Amidst Coronavirus’ Continued Disruption of Global Supply Chains, Looming Threat of Transnational Breach of Contract Litigation

Future litigation involving breach of contract in the age of COVID-19 will implicate thorny issues surrounding choice of law, international contract excuse doctrines, and later, enforcement of foreign judgments.

by: Chelsea K. Minuche, STaff member

The COVID-19, or Coronavirus, pandemic has disrupted the global economy in unprecedented ways.  Its full effect on certain parts of the economy, including the global supply chains, is yet to be seen.  Initially, the virus spread throughout China—home to many of the world’s most critical suppliers—shuttering factories and halting production.  The international community watched closely—with increased skepticism—as the Chinese government attempted to protect Chinese suppliers from the consequences of contractual nonperformance at home and abroad.  But as the outbreak increasingly affects suppliers around the world, it heightens the likelihood that suppliers from other countries will invoke contract excuse defenses to avoid breaching contracts with buyers downstream from them on global supply chains.  Given the complex, multi-layered nature of global supply chains, these developments will likely result in extremely complex transnational litigation.  Future litigation will probably implicate thorny issues surrounding choice of law, international contract excuse doctrines, and later, enforcement of foreign judgments.

There has been a lot of news coverage about China’s Council for the Promotion of International Trade issuing thousands of "force majeure certificates" excusing Chinese companies’ failure to perform contractual duties due to impossibility or illegality of performance in the wake of Chinese policymakers’ responses to the COVID-19 outbreak.  Local isolation orders restricting movement continued to stymie production, even as lawmakers ordered factories to reopen.  In response, international commerce lawyers have indicated that these certificates will have little to no legal weight in courts outside of China, and are unlikely to protect Chinese suppliers who renege on contractual obligations governed by U.S. or English law.  In late February and early March, the main story was about western manufacturers leaving China, but with the virus’ global spread, the outlook for global supply chains, and ensuing litigation, is even more bleak.

Now, while China has managed to reduce the virus’ domestic infection rate and resume manufacturing operations, the United States and Europe remain in the grip of the Coronavirus pandemic, each reporting significant daily increases in new confirmed cases of COVID-19 for weeks.  The result is likely to be a protracted disruption of global supply chains, as western retailers cancel orders from Chinese suppliers who have recently come back online, undermining the Chinese economy’s recovery.

In this new reality, the application of international theories of excuse for breach of contract, including force majeure and impossibility in the United States, and contract frustration in England, will be of critical interest.  The absence of a universal standard for excusing nonperformance of contractual obligations will add to the complexity and inconsistency of litigation strategies and outcomes.  Lengthy contract clauses listing events that absolve or diminish liability for nonperformance will lose their “boilerplate” character and remain at the forefront.  Indeed, the exhortation for manufacturers to leave China as soon as possible has largely been replaced by recommendations that companies carefully review their contracts’ choice of law and force majeure provisions.

Chelsea K. Minuche is a second-year student at Columbia Law School and a Staff member of the Columbia Journal of Transnational Law. She graduated from the City University of New York in 2015 with a Bachelor’s degree in Political Science, Chinese Language and Literature, and Human Rights. Before law school, Chelsea worked as a litigation paralegal.