The Impact of the New Coronavirus (Covid-19) on International Contractual Obligations: Force Majeure under English Law
2 March 2020
Client Alert | UK | Energy & Natural Resources
In recent years, the import of liquefied natural gas ("LNG") by China has seen strong growth in absolute terms and has accounted for a significant proportion of the growth in global LNG trade. Depending upon wider economic growth projections, China is shortly expected to overtake Japan as the largest importer of LNG.
In an environment of LNG production ramping up to meet lower carbon impact targets and significant new infrastructure being built, any down-turn in the imports of an important baseload buyer will have a strong impact in the market. In particular, new US projects are heavily reliant on Chinese demand with China having pledged to spend an additional $50 billion on energy products in the recent Phase 1 trade deal with China.
Currently, the LNG market is therefore experiencing a supply glut at a time when Europe has full gas storage and new sources of pipeline gas are hindering its ability to maximise further demand. China's demand profile has been affected by a slowing of growth at the same time as the Power of Siberia pipeline has added 38 billion cubic metres of gas supply to the Chinese market. The tragic effect of the Covid-19 virus looks set to contribute to this market uncertainty.
The evolving epidemic is already said to have accounted for the cancellation of several LNG cargoes in February 2020 and there is concern that this may continue, not just in respect of deliveries to China directly but through into the wider LNG and gas markets.
A large proportion of international gas and LNG delivery contracts are governed by English law and so it bears examining both the expectations of the parties and the underlying concepts enabling one (or both) parties to be excused from performance of their contractual obligations for reasons of force majeure.
As we set out in this briefing, depending upon the governing law and upon the specific terms used, there are potentially good arguments for both the Covid-19 event being effective as a reason to excuse or suspend performance and, also, for it not being a strong claim. This briefing aims to take a balanced position.
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