While thousands of Coronavirus sufferers around the world are receiving doctors’ notes to excuse them from work, Chinese banks have been obtaining ‘force majeure certificates’ from their government to excuse them from contractual performance. In this article we interview an expert on the subject in London and compare news from various jurisdictions.

Because the effects of the Coronavirus are so pervasive and international, compliance officers have to know about the twist and turns of contractual relationships between banks and their HNW customers, or between market counterparties. The term force majeure has sprung into prominence in the last month because it refers to a clause that is included in contracts to remove liability for natural and unavoidable catastrophes. Many compliance departments are grappling with the question of whether the unforeseen consequence of the virus will qualify.

At common law, only contractual clauses and not the wishes of governments impose force majeure on parties to a contract – or at least it has been that way until now.

Jumana Rahman (pictured), a partner at international law firm of Cohen & Gresser, spoke to Compliance Matters about force majeure clauses in contracts being used to absolve financial firms from being sued for breach of contract because the global pandemic has prevented them from fulfilling their promises. The topic might be a question of life or death for some private banks and asset managers – especially small-to-medium ones – in the next few months, although it has not become a cause of mainstream litigation yet. We present the interview in the form of a question-and-answer session.

Q: Force majeure clauses in contracts free the parties from their obligations when an extraordinary event prevents them from fulfilling them - but they're not in standard contacts, are they?

A: It depends who you are in the financial services industry. Contracts between counterparties are different from consumer contracts. You get fewer examples of force majeure in the latter, because there is an inequality of bargaining power in those consumer contracts. B2C [business-to-customer] contracts, which take in HNW individuals who have accounts at private banks, tend to be on the terms of the business, so the HNW individual who signs one needs to look out for exclusion clauses, limitations of liability and so on. It's a contractual construct. We just advise our clients to view the contract.

Q: What about jurisdictions other than China?

A: China is issuing force majeure certificates but Singapore, as it tends to do, is going one step further. It is imposing force majeure clauses on contracts retrospectively.

Q: Surely that is dangerous because it's a proclamation to the world that a jurisdiction is not a safe place for anyone who wants the terms of a contract to survive intact. Just imagine if the Government of Bermuda did that, with all those insurance and reinsurance companies abrogating their obligations to each other and to the world because of the whims of local officials.

A: Yes. The counter-argument could be made that the Government is taking uncertainty away in other areas, but I am inclined to come to your point of view. I expect that the Government of Singapore's actions will drive some financial business away. By contrast English law, i.e. the law as practised in England (both Bermuda and Singapore are common-law jurisdictions) gives primacy to contractual agreements; by that I mean that the propensity for the Government to intervene in contracts is low and the judiciary is not very active in applying extra obligations.

Good faith is a good example. Look at the contrast between the law as practised in New York and the law as practised in London. In New York, this concept has to be taken into account all the time, so it makes everything slightly woolly, over and above what's written on the pages of the contract. In England the received wisdom is that you don't apply good faith, although that's starting to change.

Q: How so?

A: It's come in for relational (i.e. long-term) contracts, and not just those. The Government is also espousing a similar concept, although not the term itself, with the Cabinet Office having released guidance on 7 May entitled Guidance on responsible contractual behaviour in the performance and enforcement of contracts impacted by the Covid-19 emergency. It strongly encourages "responsible and fair behaviour in relation to making, and responding to, force majeure, frustration, change in law, relief event, delay event, compensation event and excusing cause claims."

[Editor's note: It also calls for forbearance in: requesting, and giving, relief for impaired performance; asking for and allowing extensions of time, substitute or alternative performance and compensation, including compensation for increases in cost or additional performance; asking for payment; suing for damages; the return of deposits or part payments; claiming breach of contract and enforcing events of default and termination provisions; making, and responding to, requests for information and data; the issuance of notices, the keeping of records and the provision of reports in line with contracts; etc. The Government, moreover, is encouraging parties to try to resolve any emerging contractual issues responsibly – through negotiation, mediation or other alternative or fast-track dispute resolution – before they escalate into formal and intractable disputes.]

Q: Is the UK's slight movement in the direction of 'good faith' a judge-made one?

A: Yes, although of course judges say that they never change the law. That's a convenient fiction.

Q: What about offshore jurisdictions?

A: Of interest in offshore jurisdictions, in terms of the claims that are likely to arise from Covid, there is obviously going to be a dash for redemptions of funds, problems with the liquidity of funds, funds perhaps gating their funds because maybe they are overwhelmed by requests for redemption. There will be a loss of value in portfolios. When times go wrong, HNW investors in funds reach for the lawyer but they also go back to the prospectus and accuse funds of breaching their agreements with sub-standard disclosures and investment guidelines. Have they calculated the right risk profile? Have they struck the right balance between investments? When it comes to the weighting of assets, a fund firm might allocate 20% to the high-risk category, 29 to medium risk and so on. Have those weightings been downgraded? That's where external factors come in.

But they'll also look to see if the fund manager has looked after the fund long-term and kept his promises. Often investors are not the most patient of people and that's even before you get to fraud – greater scrutiny of this kind often uncovers things that would otherwise have remained hidden.

Q: I suppose that there is likely to be a rise in insurance litigation because of the Coronavirus, accompanied by the debate about whether insurers ought to cover Corona-related gbusiness interruptions. Should insurers be supported or the industry be supported?

A: In Bermuda, insurers are quaking in their boots. All sorts of insurance problems are going to arise out of this. The obvious one is business interruption. This turns on the level of cover that you have. Most policies cover property damage and not much else for small-to-medium enterprises. The received wisdom is that Covid is not going to be covered. How, after all, can it constitute damage to your property?

Cyber-attacks are going to arise in insurance litigation because we're all online now. People are holding conferences on Zoom and their communications are being intercepted and garbled by the 'Zoombusters.' Other cases are going to arise out of data-protection breaches. At least the outcome of the Morrison's case is heartening.

By 15 May, the FCA is going to initiate some test cases to see if policies should take in Covid 19. It is rare for a regulator to get involved in a test case. These cases won't dictate what elements of their loss they recover, but they will set out some principles. Also, there are some group actions against Hiscox [the Bermuda-based underwriting giant that is prominent at Lloyd’s of London] on the stocks.

[Editor's note: On the first of this month the FCA published a document entitled FCA seeks legal clarity on business interruption insurance alongside package of measures to help consumers and small businesses. It states: "The FCA is seeking to bring to court what it believes are the key relevant cases which provide the greatest clarity on specific policy clauses as soon as possible to get an independent view on these disputed business interruption insurance policies if there remains uncertainty. The cases...will be...a representative sample of the most frequently used policy wordings that are giving rise to uncertainty.

"The FCA will seek to put cases before the court on an agreed basis with the insurers concerned in order to get the fastest possible judgement. Individuals can still access the Financial Ombudsman or the courts if they qualify and wish to do so. The FCA is writing to a small number of firms seeking clarification about whether they are declining, or intend to decline BI claims."]

Trade-credit insurance is often something that comes up in an emergency. Insurers are not likely to be enthusiastic about providing that now. D&O (directors' and officers') cover is also likely to be called upon. With greater scrutiny being placed on financial firms, there is also the likelihood that people are going to uncover fraud. Loopholes in corporate governance might be appearing with all the chaos that is happening now.

Q: What else is going on that is of interest to compliance officers?

A: HM Government has taken various forms of action. It has suspended the offence of fraudulent trading. It has made some moves to help businesses. It's not all bad news – HNWs might sue private banks for negligence in the wake of the virus but the standard of negligence is higher than just saying "oh dear, you've just made a bad bet." D&O insurance I think is too.

* Jumana Rahman can be reached on +44 (0) 20 8036 9394 or at jrahman@cohengresser.com