Force Majeure in the Time of COVID-19
The fear and pressure that the Coronavirus is placing on Australian business is immense. In addition to the medical threat, many businesses are looking at how their operations can continue, where costs can be cut, and where and how certain contracts can be jettisoned.
Many are starting to look at Force Majeure clauses to see if they hold grounds for forfeiting compliance of particular contractual obligations, or the contract in its entirety.
The term “Force Majeure” originated in French civil law; it literally means a “superior force” and refers to unforeseen events or situations of a sizeable and catastrophic nature: riots, revolutions, crime. They are usually grouped with what are termed “Acts of God”, which refers to dramatic natural events on the scale of a flood, hurricane, hail etc. These are situations that are significantly disruptive and outside the control of either party. Force Majeure clauses are boilerplate items that appear in 99% of contracts, and tend to be ignored during reviews and negotiations because of the standard nature of their contents and the unlikely chance any of the events would ever come to pass. It should be noted that some force majeure clauses will make specific mention of epidemics or pandemics, but that is far from common. Expect that to change.
A situation would be classified as a Force Majeure if:
- A party is prevented from performing their obligation, either wholly or in part
- The event is reasonably unforeseeable and beyond a party’s reasonable control
- The party is unable to prevent the consequences from the event (ie they couldn’t find an alternative way to carry out their obligations)
Force majeures can typically be classes into two categories – simple and comprehensive. A simple force majeure will state that in such an event, the parties are relieved of their obligations and won’t be liable for breaches caused by the event.
A comprehensive clause will define the steps the parties need to undertake in the event of a force majeure and often include:
- Giving notice to the other party
- Fulfilling all obligations that are not affected by the event (usually including payment obligations)
- Taking steps to mitigate the event’s impact.
If the force majeure event is ongoing – usually more than 30 days – many clauses will allow the party to terminate the contract.
It is important to be aware that some force majeure clauses require notice of the event to be given as soon as possible. Considering this, engaging in any discussions or negotiations with the other party may be understood as forfeiting your ability to rely on this clause later.
Eventually COVID-19 will pass, and business will return to normal. Once it does, you will need relationships with your customers and suppliers to get back up and running. Considering this, you should be careful about negotiating too harshly with them now. It may be more productive and beneficial in the long run to see if you can come to an understanding with the other party about how your relationship and dealings can best be mitigated throughout this period: see if payment terms can be extended or changed; if deliveries can be staggered and so on. Record your conversations in writing, as these compromises may effectively become part of the contract, as contracts can be varied by consent of the parties.