Following on from the outbreak of COVID-19 in Wuhan, and its subsequent global spread, it has become inevitable that many suppliers will face a great difficulty in meeting the demands of their supply contracts. It is therefore no surprise that force majeure clauses have already been invoked by a number of major suppliers across various markets, including CNOOC, one of China’s largest national oil companies.
This article will consider how force majeure clauses can be invoked to vary the terms of, or terminate a contract in the event that a party’s ability to perform their obligations is impacted by coronavirus.
A force majeure clause is a clause incorporated into a contract as a way to remedy non-performance in circumstances where a party is unable to meet their contractual obligations due to circumstances beyond their control.
The clause helps the affected party to avoid liability, and may have a variety of effects, such as suspension for the duration of the force majeure, allowing for renegotiations where the contract may still be partly performed, extending the deadline for performance, or terminating the contract in its entirety. Before invoking force majeure, you should look at the way the clause has been drafted into your contract in order to determine what the remedy will be.
Force majeure is not a catch-all; the use of the term alone in a contract does not automatically capture all events beyond the control of the parties. Check the listed events referred to in the clause; an “epidemic” or “pandemic” is a typical inclusion in a force majeure list, and coronavirus is has recently been escalated to the “pandemic” stage. Parties with a force majeure clause in their contracts should pay particular attention to ensure that a pandemic is covered. If it is not, then parties should check if government action is covered by the clause, as this would provide protection in case of sudden trade restrictions or the imposed closure of premises.
Anyone seeking to rely on force majeure, provided they believe they are capable of doing so under the force majeure clause in the contract, must prove that a) the event does fall within the clause, and b) non-performance was due to the event.
The claiming party must show that the force majeure was the sole cause of non-performance. In instances relating to COVID-19, this means showing that they would have been in a position to fulfil their obligations had it not been for the direct impact of coronavirus.
A force majeure clause will typically state that the defaulting party must show that it took reasonable steps to mitigate the effect of the force majeure. Therefore, in seeking to make a force majeure claim, a party would ideally show that it attempted to minimise the impact coronavirus would have on their ability to perform.
As a buyer, force majeure clauses should also be considered in circumstances where coronavirus will impact your ability to accept delivery of goods or provision of services. For example, if your premises is forced to temporarily shut down due to an infected employee, you may be able to rely on force majeure in refusing to accept deliveries.
If the counterparty to your contract seeks to claim force majeure, you should consider methods to enforce the contract. If your contract has an arbitration clause, then this can be relied on in the event of a force majeure dispute.
If there is no arbitration clause in the contract, you may wish to seek any of the following remedies via the court, depending on the circumstances:
1. Damages for breach of contract – useful for a buyer if you’ve had to resort to a more expensive alternative supplier at short notice due to the supplier’s non-performance.
2. Specific performance – if you are relying on the performance of the counterparty, you can seek an order compelling the counterparty to perform its obligations.
3. Mandatory injunction – similar to specific performance, although it acts as an order for the counterparty to do a specific act. This may be a useful alternative to specific performance if you do not require the counterparty to fulfil all of its obligations.
If a contract cannot physically or legally be performed, it is possible to rely on the doctrine of frustration to discharge parties from their obligations. There is a significantly higher bar to establishing frustration as opposed to force majeure, and it is unlikely to be claimable if a contract has a force majeure or other clause which covers pandemic, or the particular consequences suffered by a party. The important thing to consider is that if it is possible to perform the contract by alternative means, even though it may be at a much greater expense, then the contract will not be considered frustrated.
Parties should be aware that force majeure clauses may not operate in contracts across the entire supply chain, particularly in smaller supply contracts. Frustration does not apply to a contract between a supplier and purchaser where the supplier fails to fulfil their obligations due to being failed by their own supplier further down the chain, so it is important that alternative suppliers are kept in mind.
1. Insurance – check any relevant insurance cover and consider your contractual obligations, including notifying insurers so as to protect your position.
2. Consider your reputational risk and long-standing relationships with counterparties – if you are able to work with a counterparty to mitigate losses, this will ensure that a good working relationship is maintained in the future.
3. Implement steps to mitigate the effect of coronavirus, and document them – whilst most businesses are taking steps such as promoting extensive handwashing and imposing mandatory isolation periods for employees returning from high-risk areas, it is important to have a record of these policies in the event that you need to rely on a force majeure claim.
If you have any queries on disputes arising from a force majeure claim, please contact one of our Commercial Disputes Team.
