Covid 19 and Force Majeure

All our lives have been radically changed by Covid 19 and none of us were expecting it apart from a few ‘planners’ formerly regarded as a bit crazy but now perhaps as ‘prophets’!!

Businesses across the world are being forced to close or radically change the way they operate.

Huge events are being cancelled -it doesn’t come any bigger than the Olympics after all.

The knock-on effects ripple out across the marketplace through the contracts between affected parties.

One of the boilerplate clauses that is regularly included in commercial contracts is a Force Majeure clause. A Force Majeure clause provides that if a party is prevented from performing its obligations by reason of an event beyond its reasonable control, it is not liable for that failure to perform (or its obligations are suspended for as long as the Force Majeure Event continues).

Well that could be jolly useful for a supplier who is not able to supply product because of the Covid 19 crisis due to reasons beyond its reasonable control or where a party to a contract cannot host a sports event because the government has banned public gatherings of more than two people.

Needless to say each contract will need to be analysed carefully in the light of its particular provisions and relevant underlying facts.

Important points to consider as you dust down your contracts and search for the Force Majeure clause:

• In English law, a Force Majeure clause is a contractual provision as negotiated between the parties to the contract, so in order to understand the implications of a Force Majeure clause, the detailed wording needs to be carefully analysed against the factual background;

• What notice requirements are there in the contract that must be complied with in order to trigger the Force Majeure clause;

• A Force Majeure clause will normally provide that it does not apply to relieve a party of an obligation to pay;

• A Force Majeure clause will in the relevant circumstances (for example the occurrence of an event beyond a party’s reasonable control) that prevent it from being able to perform its obligations under the contract relieve or suspend that party from its obligations to perform the obligations under the contract affected by the Force Majeure Event.

• A party that does not want to take delivery of goods it has contracted to buy because it will not be able to sell those products on to its customers because its venues have been closed would not normally be able to rely on the Force Majeure clause to justify not completing the purchase. Why because the purchasers obligation under the contract is to pay for the goods and accordingly its obligations under the contract have not been affected by an event beyond its reasonable control that prevents it from being able to perform its obligations under the contract;

• If there is no prohibition on a party’s work force going to work and on that party’s factory continuing to operate and the reason the party closes the factory is because it believe it is in the interests of the health of its work force – is that an event beyond its reasonable control?

• Consider the relationship you have with your supplier and how important it will be after the end of the Covid 19 Crisis. The optimum way forward will often be to seek a win win solution that works for both parties;

• Many Force Majeure clauses include an obligation on the affected party to take all reasonable steps to bring the Force Majeure event to an end and begin to perform its obligations as soon as practicable. What steps might you be taking in this situation? Homeworking is an option but difficult in the context of manufacturing.

Points to consider if your company is about to enter into an important contract to purchase an important piece of equipment. Does there need to be clarity as to whether the supply could be affected by the Covid 19 Crisis – should you seek assurances that the Covid 19 Crisis will not amount to a Force Majeure Event.

In the light of the Covid 19 crisis more attention should be paid to drafting Force Majeure Clauses so that as unforeseen events arise parties to contracts are in better positions to deal with them.

Frustration

If the Force Majeure clause does not provide a party with relief it should explore whether it might claim that the contract has been frustrated by the Covid 19 Crisis. More to follow on frustration in the next few days.