Zika - force majeure and contractual implications

In the last few weeks there has been a considerable amount of press coverage on the Zika virus, transmitted by Aedes mosquitoes, as the World Health Organization announced that the recent cluster of microcephaly and neurologic disorders, reported to be linked to the virus in Brazil, is a public health emergency of international concern. This fear of infection can have economic consequences and cause disruption to commercial contracts which may, in turn, trigger rights under force majeure provisions. As the Zika virus spreads, questions and concerns are increasingly being raised about the potential impact this could have on the Rio Olympics (the “Games”), which is due to take place from 5-21 August.

Whilst some may say that concern over force majeure provisions is exaggerated, it is worth noting that in August 2014, steel and mining company, ArcelorMittal, announced disruption of its iron ore mine expansion project in Liberia, after contractors declared ‘force majeure’ and moved people out of the country because of the Ebola crisis sweeping West Africa at that time.

What is ‘force majeure’?

The legal concept of ‘force majeure’ (French for “greater force”) relates to the impossibility to perform a contract. Although, ‘force majeure’ has no recognised meaning in English law, the concept is commonly drafted into English law international contracts: That is, to relieve the affected party from the obligation to perform the contract for the duration of the force majeure event, provided that the event is of an external nature, unforeseen, beyond the control of the party and makes performance impossible or delays performance.

Whether a force majeure clause is triggered will depend on how the clause is drafted. For English law governed contracts, the first step is therefore is to look at the drafting, paying particular attention to how ‘force majeure event’ is defined. This will usually require the event to satisfy the criteria mentioned above and will then contain a list of events such as acts of God, floods, droughts, earthquakes, pandemics, war, strikes and action taken by a government or public authority. This list will either serve as examples of events that could constitute force majeure or they will restrict the definition to the specific events listed. Often, contracts will contain a termination right where a force majeure event continues beyond a specified length of time.

‘Force majeure’ clauses are also commonly used in Brazilian law contracts. Unlike English law, however, the concept of ‘force majeure’ is also recognised by the Brazilian Civil Code (BCC). Indeed, under Brazilian law the concept is divided into two categories: ‘Force majeure’ which is an event that has its origin in nature, such as floods, earthquakes etc. and ‘caso fortuito’ which is an event that has its origin in an act of man, such as war, civil commotion, strikes etc. In both cases, the event must be unforeseeable or difficult to foresee and the effects must be impossible to avoid. The affected party is not responsible at law for the losses of the other party resulting from the event, unless such responsibility has been expressly stated in the contract.

The Brazilian law concept of economic and financial balance

Under Brazilian law, it is not only the concepts of ‘force majeure’ and ‘caso fortuito’ that need to be considered in the context of the Zika outbreak. Brazilian law also has the constitutional principle of economic and financial balance, contained within article 478 of the BCC (known as the ‘Theory of Unpredictability’). This states that in the case of a financial imbalance arising in respect to a contract which results in an excessive burden to one of the parties, due to supervening unpredictable facts, the affected party has two options. It is entitled to request the Court either to terminate the contract or restore the financial balance of the contract to the original position between the parties. Article 317 of BCC also states that if an unforeseeable event brings about a clear disproportion between the contract value on the date of signature of a contract and at any time during its performance, the Court is able to readjust the value of the contract.

Consumer laws

As tourists are consumers, they would benefit from the consumer protection rules under the Brazilian Commercial Code. A fundamental principal of this is the protection of life, health and safety and it allows the Court to modify contractual terms where a supervening fact occurs which causes an excessive burden on the consumer. A consequence of these rules is that tourists planning to travel to the Games may be able to cancel their travel package or airfare tickets without paying any fines if these tickets and travel packages are subject to Brazilian law.

Conclusions

As Rio de Janeiro prepares itself for the Games, the governments of some participating counties are debating whether or not they should pull out their teams, or recommend their citizens not to travel to Rio de Janeiro.

Whilst this might be ‘sensationalism’ within the media, if a sufficient number of people and teams did pull out or the Games were cancelled, that would certainly have dire consequences for businesses involved. It is quite possible, for example, that counterparties, including the Brazilian government, would seek to reduce their costs by terminating contracts. In seeking to do this, ‘force majeure’ and the ‘financial imbalance’ caused by the lower number of attendees or the cancellation, are likely to be used to justify a claim for termination. Contracts at risk would include everything from infrastructure projects still under construction, contracts for temporary structures for use during the Games, hospitality and service contracts. As mentioned, consumer laws may also entitle tourists to cancel their travel packages, putting even more pressure on local businesses.

Whether the Zika outbreak would qualify as a force majeure event, requires careful analysis of both Brazilian law and the drafting of the contract in question. Both need to be considered as it is not clear whether the rules referred to in Brazilian law can be limited or excluded by the terms of a contract.

When looking at the contract, it is important to remember that even if the list of force majeure events contains items such as ‘epidemic or pandemic’ the event will usually also have to satisfy the force majeure criteria in the clause. For construction contracts based on the FIDIC Silver Book, for example, the following criteria need to be satisfied: The event must be exceptional; beyond the party’s control; be such that the party could not reasonably provide against before entering the contract (unforeseeable); cannot be reasonably avoided or overcome; and is not substantially attributable to the other party.

It may also be the case that action taken by a foreign government or public authority, in recommending its citizens not to travel to the Games or withdrawing teams from competing, would also qualify as force majeure. Additionally, even if ‘force majeure’ is not applicable, there may also be arguments under Brazilian law that would support termination if the financial equilibrium between the parties was significantly altered, which may be the case if far fewer people attended the Games.

This is therefore an uncertain area where advice can only be given on a case by case basis. In view of the potentially severe consequences for contracts due to the Zika outbreak, businesses which concerned about this should seek legal advice.