Covid-19 and force majeure – an essential checklist18 March 2020
Covid-19 and force majeure: an essential checklist
In these difficult times, there is a good deal of cooperation going on between parties to agreements to get past the havoc wrought by Covid-19. Having said which, it would be idle to suggest that all is plain sailing as parties have to protect their own interests and many are looking for an exit from an agreement that has suddenly become non-viable.
What should you be looking at? What should you be doing? Here is a simple checklist to get you going in the right direction.
Like all checklists, this one comes with a caveat: all comes down to the precise wording of your contract and the particular circumstances of your situation, so this is general only, not specific advice.
1. What is your governing law clause?
It is tempting to rush at the contract but always first check which legal system applies to the contract. While English Law does not have any general concept of force majeure, other legal systems might do, especially if they are following some civil law system (such as those used on the Continent). This note is predicated on English Law applying.
(Note: a choice of law clause is not the same as a jurisdiction clause. A clause providing that the Courts of England have exclusive jurisdiction is not the same thing as providing that the English Courts should apply English Law. You need two provisions dealing with both choice of law and jurisdiction).
2. Identify your force majeure clause(s)
This is not always so easy as you might think. It might be called force majeure, but that would be too easy. I saw one recently that was headed “Impossibility”, but there are other options, such as clauses (or schedules) dealing with assumptions or dependencies. Even after you have found your force majeure clause, there might still be some clause or paragraph tucked away in a schedule dealing with assumptions or dependencies (or whatever). Don’t forget to check the Definitions section which might provide an exhaustive definition of what amounts to force majeure.
Another important point is that some contracts might have a Material Adverse Change (or MAC) clause: this is especially a point to watch for in corporate or financial transactions. It might be there in addition to a force majeure clause but apply in different circumstances.
3. Work out the contractual carve-outs to force majeure
While most commercial agreements have a force majeure clause, they might also have other provisions that cut right across it or severely limit its effect.
If a party undertakes to devise and maintain some sort of Business Continuity plan, then this could well have the consequence of limiting the value of the force majeure clause.
Similarly, there could be another provision dealing with change in law following the commencement date. If the real reason for your inability to perform is in fact restrictive government regulation brought in to deal with the Covid-19 outbreak, then these sorts of clauses could again be a big carve-out from the protection given by the force majeure clause. eck for these sorts of carve-outs – typically Business Continuity or Disaster Recovery. Check for their effect on the operation of the force majeure clause.
4. Work out what the clause(s) cover(s)
This is where it gets harder. Not all force majeure clauses are born equal – everything comes down to the particular words used. You can devise different categories of force majeure clause which might be useful if you have a lot of contracts to review quickly e.g.
- “Contractual frustration” (relatively rare) vs. “exceptions” (relatively common) clauses: a contractual frustration clause will provide for automatic termination of the contract after a specified force majeure event whereas an exceptions clause leaves the contract alive but provides that a party is relieved from liability after a specified force majeure event
- Long-form vs. short-form: a long-form clause will list a (sometime) vast array of individual force majeure events whereas a short-form clause might simply provide for any event “beyond a party’s reasonable control”
- Limited effect vs. broad effect: the clause may specify that a force majeure event must “prevent” performance (limited effect) whereas another might provide that a force majeure event should only “hinder” or “delay” or “impair” (broad effect)
5. Dive into the detail – does the particular wording cover what has happened?
Looking at the specific wording, taking account of the type of force majeure clause you are dealing with, does the wording cover Covid-19, in particular the consequences of the virus oni your business?
- With a long-form clause, does it actually refer to an epidemic or pandemic or anything similar? If not, the court will not imply the words for you, there has to be some wording actually covering the outbreak of Covid-19
- Especially with a limited effect clause (“prevent”), are the effects of Covid-19 such that they have “prevented” performance of the contract (or a part of it)?
- With a broad effect clause (“hinder”, “delay” etc), this question may be easier to answer
- Where you have a short-form clause, are the consequences you are suffering such that things are beyond your reasonable control? This is where other provisions, such as those providing that a supplier should maintain a comprehensive Business Continuity or Disaster Recovery programme, might cut right across the effect of a force majeure clause
Recent case-law suggests that courts are prepared to apply a fairly restrictive approach to force majeure clauses, requiring that the party claiming force majeure should be able to show that “but for” the force majeure event, it would have performed. Having a plurality of causes, one of which is force majeure but the other not may deprive you of the benefit of the protection of the clause according to recent case-law.
6. Make an assessment of your surviving obligations
Again, much will depend on your specific wording, but the force majeure clause may nonetheless require that a party affected by force majeure should strive to continue with performance, or find ways around the force majeure event. These are important as they have the potential to cost money.
Even if you have a short-form force majeure clause (“beyond a party’s reasonable control”), case-law suggests that you cannot sit back idly but must actively seek to limit the operation of the clause or seek ways to mitigate the effects of the force majeure.
So – what are you doing and are you documenting your actions and decision-making processes?
7. Work out what you have to do to claim force majeure
Force majeure clauses normally require a party claiming force majeure to claim it by the service of a formal notice. There is a good deal of case-law on this vexed topic. Notices clauses have in recent years become prohibitively complex and require exact compliance to gain the benefit of having served notice. A recent case confirmed that where a force majeure clause requires some sort of notice, then compliance with the notice provisions is a precondition to claiming relief under the force majeure clause.
It gets even harder when the clause requires a party to serve a notice specifying “reasonable details” of the effects of the force majeure. Again, recent case-law suggests that quite a lot of detail might be required for a valid notice.
A further point is that some clauses require continuing reporting on the effects of the force majeure at regular intervals, failing which, the benefits of the clause may be lost. Notice again may be required as you approach or achieve the end of the force majeure.
The consequence of failing to give a required notification of force majeure or getting the notice wrong may well be that you have not served a valid notice at all. The consequence is then that you don’t get the benefit of the force majeure clause – foot-faulted.
8. Assess the protection given by the force majeure clause – document your actions
The clause in question may be a contractual frustration clause (leading to termination – rare) or it may be an exceptions clause (providing a defence for non-performance – common).
If it provides a defence, what is that defence – do you get a “reasonable” extension, or do you have specific obligations imposed on you e.g.
- Continue working on such of the contract as is not affected by force majeure
- Reporting obligations
- Seek workarounds or mitigation of the effect of the force majeure
These might cost additional money, so are important to note. Check whether the additional costs are claimable from the other party – there could be some sort of price adjustment clause, or additional work might be claimable according to some rate card included in the contract.
Are you required to take steps to agree actions with the other party following notice of force majeure? Assess whether those obligations are binding or unenforceable “agreements to agree”. Consider the consequences of failing to agree.
In all cases, document what you are doing in terms of mitigation or continued working or whatever, as you may have to prove it later.
9. The end-game – preparing for termination
Some force majeure obligations are in the nature of “contractual frustration” clauses providing for automatic termination after a specified force majeure event. Other clauses might give one or both parties a right to terminate if the force majeure continues beyond a defined period.
Consider whether you need to terminate if you have the right to do so.
Are you ready for termination? Is the clock ticking – if notice has been served, does that party have a right to terminate after a defined period? If you are the customer, do you have alternative sources of supply lined up?
10. Consider your position if you receive a notice of force majeure
If the contract is part of a chain of contracts and you get served a notice of force majeure, you need to consider quickly whether you should serve force majeure notices on subcontracts or head contracts affected by performance. Those contracts may or may not be back to back – exceptions need to be noted.
This is where it gets complicated: you need to assess each contract in its context and work out whether a force majeure notice served on one contract will have knock-on effects up or down the chain of contracts.
11. Play nicely!
Remember that it is not always necessary to get the contract out and threaten the other side. In a global pandemic such as Covid-19, the other party to your contract may be going through a similar or even a worse experience. It may be possible to agree something by way of change control that benefits both parties in the long term.
Remember not to prejudice your position by not serving notice of force majeure while negotiating with the other party though.
Richard Stephens 18 March 2020
Caveat: I warned right at the beginning that force majeure clauses are all different. The effects of Covid-19 on a party’s performance will differ from one business to another. Always take professional advice before acting on anything contained in this note.