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Businesses should review Force Majeure clauses and take action to preserve rights and limit liability
The world is currently navigating uncharted waters with the rapid spread of the novel coronavirus (COVID-19). According to the World Health Organization, as of March 18, 2020, a total of 191,127 cases and 7,807 deaths were confirmed globally. In addition to the health implications of COVID-19, this pandemic has and will continue to impact our local businesses and economies. Supply chains are disrupted, financial resources are strained, and businesses are challenged to meet fundamental contractual obligations.
What happens when your business or one of the businesses you receive goods or services from can no longer perform under contract? Many, but not all, commercial contracts have a clause designed to forgive non-performance in the event of circumstances beyond control. These are called “force majeure” clauses. A force majeure clause in your contract may be invoked as a result of the COVID-19 pandemic to excuse non-performance of contractual obligations, but it is highly fact dependent and must be assessed on a case-by-case basis.
Force Majeure Clauses – General Structure
Force majeure clauses are an important risk allocation tool and are often negotiated and tailored to specific commercial contracts and industries, but generally include the following:
- A list of events which are defined as force majeure events,
- for example, natural disasters, war, terrorist acts, civil unrest, labour strikes, “acts of God”, epidemics, pandemics and government actions.
- The degree to which a force majeure event impacts contractual obligations,
- for example, some clauses invoke the high standard of “prevention” or “impossibility”, while others invoke the lower standard of “delay” or “hinderance”
- The relief available to an impacted party,
- for example, a party may be relieved of its contractual obligations, in whole or in part, and not held liable, in default or otherwise in breach of the contract.
- Notice obligations of the impacted party to provide timely notice of the force majeure event in question;
Invoking Force Majeure
Force majeure clauses are interpreted narrowly by the courts. To invoke force majeure, a business must first establish that the event falls within the list of events expressly stated in the force majeure clause. The more events included in this clause increases the chance the event in question will be captured. Once the event is determined to fall within the meaning of force majeure, the impacted party must establish that the event has prevented, delayed or hindered (depending on the express wording of the clause) its ability to perform contractual obligations.
Even if a business establishes the foregoing, it must ensure that it complies with all notice obligations. Failure to deliver notice within the specified time period could negate the ability to invoke force majeure. Additionally, an impacted party must show that it mitigated the impact of the force majeure event and not just let it unfold. The duty to mitigate in this case is limited to commercial reasonableness. Otherwise stated, a business that is unable to perform its contractual obligations must still take commercially reasonable steps to alleviate the issue and resume performance as soon as reasonably possible.
Force Majeure and COVID-19
If the force majeure events listed include words such as “disease”, “outbreak”, “epidemic” or “pandemic”, it is likely that COVID-19 would be considered a force majeure event. However, if these terms are not listed, a business will need to assess whether COVID-19 falls into an analogous category. Sometimes force majeure clauses include broad “catch-all” language to include “any event beyond a party’s control” or similar wording; however, this is highly fact dependent and opens the door to challenge from an adverse party.
Assuming COVID-19 falls within one of the force majeure events listed, a business must show that COVID-19 prevented, hindered or delayed it from performing contractual obligations. Unprofitability or an increase in financial strain is not sufficient. An analysis of the relationship between the parties and the nature of the business, would aid in assessing whether COVID-19 in fact prevented, hindered or delayed contractual performance.
Take-Aways and Recommendations
If your business is experiencing goods or services interruption due to the COVID-19 pandemic, contact your legal advisor to formulate an appropriate course of action. Your COVID-19 response plan should include:
- A review of affected contracts to determine if COVID-19 falls into one of the listed events defined as a force majeure event;
- A compliance check of all applicable notice obligations such as delivery periods and required content; and
- A plan to ensure commercially reasonable steps are taken to mitigate the impact of COVID-19.
The full extent of COVID-19’s impact on business and our economy is yet to be seen. In the coming weeks and months, we will be forced to deal with COVID-19 and its knock-on effects as they continue to evolve. For your business, that means preserving your rights and limiting your liability during this period to the greatest extent possible. It is important we all work together to limit COVID-19’s reach and mitigate its impact as best we can.
