24th Mar 2020

What is force majeure and what does it mean for my business?

Designed to alter parties’ responsibilities when extraordinary circumstances hit; force majeure clauses are increasingly being looked to as a solution to Covid-19 related contractual issues, though their enforcement will depend on how they, and your contracts, are written.

Will coronavirus trigger a force majeure clause?

Now that coronavirus has landed, a lot of people are wondering whether or not the situation is bad enough to get them out of performing contractual duties where they are affected by the pandemic.

The answer – a typical lawyer answer – is “maybe, it depends”. It is true and there’s also the doctrine of “frustration” that could apply too.

It really is just very, very fact specific and you need to READ your contract to see what it says and really think about it before you do anything. If in doubt though, find a good contract lawyer.

Think about the implications of Covid-19

The first thing to consider is what might realistically happen to your business as a result of the coronavirus outbreak? Think about:

  • Social distancing or other PHE advice requiring closure of premises/offices
  • Travel restrictions and bans
  • Staff shortages/many people off sick
  • Supply chain disruption (facing the same issues)
  • Drop in custom/demand
  • Increased costs/expenses
  • Internal chaos

The question then becomes, what can I do about it? Say – quite rightly – you have told your employees to work from home, but this has reduced your overall capacity to carry out work. Can your customers still insist that you meet the same deadlines? Well, maybe they can – it all depends on the agreement you have entered into.

Take a look at your contract(s)

If you have one, get the contract out and take a look at it. Probably somewhere near the end you might see a clause called “Force Majeure” and that could be where the answer lies. Often, you might not be able to see the words “force majeure” anywhere and instead you’ll see something similar to this, (the wording will vary considerably from contract to contract, but I’ve added my own emphasis on the important parts that I want to talk about):

Neither party shall be in breach of this agreement nor liable for delay in performing, or failure to perform, any of its obligations under this agreement if such delay or failure result from events, circumstances or causes beyond its reasonable control. In such circumstances the affected party shall be entitled to a reasonable extension of the time for performing such obligations. If the period of delay or non-performance continues for X months, the party not affected may terminate this agreement by giving X days' written notice to the affected party.

The key part to consider here is “beyond its reasonable control”. Generally speaking, you have to try to take into account, and cover off, certain things that could “foreseeably” go wrong. When something unexpected happens, where that wasn’t your fault, and you couldn’t have foreseen that might happen then you may be able to argue that you are affected by Force Majeure.

So if the government instructs the population to work from home and self-isolate, or if they order a ban on international travel, then following those orders could be covered under force majeure because we only vote our government into power, we don’t control them and we are subject to their decisions.

What you really need to make this enforceable is a slam dunk, for Covid-19 you’re looking for the words “pandemic”, “epidemic” or similar to be expressly set out under the definition of Force Majeure. But there are very rarely defined circumstances set out in a force majeure clause to tell you what will count as force majeure. Often, you’ll be left trying to read the clause several times scratching your head asking yourself if a certain word or phrase might be taken to include your current circumstances.

Are difficult business conditions covered?

It is important to note that you can’t just rely on force majeure if things get a little bit more difficult or expensive to do.

Let’s take an example. Say you’ve agreed to carry a 50kg rucksack from point A to point B and you just so happen to have signed a contract with your mate “Dave”, the lawyer, who writes up contracts for everything…

  • Situation one: Dave takes you out the night before for a few drinks and the next day you’re feeling pretty rough, carrying that 50kg rucksack is going to be tough. Dave isn’t going to let you off as you’ve not been affected by Force Majeure (he’s a stickler for the law). you’ve been affected by force Dave. Without getting pretty deep into the laws of equity and whether or not Dave acted unconscionably by getting you drunk and was trying his best to make sure you had a really bad time the next day, you really can’t get out of lugging that big old backpack from A to B.
  • Situation two: Now imagine that the government has “advised” people to stay inside unless absolutely necessary. Dave could argue that it’s still absolutely necessary for you to carry his rucksack for him, he needs that thing at point B by tomorrow and it’s too late to find anyone else to do it, you might be looking at having to take appropriate measures before making your journey to ensure you’re safe. It just got more expensive and a bit riskier, but it isn’t impossible.
  • Situation three: The government announced that it has quarantined the entire country, we are all under lock-down until further notice. This is not specifically an “act of God” (sorry Boris) but it could be enough to get you out of having to take that backpack to point B, at least until the quarantine is lifted.
Are alternative arrangements acceptable?

You can replace Dave’s rucksack with anything that may affect your business. Let’s take as an example a seminar or training package.

You can deliver seminars online pretty easily and obviously that would be the sensible approach - there are plenty of affordable solutions out there. In all three situations above, you could potentially do the seminar online (though in the case of situation number one may not want to at the time).

The other two situations may be suitable for providing this kind of “alternate” service, and because the end result is the same as with physical attendance to a seminar, it would be reasonable in the circumstances to make that kind of adjustment. Watch out for clauses though – you may have agreed that physical attendance was essential, in which case the webinar would not be appropriate. You really do need to consider what is actually impossible versus what would simply be trickier or more expensive.

What should you do now?

There are a few steps to consider:

  1. Get your contracts together and summarise your facts
  2. Start the conversation as soon as possible, you need to act promptly and your contract may require notice of force majeure to be given within a particular time frame
  3. Check your supply chain, call your suppliers and ask them what they are doing
  4. Call your customers to manage their expectations if delays are unavoidable then deal with your problems early and tackle them head on.

You can’t rely on force majeure in silence, and sticking your head in the sand just won’t work. If you need advice, please get in touch.

Sam Crich is an Associate in Berwins' commercial team and specialises in advice to businesses form all sectors, with a focus on digital and technology based organisations.

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