COVID-19 and force majeure
The COVID-19 pandemic is placing considerable strain on businesses, making it difficult or impossible to meet pre-existing contractual obligations.
Contracts routinely contain a force majeure clause, that is, a clause that sets out the consequences of what happens if a party is prevented from performing the contract in circumstances that are outside of its control.
A well-drafted force majeure clause will:
- Include a clear definition of what a force majeure event means in general terms, for example. any event not within a party’s reasonable control, with a non-exhaustive list of examples, such as acts of God, epidemic or pandemic, war, terrorism, fire, legal or government restrictions, chemical, nuclear or biological contamination, utilities failures and so on.
- Require a causal link between the force majeure event and the non-performance.
- Clearly provide for the consequences of not being able to perform.
- Clearly set out the procedure for giving notice and relying on a force majeure event.
Some points to note are:
- he meaning of a particular force majeure clause is a matter of construing the clause in the ordinary way. Some force majeure clauses will require a party to show physical or legal impossibility to perform. In other words, severe economic toll or severe delays may not engage a particular force majeure clause. The other terms of a contract may circumvent the application of a particular force majeure clause on the facts because, for example, alternative supplies of goods, are available. Other force majeure clauses may be less stringent and may be engaged in circumstances where the force majeure event causes a hinderance or delay.
- “Acts of God” are ambiguous. The more specific the definition of a force majeure event the greater the certainty of the application of a force majeure clause.
- The fact of a pandemic or other defined force majeure event included in a force majeure clause is not necessarily in and of itself the reason why contractual performance is not possible, it is the effect of the force majeure event. Identifying the relevant event that caused non-performance is therefore a central part of analysing the application of a force majeure event.
- An event “not within a reasonable party’s control” is fact sensitive.
- Subject to the terms of the contract, the default position is that the party claiming the benefit of a force majeure clause has the burden of showing that reasonable steps were taken to avoid or mitigate the effect of a force majeure event.
Going forward, it would be wise to review current contracts to determine whether any force majeure clause offers appropriate protection, and for any updated or new contracts to carefully consider what is required in this respect. An updated boilerplate clause is unlikely to be sufficient.
Tags: Commercial, contracts, force majeure
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