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

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

 

 

The coronavirus pandemic has fundamentally changed the way we live, work and, crucially, do business. In recent weeks , companies have been scrambling to determine whether they have a valid “get-out-of-jail-free” card in the form of force majeure in their commercial contracts and we’ve already seen the likes of Tui and Primark invoking the clause to attempt to relieve themselves of their obligations.

There’s a lot of content out there at the moment helpfully explaining the meaning and effect of force majeure from a technical perspective. But what are the practical impacts of force majeure and how can you protect yourself in the future from its effects?

 

Quick recap - what is force majeure?

 

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?

  1. Be open. Think about this next time you negotiate a contract and openly discuss with your counterparty what would happen in such a scenario and try to consider how this would affect each party in practice. Consider whether this should be in a force majeure clause or an additional clause that may cover, for example, interruption of supply.
  2. Include force majeure clauses. Make sure you have a force majeure in all your customer agreements. Review force majeure in supplier contracts to see if these are so broad they may undermine reliance on critical suppliers if low thresholds are now included.
  3. Make sure you’re covered. Make sure your force majeure clauses specifically call out what would happen if there was a pandemic and government-mandated or recommended lockdowns or social distancing as force majeure events (or not).
  4. Mitigate your risk. Where you bear more risk, try to mitigate it by negotiating termination for convenience clauses where possible and appropriate but prepare for some strong resistance to this request, many business will want to secure revenue for recurring services they sell.
  5. Audit counterparties. Audit suppliers and review their business continuity plans in the event of a pandemic before you onboard them, or now if they are key suppliers or partners.
  6. Get help. If you need support from flexible legal support to get this exercise done quickly and efficiently then that would be a good investment of your money.  It’s wiser to invest in a small piece of work to future proof your contracts in the event this happens again as it has the potential to save enormous amounts of time and money in the long run.

 

 

 

 

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About the author:

Electra Japonas is the founder and CEO of The Law Boutique, a challenger law firm that is bringing law into the 21st century. The Law Boutique takes a uniquely holistic, customer-first approach to delivering high quality legal, operational and strategic support to fast-growth businesses.

Electra started The Law Boutique in 2017 having spent over ten years in various large organisations in commercial legal and data protection roles, including the European Space Agency, Disney, BAT and EY. She realised there was a gap in the market for a legal company that took a more holistic approach to legal support, beyond just the law. The penny dropped when in her last role at BAT, she spent four months negotiating a multi-million pound agreement for an IT project with the support of a big expensive law firm, only to come out of the negotiation and have to re-draft the whole agreement when the business was unable to understand most of what it said. She spent another few months translating the agreement into plain English, introducing visual guides to explain how the various teams need to operate to reach the right outcomes and building tech tools to streamline the contract management process.

Electra is passionate about bringing innovation, design-thinking and strategy to the legal sphere and building a business that is truly going to make a difference in the way people experience, expect and deliver legal support.