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Coronavirus and Force Majeure

February 18, 2020

At the time of the Global Financial Crisis, the Force Majeure clause briefly rose to second place in the annual study of the most negotiated terms. Those buyers and suppliers who had sufficient power to drive changes sought to reshape the clause in ways that would work to their advantage.

Now, the outbreak of the Coronavirus and its fast-emerging impact on world trade has once again elevated the importance of Force Majeure clauses and many are asking how it will impact obligations of contract performance.

Finding the contract

It is at times like this that many organizations wish that they had better control and insight into their contracts. In order to establish the likely impact of this health emergency, they firstly need to be able to find their contracts and secondly they need to analyze what they say. A fortunate few will have robust and searchable repositories and have also deployed the sort of AI or NLP tools that support rapid analysis and review of the relevant terms.

But beyond this, is the nature of the emergency now declared by the World Health Organization likely to qualify as a Force Majeure event? In order to qualify as a public health emergency, it must (i) be extraordinary; (ii) constitute a public health risk to other States through the international spread of disease; and (iii) potentially require a coordinated international response. These factors clearly indicate the seriousness of the event, but in themselves do not of course generate the basis for a claim of Force Majeure.

Determination of applicability will always depend on the specifics of the clause and how it is written. But there are other factors to be taken into account in any adjudication relating to the applicability of Force Majeure. Among the critical factors are likely to be industry custom, whether or not the event in question was unforeseeable, and whether adequate efforts have been made to mitigate the consequences.

Further considerations  

Thoughts on this topic do not simply end with the question of whether Force Majeure applies (and in many cases I suspect it will). There are also factors such as termination rights to be considered, This will most likely depend on the duration of the event – so right now, not something we can forecast.

There are also likely to be related terms to consider. For example, if Force Majeure applies, what consequence does it have on things such as an extension of time, or future obligations on supply, or possible recovery of additional costs. Also, are losses in any way recoverable under insurance?

Finally, what about a situation where there is no Force Majeure clause – does this mean an obligation to perform? the answer is not necessarily, because the concept of ‘frustration’ may apply.

 

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