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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?
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.
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:
What should we be doing going forward to avoid lack of clarity if we have another pandemic to deal with?
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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.
0330 161 1234