Business Contracts and COVID-19: Force Majeure27 Mar, 2020 - Business and Entrepreneurs | by Grosvenor Law
The COVID-19 outbreak has caused, and continues to cause, significant uncertainty for businesses. Businesses will be reviewing their contracts to determine their rights, obligations and the remedies available to them, in anticipation of parties being unable to perform. In these circumstances, one of the first contractual provisions considered are force majeure clauses.
What is a force majeure clause?
A force majeure clause typically relieves a party from fulfilling its contractual obligations where circumstances arise that are beyond its control.
Does the contract contain a force majeure clause?
As a matter of English law, force majeure clauses cannot be implied into contracts – they must be expressly included. Therefore, businesses will need to consider each individual contract and determine whether it contains a force majeure clause which applies to the business in these circumstances.
Can we rely on a force majeure clause because of the COVID-19 outbreak?
The mere existence of a force majeure clause does not mean a party has the right to invoke it in all situations. A force majeure clause would usually be drafted to cover specific, expected events which are set out in the contract; the way that the clause is drafted, will therefore be important in understanding whether or not it may be relied upon . It is unlikely that the force majeure clause actually lists or envisages the COVID-19 outbreak, however it may specify events such as:
• work stoppages;
• compliance with a law or governmental order, rule, regulation or direction; and
• delays by suppliers or materials shortages.
A business may find it possible to argue that the Covid-19 outbreak is included in one or more of these specified events.
Should we invoke a force majeure clause?
It is important to note that invoking a force majeure clause is likely to have an effect on other contractual clauses, including but not limited to, liquidated damages and termination rights. Whether the consequences of invoking are good business will therefore need to be considered with care. For example, force majeure clauses typically include the right for the unaffected party to terminate a contract when the force majeure event has continued for a specified and/or continued period of time. So, whilst invoking a force majeure clause might be tempting in the short term, it may unintentionally trigger termination rights under a contract in the long term.
Moreover, a force majeure clause typically contains an express obligation to mitigate by preventative action and procedural requirements which must be followed to effectively claim relief under the clause. Businesses should carefully consider the terms of their contracts in their entirety, and take legal advice before invoking force majeure clauses.
Akram Shalabi is an associate in Grosvenor Law’s commercial litigation team, where he often advises on complex, large scale disputes
The contents of our blog posts do not constitute legal advice and are provided for general information purposes only