Strain on the Relationship: Reviewing Force Majeure in Light of COVID-19
06 March 2020
A typical force majeure clause in a commercial contract suspends a party’s obligations to perform under the contract for the duration of a certain extraordinary event.
Whether or not the COVID-19 outbreak constitutes a force majeure event is a matter of contractual interpretation. It will turn on the precise language of the clause.
We set out below some factors to keep in mind when considering whether the recent Covid-19 outbreak triggers a force majeure event.
Does the event constitute a force majeure event?
Some force majeure clauses do not specifically define a “force majeure” event. Instead they refer to ‘any event outside the reasonable control of the party’. This is an objective standard, but as it is defined widely, it allows the affected party to argue that the impact of an external event like the Covid-19 outbreak is not something within its reasonable control.
The issue is more clear-cut if the force majeure clause specifically lists pandemics and epidemics as a type of force majeure event that excuse performance.
Even where pandemics and epidemics are not specifically listed, the definition of force majeure may be broad enough to capture events such as the Covid-19 outbreak. This will depend on the language used in the clause.
You should consider:
Does the force majeure clause define other types of events that the affected party may be able to rely on in the circumstances. For instance, any action taken by a government or public authority, third party work stoppages or a change in law, may all give grounds to argue force majeure depending on the circumstances, and
Is the list of events that the force majeure clause defines intended as an exhaustive list of the type of events which constitute a force majeure event, or is it intended as an indicative list? An indicative list may provide the affected party with more room to argue that the Covid-19 outbreak is similar enough to the listed event to therefore count as a force majeure event.
A force majeure clause typically does not cover events that could reasonably have been avoided or overcome by the party looking to claim relief. This means that the non-affected party may insist that the affected party show it has implemented business continuity or serious incident planning appropriate to its particular circumstances. With Covid-19, this might include the affected party following government and W.H.O. recommendations and implementing robust procedures to help prevent outbreaks among employees.
Impossible or just more expensive
In order to claim relief, a force majeure clause often requires that performance of the affected party’s obligations is made impossible by the force majeure event. This means that additional expenses in performing its obligations will not afford the party the opportunity to claim relief under force majeure.
Rules to follow
The contract may also set out additional rules that a party must follow in order to successfully claim relief. These can include:
Notifying the other party of the occurrence of the force majeure event in a particular way and within a particular time period
Sending periodic updates to the other party on its efforts to overcome the event, and
A duty to avoid or lessen the effects of the impact of the force majeure event
Impacts of force majeure
If a party successfully claims under a force majeure clause its obligations are typically suspended for a period and it may receive extra time to meet any target dates.
If the force majeure event continues for a specified time, one or both of the parties may have a right to terminate the contract without penalty. The impact of termination on outstanding charges and any obligation on the customer to provide a refund depends on the contract.
No force majeure clause?
There is no common law principle of force majeure. Accordingly, if a contract does not contain a force majeure clause it will be difficult for the affected party to claim relief. There may be grounds to claim under the doctrine of frustration but this is a complex and difficult legal argument to run.
What action can businesses take?
As COVID-19 continues to spread globally, businesses should carefully consider their ability to trigger or resist claims of force majeure in their contracts.
Evaluate the contents of the force majeure clauses in key contracts with their legal advisers
Review and implement serious incident planning and business continuity measures
Check insurance arrangements, and
Consider including express provisions into new and renewed contracts covering infectious diseases, epidemics and pandemics
For expert guidance on navigating these issues, contact a member of our Commercial Contracts & Sourcing team.
The content of this article is provided for information purposes only and does not constitute legal or other advice.