments. Government intervention is inherently political, and may favor one side of the contract.
A force majeure certificate from the Chinese government would almost certainly be dispositive in litigation that takes place in Chinese courts. And a non-Chinese court might well decide that such a force majeure certificate should be given weight if Chinese law applies to the contract. But many export contracts are governed by American or English law. How might a court or arbitrator applying these sources of law treat a force majeure certificate?
Lawyers for Chinese suppliers might invoke notions of international comity and public policy, and argue that American courts should respect the determinations of a foreign sovereign, especially where there is a plausible factual basis for them. The fact that the coronavirus pandemic has shut down factories and sent workers home can hardly be denied.
If courts were required to sort through the language of force majeure clauses in thousands of contracts, and determine whether the factual circumstances of each supplier justified invoking them, parties could be tangled up in litigation for years. If China issues force majeure certificates in a broad and nondiscriminatory way to companies that have been especially hard hit by the pandemic, it could help contractors adjust their relationships without this costly litigation.
However, there is no such thing as a force majeure certificate in the United States, and American courts are likely to view them skeptically. In American law, the party that invokes a force majeure clause must prove that a contractually specified event occurred and interfered with performance.
And while the final judgments of foreign sovereigns’ courts are given respectful consideration, it is highly unlikely that an American court would allow a foreign government to simply nullify or suspend contractual obligations between private commercial parties without affording those parties any process.
Yet it is also hard to predict how courts will act in an international emergency. The worry is that the disruption of international supply chains would be exacerbated, rather than mitigated, if courts forced Chinese companies to perform when they simply cannot, potentially driving them into bankruptcy at a time of significant global economic disruption. As always, it is best for the parties to a contractual dispute to try to negotiate a resolution—one that gives the supplier some breathing room when its distress is authentic and bankruptcy looms in the background, but that respects the buyers’ contractual rights as much as possible.
To learn more about the implications of COVID-19, follow us on LinkedIn. “Brilliant lawyers with courtroom savvy” – Benchmark Litigation. Copyright MoloLamken LLP 2020.