Coronavirus and force majeure - keeping your contracts safe
On 30 January 2020, the World Health Organisation declared the outbreak of the coronavirus a public health emergency.
Since then we have seen the Coronavirus, COVID 19 as it is now generally known, (much to relief of the makers of a popular beer company…) become a widespread global health and economic problem.
Human and Economic Impact
The human cost, in terms of numbers of cases and deaths attributable to the COVID 19, is widely reported in our media on a day-to-day basis. However, as well as the human cost we are now starting to see (and feel) the economic impacts.
We have seen workplace shutdowns, disruption of production and supply chains, port closures and the suspension of air travel. This week we have also seen the sharp fall in oil prices, the meltdown of global markets, the surprise ½% cut to the base rate and the complete lockdown of a European country. Not to mention the cancellation of football games and sporting events – as any supporter of Man City and Arsenal would have discovered the other day.
Whilst we have seen other public health emergencies in the past, the size, scale and overall impact of COVID 19 on other daily lives and our business operations is something that we simply have not experienced before in living memory.
In such circumstances, and as parties struggle with some of the fallout, it is very likely that we will see a rise in force majeure claims.
Force Majeure clauses
Force majeure clauses are used to temporarily or permanently (if that is the way they are written) excuse the performance of one or more parties to a contract. They are a way of allocating contractual risk, and excuse one of the parties from liability, where the parties experience unforeseen events.
It should be noted that the term ‘force majeure’ has no recognised meaning in English law or Scots law. Therefore, if a party wants to use any force majeure provisions as a way of smoothing out some of the uncertainties and disruption that COVID 19 has brought about, they are going to have carefully review their contracts.
Exact wording is key
The precise wording of a Force Majeure clause, and in particular the exact definition as to what constitutes a force majeure event, will be a key factor in assessing whether COVID 19 is a force majeure event for your contract. So, what does your contract say?
Some common language, often seen in Force Majeure definitions include:
- ‘acts of god’ or an ‘event outside the parties’ reasonable control’ - Is COVID 19 an act of god?
- ‘disease’, ‘epidemic’ or ‘pandemic’ – COVID 19 has now been officially declared as a pandemic.
- ‘government restrictions’ - it is also possible for something related to the virus, like the governmental restrictions of the kind that have been imposed in China, Italy and now the USA, to fall within the scope of an force majeure clause.
As well as clear language to define coronavirus as a force majeure event, the parties still need to demonstrate that COVID 19 has actually caused the failure to perform the contract. Without a direct causal connection, parties will be unlikely to rely on COVID 19 as a way of looking to excuse performance.
Also, it is fairly common to see that ‘reasonably foreseeable events’ are excluded from the definition of force majeure. Could it be argued that COVID 19 was reasonably foreseeable? We already have and live with a number of other similar viruses. Is this not just a new strain?
As always, all cases turn on their own facts – as us lawyers like to keep reminding everyone.
Here are some practical tips when considering force majeure clauses and COVID 19.
- review your key contracts, and in particular the definition of force majeure events, to determine whether COVID 19 is likely to be construed as a force majeure event, entitling you (or the other party) to be excused from further performance of the contract
- take reasonable steps to avoid or mitigate the effects of COVID 19
- check whether the contract contains any specific requirements on notifying the other party – these notification requirements should be followed very carefully
- retain evidence for any future legal claim
- revisit and update your standard contracts and T&C’s, where appropriate
- consider whether sufficient insurance cover is in place in respect of losses arising from COVID 19.
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