Force Majeure and Coronavirus in Commercial Contracts


08 Apr
08Apr

The outbreak of Coronavirus has disrupted almost nine in 10 (86%) of supply chains but buyers are working to mitigate the risks, according to a survey.  

"Lawyers swamped by contract queries" so read a headline in the FT Weekend of 14th March 2020.  Followed by: "Coronavirus prompts 25% jump in calls over sick pay, mergers and order delays."  Commercial firms are seeking advice in increasing numbers over the legal and contractual consequences of Coronavirus.

One issue that is apparently proving to be of particular concern is whether it could amount to Force Majeure.

The FT's article goes on: "Companies have been calling on force majeure clauses in contracts that allow them to renege on or delay orders, with a record number enforced by Chinese companies in the last few week?"

We have done some research to pull together some general information on Force Majeure, along with commentary on whether Covid-19 could qualify as an event that might be validly claimed to release or suspend contractual performance

We are grateful for the many online contributions from lawyers, their firms and others who are regularly publishing informative articles and blogs on this important topic.

‘Superior Force’ is the literal translation of Force Majeure, but what does this often used and misunderstood phrase mean when it comes to commercial contracts?

Under English common law, which is different from civil law (e.g. France, Germany, Netherlands, UAE), the expression is not defined anywhere by statute or for that matter by decided cases. Nor is Force Majeure to be implied into contracts.

To all intents and purposes, parties to a commercial contract can only rely on Force Majeure if there is a specific clause setting out what it means in the agreement between them.

What does a Force Majeure provision contain and what does it do?

There really is no typical Force Majeure clause and they come in many different forms. But, in order to illustrate what they can contain, this is an amalgam of the sort of events that they can cover:

“No Party to this Agreement shall be liable for any failure or delay in performing its obligations if such failure or delay results from any cause that is beyond the reasonable control of that Party. Such causes shall include, but shall not be limited to:

1. Acts of God

2. Power failure

3. Internet Service Provider failure

4. Strikes, riots, rebellion and industrial action 

5. Flood 

6. Earthquakes 

7. Acts of terrorism 

8. Acts of war 

9. Changes of law

10. Refusal of licenses”

There are many other formulations and different events can be, and often are, included in commercial deals to cover specific risk events that the parties consider could affect their respective obligations to perform.

For example an air freight contract might include events that involve unscheduled air traffic control outages. A manufacturing supply contract might include factory fire or explosion.

What is the effect of a Force Majeure provision?

Contracts will normally provide that if a Force Majeure event occurs the parties can be released from performing their obligations to one another.

Often, there will be a requirement for the party wanting to trigger the release for Force Majeure to give a written notice that it in its opinion such an event has occurred and that it is relying on the provision to cease performance of the contract.

The other party may or more may not accept the notice as being valid and try to maintain the contractual obligations between them remain in force.

This can lead to disputes that have to be resolved through discussion or possibly via legal process.

A party who wrongly claims Force Majeure can find itself in breach of the contract and liable to the other party for damages, so there can be significant downside to misusing the provision.

This helpful blog Force Majeure Events in Agreements and Disruption in Contract Works (with examples) by Leigh Ellis of Hall Ellis, Solicitors sets out more details on how Force Majeure works under English law.

The potential consequences to a Force Majeure event that may be included in commercial contracts include:

  • suspension of contractual obligations;
  • non-liability;
  • extensions of time to fulfil obligations;
  • renegotiation of terms;
  • obligation to mitigate losses; and
  • the right to terminate the contract.

But to benefit from those effects, recent case law suggests that the party looking to be excused from its contractual obligations must have been ready and willing to perform the contract, if it had not been for the force majeure event.

There may now be a question, which would have to be answered by the Courts if there was a dispute over it being claimed as Force Majeure, as to whether Coronavirus, as a viral pandemic that has the potential to cause significant disruption, amounts to an Act of God that could release parties from performing their contract.

It is clear that each case will fall to be decided on its own very particular circumstances.

Having said that, Acts of God are generally taken to mean events that occur through natural causes, could not have been prevented through planning or intervention and are not possible in general to guard against.

Anecdotally, it seems that businesses involved in the financial services sector are, for the time being, holding off using their Force Majeure clauses (UK Finance webinar 6th April 2020).  

As there are reports of the steepest downturn in the UK services sector in more than two decades due to business shutdowns and cancelled orders, according to the latest Purchasing Managers Index, It will be interesting to see and assess the level of reliance on these sort of contractual provisions in other business areas.

This article “Coronavirus: impact on commercial contracts” by Ashurst, explains how this highly significant worldwide event may have an impact on commercial contracts, as it says:

” Notwithstanding that a court or tribunal may have sympathy for circumstances which have arisen and may cause disruption to the contractual relationship, the task required in common law jurisdictions is an analysis of which risks it was agreed would be borne by which commercial party. This requires careful consideration of the precise wording in the particular agreement.

Since the virus is a relatively new phenomenon, it is unlikely that any force majeure clauses would explicitly refer to the event of a Coronavirus outbreak. Accordingly, in order to rely on the clause, parties will need to consider the other events included, such as epidemics, actions by government agencies, or work stoppages.

In addition, force majeure clauses that are widely worded will not necessarily capture events such as the Coronavirus outbreak. The party relying on the clause will still likely need to prove that the force majeure event was not "reasonably contemplated" by the parties when making the contract, and that the event is "beyond the reasonable control" of the party seeking relief.”

What others have been saying:

As always, this is not legal advice, so where you have a question, please consult your lawyer.

By the publications team at: Contracts-Direct.com

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Note: This publication does not necessarily deal with every important topic nor cover every aspect of the topics with which it deals. It is not designed to provide legal or other advice. The information contained in this document is intended to be for informational purposes and general interest only.

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