Force majeure clauses and Covid-19

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Force majeure clauses and Covid-19

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A force majeure clause is a common clause found in contracts that allows one or more of the parties to suspend the performance of its obligations when certain circumstances beyond their control arise, making performance inadvisable, commercially impracticable, illegal, or impossible. In practice, most force majeure clauses do not excuse a party's non-performance entirely, but only suspend it for the duration of the force majeure event.  They may or may not be coupled with a right for the parties to terminate the contract should the event continue.


The circumstances when a force majeure clause can be relied on are typically extraordinary events such as war, strikes, acts of God (hurricane, flood, earthquake, volcanic eruption etc), terrorist attacks, building collapses or pandemics.

Given the Covid-19 pandemic currently sweeping the country we are very likely to see particular stress in sectors such as airlines, shipping, hotels and restaurants, exhibitions and conferences, cinemas and theatres, cruise lines, tour operators and travel agents, to name but a few.

 

If your business is involved in the supply chain within these or other sectors likely to be affected by Covid-19, you or another party to the contract may look to the force majeure clauses in the contract as a way to defer liabilities under the contract whilst the pandemic continues.

What to do if your business is likely to be affected by the pandemic

 

As a first step, if you consider that your business is likely to affected by the pandemic then you should consider whether you can safely engage in a conversation with your suppliers and customers to see whether any contract between you can be extended, paused or otherwise altered to better suit the situation.

 

In the event that strategy doesn’t work, isn’t possible, or presents an unacceptable commercial risk to your business, then you will need to look at the wording of your commercial contracts to see whether there is a force majeure clause and, if there is, how it works. Such clauses in time-critical and other sensitive contracts may be drafted to limit the shield of force majeure where a party does not take reasonable steps (or specific precautions) to prevent or limit the effects of the outside interference, either when they become likely or when they actually occur.

 

As a starting point, you will want to assess whether the clause:

 

  1. extends to extraordinary events such as pandemics like Covid-19, either expressly or implicitly;
  2. excludes any event which was “foreseeable” at the time the contract was entered into (for example, if the contract was entered into last week when Covid-19 was already causing trouble, it’s likely that a pandemic was “foreseeable”); and/or
  3. permits a party to terminate the contract after a period of non-performance has continued for a certain amount of time (if it does then you should consider the implications for operational and financial planning).  

 

Suspending or terminating a contract has many consequences for the parties concerned and relying on a force majeure clause needs serious consideration. If, however, the clause is well drawn and the impact of the current pandemic is not excluded from the scope of the clause, then a party may be able to rely on it to defer (or even bring to an end) its contractual performance obligations.

 

If you have questions about how the current crisis may affect your relationships with your suppliers or customers, we’re here to help. Please get in contact Ian Lindley or Victoria Jessup.

 

View more information on the Covid-19 pandemic on PDT Solicitors Covid-19 Legal Hub 

The content of this webpage is for information only and is not intended to be construed as legal advice and should not be treated as a substitute for specific advice. PDT Solicitors LLP accepts no responsibility for the content of any third party website to which this webpage refers.

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