Coronavirus and triggering a force majeure: What are my options?

Force majeure is a boilerplate clause that, depending on its wording can  release or suspend the performance of one or both parties from their contractual obligations on the occurrence of an extraordinary event or circumstance beyond the control of the parties. Such events usually include a war, strike, riot, crime, pandemic or an ‘act of God’ (hurricane, flood, earthquake, etc.), which prevents one or both parties from fulfilling their obligations under the contract.

It will only be applicable where the event is:

●      Within scope. The disrupting event falls within scope of the clause. For example, if the clause specifically lists “pandemic” or “lockdown”, you’ll be in a strong position to say that coronavirus (COVID-19) falls within the definition. Conversely, if the clause refers only to “events beyond either party’s reasonable control”, the onus is on the person seeking to rely on the clause to prove that the event falls within that definition.  Courts tend to interpret these clauses narrowly. A precisely drafted clause is great if you have named the relevant event, but if you are drafting for future situations it is always good practice to include the expansive ‘catch all’ wording to reserve the position to argue that an unspecified event is beyond that party’s reasonable control. Remember, if defining ‘force majeure’ by referring to examples of events, draft the definition so that it includes but is not limited to those examples.

●      Measurably disruptive. The measure of disruption specified in the clause must also be met. For example, the clause might excuse the parties of “delay” or where performance is “hindered” as a result of the disrupting event. This is a pretty low threshold to meet in order to rely on the clause. By contrast, the clause might state that the disrupting event renders performance “impossible” or “illegal”. In these circumstances, even if coronavirus is within the scope of the clause, if it doesn’t result in performance being impossible or illegal, a party will not be able to rely on the clause.

What to do now?

It’s important for businesses to act now before they go any further with exercising (or deciding not to exercise) the force majeure clause. Performing an analysis of your contract landscape will give you a good risk profile so you can begin to prepare and take risk mitigation measures as needed.

In the first instance, you should review your key agreements with customers and suppliers to check:

• a force majeure clause exists
• whether or not coronavirus and associated governmental action fall within scope on the basis of how it’s drafted
• whether or not the measure of disruption is met
• are contractual obligations suspended or does a right to terminate the contract exist?
• have notice obligations been complied with to trigger the force majeure clause and has supporting evidence of force majeure and its impact been provided, if required?
• the governing law provisions and impact that such law will have on interpreting the contract
• whether mitigation steps or alternative means of performance can reasonably be taken in respect of the contract
• the potential consequences of a breach and/or default of the contract
• how the force majeure provisions interact with the contract’s indemnity and termination provisions
• whether your insurance policy covers you for any potential losses.

Future proofing

What should we be doing going forward to avoid lack of clarity if we have another pandemic to deal with?