Force Majeure, does this provision apply to Coronavirus?

The coronavirus pandemic has resulted in the entire world bracing for a very rough ride with an inevitable devastating outcome to the population in every country affected and considerable disruption to the global economy. It has been described by commentators as a true black swan event (a substantial unforeseeable issue with serious consequences).

In an attempt to mitigate the commercial consequences of failure to fulfil contractual obligations, a flow of force majeure claims have made an appearance, with the copper mining industry leading the way with a stream of claims which will undoubtedly be followed by a deluge from industry sectors across the globe.

So what is force majeure? Can it be invoked in the case of failure to fulfil a contract due to the coronavirus emergency? Key factors in force majeure are that the event is unpredictable and uncontrollable. Whether or not coronavirus will constitute force majeure may very well be open to the interpretation of the wording of each contract and any claim must be carefully drafted. One thing that is likely to be a consequence of the current situation, is that all future contracts will have far more comprehensive clauses relating to the potential for an unexpected pandemic.

Force Majeure is a concept that, whilst deriving from civil law, is widely applied in jurisdictions practising common law. It is a provision in a contract that excuses one of the parties to that contract from fulfilling the execution of the contract due to unforeseeable superior circumstances that are beyond reasonable control. Force majeure is often incorporated within an international contract. There are broadly consistent interpretations of force majeure in jurisdictions where civil law applies. However the English courts frequently rely on the actual language used in the contract used to define the provisions, which inevitably results in variable conclusions in the event of a legal challenge. Cross-border force majeure claims will require careful drafting under the present unprecedented circumstances. Another aspect that must be considered is when deciding whether this provision can be applied, is that force majeure is applied across a number of different and separate types of provision.

For example:

Non-performance – a provision designed to excuse non-performance, this clause would be expected to list the excusing force majeure events as specifically as possible, concluding with a “catch-all” clause suspending all relevant obligations should a force majeure event take place. Sometimes the provision will go as far as listing events that will not be regarded as a force majeure event. There may also be a length of time defined relating to the force majeure event, on the expiry of which, one or both parties may terminate the contract.

“Hardship” Clause – a provision that allows for the adjustment of the commercial terms of a contract due to a force majeure event which results in considerable hardship for one of the parties. Effectively, the contract can be renegotiated to reflect the consequences of the force majeure event. The extent of the variation will depend on the force majeure event in question and the wording of the original provision.

Automatic Termination – a provision relating to a defined force majeure event and consequences relating to the event that triggers automatic termination of the contract. Such a provision would relate to a major crisis whereby the ability to fulfil the contract was rendered permanently unavailable. In relation to the coronavirus it is possible that the government may take action which prevents contracts from being fulfilled if there was a blanket embargo on travel to and from a certain area, the ability to fulfil a contract would then be prevented.

Any organisation seeking to rely on force majeure usually has to clearly demonstrate that a force majeure event has prevented or hindered them from the performance of the contract. The organisation must also, depending on the nature of the event, demonstrate any steps that they have taken to mitigate the effects of the event where it is possible so to do.

The consequences of invoking a force majeure provision are that there is relief from carrying out the contract, avoiding a default termination, or the obligations of the contract will be deferred until such time as it can be fulfilled. In these circumstances, it is usual for each party to bear their own costs. If there the force majeure event that is likely to be prolonged it is possible that the contract will be terminated. If this is an unwelcome consequence the parties can negotiate an alternative route on a without prejudice basis.

As it stands at the time of writing there is the prospect of a medical defence against the coronavirus in the shape of the vaccines that various pharmaceutical companies have developed and have only just begun to be administered; the only other measure is isolation and hygiene. The tipping point where the virus may have been able to be contained passed long ago. It is reasonable to say that, in recent times, the only comparable occurrence is the so-called Spanish flu pandemic that swept through the world immediately after the First World War. The impact of this latest pandemic in commercial terms is, at present, unquantifiable; suffice it to say the international costs will go into billions but we appreciate that the human costs will always be far greater.

The commercial teams in all our offices are standing ready to assist businesses with invoking force majeure clauses. If you would like to have more information about making a force majeure claim please click here.