Coronavirus, Force Majeure Clauses and Other Contractual Issues
The coronavirus disease 2019 (“COVID-19”) has shaken up industries all over the world. Restrictions on travel and gatherings have either been imposed or are at least being considered as next steps by pretty much all governments. The most common question a lawyer today gets is “how does the coronavirus affect my contract?” The answer is, as typical to legal questions, never simple or same but it always depends on the contract in question. In this article, we consider how force majeure provisions in commercial contracts may be engaged in the context of the COVID-19 outbreak.
So-called force majeure (meaning “superior force”) clauses typically are included in contracts to 1) excuse performance by the parties or 2) suspend their obligations the contract due to unforeseen difficulties for acts of God, impossibility of performance, disaster, and other circumstances beyond the control of the parties. Sometimes the clause includes foreseen problems that are likely to occur, but the nature or extent cannot be foreseen.
A force majeure event is not necessarily a right to terminate an agreement, but rather it excuses a party’s non-performance due to circumstances beyond its control. Essentially, you can call it a defense to breach of contract. To successfully trigger a force majeure clause performance of the contract must be impossible. It is not enough that performance may have become inconvenient or too costly it must be actually impossible.
At the moment, many Chinese parties are considering force majeure declarations as potential relief from their contractual obligations. The Chinese body in charge of foreign trade and investment, the China Council for the Promotion of International Trade (CCPIT), has begun issuing force majeure certificates to Chinese companies. It remains unclear what legal effect these certificates have as force majeure is a contractual issue. (The CCPIT is not a party to the contracts in question.) But it is expected that Chinese parties seek to rely on them in supporting force majeure claims in future disputes.
What force majeure clauses include?
Force majeure clauses vary significantly in their content and wording. Some clauses contain very specific wording, when sometimes the force majeure events are left open to interpretation. A general catch all force majeure clauses can be held void for uncertainty, at least in some jurisdictions.
The starting point is that the common term “acts of God” includes for example floods, earthquakes or other natural disasters. It can be argued to include epidemics or pandemics, but it can be quite risky to expect that a court would consider COVID-19 as an act of God. That is a very jurisdiction and fact specific question, and can be argued both ways.
Sometimes the force majeure clause includes specific remedies when a force majeure event occurs, including one or more of the following: (i) make-goods or substitute benefits, (ii) equitable adjustment or rebate, (iii) extension of the term of the contract, (iv) postponement of the event or services, (v) suspension of performance, or (vi) the right to terminate the agreement and receive a refund for services which have yet to be performed or rights that have yet to be received.
Normally, the party seeking to excuse its contractual performance under a force majeure clause bears the burden of proof in establishing the defense.
What to look in a force majeure clause?
It is important to remember that in some jurisdictions, there are specific legislative definitions of force majeure, which apply whether or not the contract contains a force majeure clause (in Europe, for example in Germany and the Netherlands). Therefore, the first step is to look at the governing law of the agreement.
The governing law of your contract will be key, because it determines the interpretation of the contract and the potential legal remedies available. Most commercial contracts will state what the governing law is. If the contract doesn’t, then there are rules that will help determine this.
Sometimes the contractual force majeure clause is used specifically to narrow down or broaden the legislative definition of force majeure in situations where there is a legislative or case law definition. In that case, it depends on the jurisdiction and governing law how the court will interpret the contractual clause.
The second key element is the wording of the force majeure clause. Whether a particular clause is triggered will depend on the exact words that the parties have used – particularly the non-exhaustive list of events that are often included in a force majeure clause.
For example in the UK (where there is no legislative definition of force majeure), the courts have confirmed that the proper approach to interpreting a force majeure clause is by reference to the actual words the parties have used, not their general intention.
Also under New York and Delaware law, the force majeure clauses are narrowly construed and the list of force majeure events normally only include events specifically listed.
If your force majeure clause includes specific public health-related language, such as “flu, epidemic, serious illness or plagues, disease, emergency or outbreak” it could quite likely cover the COVID-19. However, this public health-related event list is not typical in most commercial contracts.
The clause may also include “acts of government” constituting force majeure events. In the current situations, where gatherings and events are being cancelled, shops and restaurants closed, etc. due to government actions this can be a very relevant provision.
Each contract needs be looked at individually. Identify the relevant terms and assess the facts as they impact upon a party’s ability to perform its obligations. Has COVID-19 caused a breach of the contract (or if the COVID-19 outbreak keeps heading in the same direction, is a breach likely?).
General conditions linked to force majeure clauses
Most force majeure clauses require a causal link between the unexpected event (or the event which is beyond the reasonable control of the relevant party) and that party’s delay or failure to perform the contract. It’s normally the excuse seeking party’s obligation to establish this link.
Force majeure clauses may also require that written notice is given or other conditions. If your agreement has this requirement, please remember to follow it.
It is good to remember that where a force majeure clause is triggered, this may not lead to a right to terminate the contract, but simply a right to delay performance by the duration of the unexpected event. Once again, find out what the wording of the clause says.
Consequences linked to a force majeure clause
A force majeure clause commonly also suspends the obligation to perform while the particular force majeure event continues. This means that the contract still continues to exist, but the clause may go on to allow one or either party to terminate the contract if the circumstances persist for a particular period of time.
Some force majeure clauses may partially excuse performance or permit the counterparty to procure products or services elsewhere during the force majeure event.
Assuming that the declaration of force majeure is validly given, parties may have different views as to the period of time in which performance should be excused and the time at which the force majeure has ceased to exist.
Can coronavirus trigger a force majeure clause in a contract that is yet to be entered into?
This question is not simple to answer.
First of all, it is difficult to predict the scale, length and effect of the COVID-19 pandemic in any given country or sector.
Furthermore, the concept of foreseeability varies in different jurisdictions. In some jurisdictions, it is a fundamental part of the definition of force majeure – for example in French law. An event will not be considered force majeure if it could reasonably be foreseen when the contract was entered into (nor if it could have been avoided by appropriate measures).
Despite the virus spreading all over the world, the world doesn’t stop. New agreements are entered into, and that is a good thing. However, entering into a new contract in this kind of exceptional situation takes more considerations. If there is a real risk that a contract might not be capable of being performed as a result of the virus, the most straightforward option would be to expressly name it in the force majeure clause.
Express wording to this COVID-19 force majeure effect may override the general position in jurisdictions that have a civil code (as in France), and also forces the parties to think about what the remedy should be if the clause is triggered. Think if the the party unable to perform wants the contract only to be suspended, or would both sides prefer to be able to walk away and consider alternative options?
Also pay attention to the wording of the force majeure clause. Anything about foreseeability of the force majeure event may mean that the clause will not be triggered. For example, depending on when the contract was drafted, the possibility of an event getting cancelled due to COVID-19 may have been foreseeable at the time, and thus, the court may view this as a risk which was taken into effect at the time of entering into the agreement.
Parties Receiving Notices of Force Majeure
You must carefully weigh the legal and business consequences of accepting or rejecting a force majeure declaration based on the coronavirus outbreak. Some parties appear to have accepted force majeure declarations, while others have rejected them.
Others are actively working with affected companies to avoid a force majeure declaration altogether by affording the affected party certain accommodations, such as extra time to perform.
- A party receiving a notice of force majeure should carefully examine the claim to determine:
- if it is consistent with the scope of protection conferred by the force majeure provision;
- if the process for giving notice has been complied with; and
- whether the relevant supporting documentation or information has been provided.
- A party involved in back-to-back contracts or a network of interrelated contracts will need to take a strategic approach, taking into account the overall impact of the claim for force majeure on its obligations under the related contracts.
- A party embedded within a chain of contracts is involved must also consider whether to issue protective notices of force majeure under the linked contracts as a protective measure.
- Where different laws govern back-to-back contracts, the differing interpretations of force majeure under those laws requires careful consideration.
Parties Making Claims of Force Majeure
Before seeking the trigger the clause, you should carefully consider all of the available options for completion of the contract including any possible alternatives to mitigate the fallout. This may involve considering whether the entire contract is affected or whether there are parts of the contract that you can still complete.
Consider whether there is only a temporary interruption to the performance of the contract or whether completion will in fact be impossible.
- A party affected by the COVID-19 outbreak should take steps to record and document the steps it is taking to prevent or mitigate the impact of the COVID-19 outbreak on its ability to perform its obligations under the contract.
- A party looking to make a force majeure claim should consider carefully how the force majeure event is framed, and the consequences from the event.
- Instead of directly claiming COVID-19, you could rely upon a governmental action or disruption in supply chain
- A party should only make a force majeure claim with care, because a wrongful claim could have serious consequences, including amounting to a breach of contract or a repudiation of the contract. In such circumstances, the other party may be entitled to claim damages or to terminate the contract.
Other possible effects on contracts
There are other contractual clauses used in some commercial contracts that may be triggered by COVID-19. These include change of law provisions. Change of law clauses may be invoked in the event of national governments taking legislative measures to combat the outbreak rendering the performance of some contracts illegal/impossible.
In the absence of force majeure, suppliers may look to avoid liability by relying on limitation and exclusion of liability clauses. What do your contracts say about loss of business and revenue? The construction of these clauses is extremely important when seeking to rely on them.
Depending on your contract, you might have other (termination) provisions than force majeure that are more likely to be triggered by COVID-19.
The doctrine of contractual frustration may be relevant in some common law situations. Unlike force majeure (or change in law clauses), the doctrine of frustration will apply regardless of whether or not the contract expressly provides for its application. The doctrine of frustration can operate to terminate a contract automatically where performance is no longer possible – for example due to the destruction of the subject matter or where an event causes excessive delay. While the doctrine has an narrow scope, it’s important to assess whether it might apply.
- Review the wording of force majeure clauses, paying particular attention to the list of non-exhaustive events which is often included, and the consequences of triggering a force majeure. If the clause doesn’t include a list of events, review the definition of force majeure and whether the general language is sufficient to include COVID-19 and its consequences. If in doubt, it might be best to seek legal advice early in the process.
- If a long list of force majeure events is included, it is likely to be helpful if wording is included such as “flu, epidemic, serious illness or plagues, disease, emergency or outbreak”, “pandemic”, “epidemic”, “outbreak”, “crisis” or “governmental action”.
- Consider those aspects that you are not able to perform and satisfy yourself that the inability to perform is due to the consequences (direct or indirect) of COVID-19 and not a different reason.
- Consider and review what steps you are taking as a business to avoid or at least reduce so far as possible the effects of COVID-19 upon your work force and your ability to continue to perform contracts.
- Consider whether there are any notice requirements to trigger entitlement to relief, including what type of supporting documents must be provided and whether there is any time limit for that notice to be issued.
- Consider what the consequences of a successful claim for force majeure are.
- Contact counterparties of contracts which may be affected and discuss a possible renegotiation, or postponement of obligations, as appropriate.
- Watch out for wording in new contracts that requires that the event of force majeure is “unforeseeable”.
- Determine whether insurances, such as business interruption insurance or force majeure insurance, may cover any of the expected losses
History has shown that in most major crises, panic has created more damage than the crisis itself. Please try to be reasonable and ask legal advice if you are in doubt.
We have a free sample force majeure clause in our Free Legal Resources Library to be used in your contracts.