FORCE MAJEURE: CONTRACTUAL ISSUES ARISING FROM CORONAVIRUS

Introduction

COVID-19, commonly referred to as coronavirus has turned to an epidemic in more than 60 countries and the spate of infections has caused the authorities to take strong measures which have substantially impacted economic activity e.g. travel restrictions have been put in place which has disrupted international supply chains.

With no end in sight to the outbreak, companies have started considering Force Majeure as a legal option to mitigate the impact of the crisis on existing contractual obligations.

#Meaning

A Force Majeure clause is a contract provision that allows a party to suspend or terminate the performance of its obligations when certain circumstances beyond their control arise, making performance impracticable or impossible.  

The provision may state that the contract is temporarily suspended, or that it is terminated if the event of force majeure continues for a prescribed period of time. The scope of a force majeure claim is usually limited to how it is defined in the contract.

#Applicability

The list of events to be included is a matter of negotiation between the parties but usually include events like war, riots, fire, flood, hurricane, typhoon, earthquake, lightning, explosion, strikes, lockouts, slowdowns, prolonged shortage of energy supplies, and acts of state or governmental action prohibiting or impeding any party from performing its respective obligations under the contract.

Many force majeure clauses are very broad and simply require that the event is one beyond a party’s control. Provided that the conditions in a force majeure clause are satisfied and it can be demonstrated that the outbreak has affected the parties’ ability to fulfill its contractual obligations, then the coronavirus outbreak may well meet the contractual requirement and be considered a force majeure event.

#Consequences

Typically, the clause will provide that the parties’ obligations under the contract will be suspended until such time as the force majeure event (and its direct effects) have ceased to prevent performance of the contract. It is prudent to include in the clause a requirement for regular updates by the party relying on the clause. 

Most clauses will provide that if the impact of the force majeure event is not lifted within a certain time, for example 6 or 12 months, then the parties will have the right to terminate the contract.

The parties should also consider the knock-on effect on other provisions under the contract. For example, it may be appropriate to provide that the term of the contract will be extended by the duration of the force majeure event.

#Practical Steps

• A party wishing to assert a force majeure claim should retain all relevant documents in anticipation of claims being resisted.

• The party asserting Force Majeure should give notice of the event as soon as possible (Typically 7-14 days)

• The Party receiving a Force Majeure Claim should put the asserting party to strict proof and if claim not acceptable should reject within the relevant contractual timelines or the entitlement to defend the claim might be lost.