Commercial Contracts and COVID-19: Force Majeure Clauses

April 5th, 2020

Whilst just a few months ago a global pandemic seemed totally implausible, we have seen the devastating impact the COVID-19 virus has had to all aspects of our lives.

Businesses are no exception. A glance at the newspapers or the news bulletins shows that supply chains have been disrupted, certain products are harder to source and some companies cannot fulfil their contractual obligations.

Review Your Contracts

If your business is having difficulty in fulfilling customer orders or your business has suffered delays or cancellations to orders purchased from its suppliers, now is the best time for the contracts governing those contractual arrangements to be reviewed.

Most commercial contracts contain a provision known as a ‘Force Majeure’ clause, which attempts to address unforeseeable events outside of the control of the parties and, more potently, what happens to the performance of each party’s contractual obligations under the contract and legal liability arising out of those obligations.

Force Majeure clauses often contain examples of these unforeseeable events and can include, by way of example, floods, terrorism, war and pandemics.

Can I rely on my Force Majeure clause?

Whether a Force Majeure (FM) clause can be relied upon in the current circumstances will boil down to the precise wording in the contract although as a pre-cursor, in almost all circumstances performance of the contract in question must have been (or is likely to be) prevented, hindered or delayed.

It will be crucial for the breadth of the FM clause to be carefully considered in each instance.

A note of caution – it is unlikely that a business can rely on a Force Majeure clause simply because, for example, the costs of it sourcing and supplying its goods has risen  as a result of the pandemic.

My Force Majeure clause includes ‘acts of God’. Can I rely on this?

Depending on the precise drafting of the Force Majeure clause in question, the clause may make reference to ‘acts of God’. An ‘act of God’ may be defined as an extraordinary occurrence, which could not have been foreseen and which could not have been guarded against – in other words, an accident.

We have all heard from the Government that we live in ‘unprecedented times’ as a result of the COVID-19 pandemic and indeed the law reflects this. Previous cases where the courts have been asked to consider whether ‘acts of God’ can be relied on are exceptionally rare, particularly in the context of commercial contracts. It would be safe to say, given the current climate, it may not be long before the courts are asked to consider this point again.

What other points should I consider?

Again, depending on the precise wording, there may be an obligation on one or both of the parties to the contract to limit their losses  suffered as a result of the failure of performance of contractual obligations, insofar as possible.

Finally, it is universally recognised that these are extremely difficult times, on many levels. If you believe there is likely to be an issue with your business’ supply chain or a supplier has notified you that orders you have placed are likely to be delayed or cancelled, it is always worth considering having a commercial discussion with the other party to rework the existing arrangement and coming to a compromise or an alternative agreement. Of course, any revised deal should be documented.

How can Verisona Law help?

As a special offer, we will carry out an initial  assessment to check the effectiveness of your Force Majeure provisions for a fixed price of £250 plus VAT per contract. Contact us on 02392 98 1000 or email today.