The rapid spread of COVID-19 is having an unprecedented impact on global markets, trade and commerce. Business owners are overwhelmed and are feeling the economic brunt of the mass scale interruptions to their businesses. Extreme containment measures imposed by governments have compelled business owners to reconsider their ability to perform contractual obligations.
Many businesses are reviewing their contracts to ascertain the ambit of their rights, remedies and obligations and clauses that would protect them from a default or remedies that they would have against other parties for non- performance of contractual obligations.
Force Majeure clauses could prove to be an effective safety mechanism for businesses against delayed or non- performance of contractual obligations.
Force Majeure Clauses
Force majeure clauses can be found in commercial contracts whereby performance of contractual obligations is exempted under certain defined circumstances. The term force majeure refers to “superior force” or commonly identified as “acts of god.” This encompasses natural disasters such as floods, earthquakes, tsunamis etc. and acts of men which are of a disruptive nature such as industrial action.
According to Black’s Law Dictionary a force majeure clause, “is meant to protect the parties in the event that a contract cannot be performed due to causes which are outside the control of the parties and could not be avoided by exercise of due care.” As such force majeure clauses apportion the risk between two parties when an unforeseeable event makes performance impossible or impracticable.
In many common law jurisdictions, force majeure is not implied as a matter of law and should be expressly provided for in a contract and are usually afforded a strict interpretation by courts. Conversely, many civil law jurisdictions allow for the implication of force majeure clauses in a commercial agreement.
How to construe a force majeure clause?
In common law jurisdictions, interpreting a force majeure clause will involve a careful analysis of risks agreed by the parties and ascertaining which commercial party would bear the risk. This in turn, requires a careful analysis of the language used in the particular force majeure clause. A force majeure clause generally contains a list of specific events which are considered as amounting to force majeure events. Most force majeure clauses define the specific events and then include a wide “catch-all” provision such as “including but not limited to” or “for other reason whether of a like nature” etc. It should be noted that the clause will have limited application when it is more specific. Most force majeure clauses also specify that the clause will have application when the performance becomes impossible whereas some liberally drafted clauses may require only the hindrance or delay of performance.
As it pertains to the Covid-19 outbreak, which is relatively a new phenomenon, it is difficult to conceive that the event would be specifically referred to in any force majeure clause. Therefore, the reliance on the clause will require inclusion of events such as epidemics, work stoppages or actions by governments.
On 11th March 2020, the World Health Organization (WHO) classified the Covid-19 outbreak as a ‘pandemic’ which is severe than an ‘epidemic’ owing to its extended geographical spread.
Most force majeure clauses would include the word ‘epidemic’ in its long list of events. Even in the absence of the word ‘epidemic’ Covid-19 will nevertheless qualify as a force majeure event due to government-imposed travel restrictions and quarantine measures.
In the case of widely worded force majeure clauses which do not encapsulate the Covid-19 outbreak, the parties will be required to prove that it was not ‘reasonably contemplated’ by the parties when drafting the contract and that it is ‘beyond the reasonable control’ of the party who is attempting to rely on it.
Generally, force majeure provisions suspend the requirement for performance of certain obligations for a specific period of time (i.e. until the end of the pandemic in the current scenario) and will require the affected party to continue to perform its obligations to the extent it is not hindered by the force majeure event. However, in certain contracts, a prolonged period of force majeure event will permit the parties to terminate the agreement where suspension of obligations may not be a viable option for the parties.
Invocation of force majeure
For an affected party to avail itself from a force majeure clause, they are required to fulfill certain conditions. Firstly, the affected party will be required to notify the other party of the force majeure event within a given time frame. The failure to do so can prove to be detrimental for the entitlement of force majeure relief. The notice requirement will be ongoing whereby the affected party will have to keep the other party informed about the actions undertaken to mitigate the impact of the force majeure event.
The onus will also be on the affected party to prove causation i.e. that the force majeure event (and not any other factor) caused the delay in the performance of the contractual obligations or the failure to perform the contractual obligations despite reasonable measures taken by the affected party to mitigate the effects of the event.
What steps should be taken by your organization?
- Examine your existing contracts and see which might have a potential impact by travel restrictions and quarantine measures or where the counterparty may be looking at suspending or terminating the contract.
- Communicate with your suppliers or customers and glean an understanding about the impact of the outbreak on the performance of contractual obligations.
- If your organization is unable to fulfill your obligations due to the outbreak immediately notify the other party of the same.
- If in doubt about the application of the force majeure clause, seek legal advice before acting or sending communications.