Has the novel coronavirus (COVID-19) pandemic caused supply chain problems for your business? It may be time for you to review your contracts for a “force majeure” clause.
A force majeure clause is a common provision in contracts. It is a contractual provision allocating the risk of loss if performance becomes impossible or impracticable, especially as a result of an event that the parties could not have anticipated or controlled.
A force majeure event is one that “can be neither anticipated nor controlled”. It is an unexpected event that prevents someone from doing or completing something that he or she had agreed to do. The term includes both acts of nature (for example, floods and hurricanes) and acts of people (for example, riots, strikes, and wars). However, does the term also include an epidemic, such as COVID-19?
Force majeure clauses are generally narrowly construed. Economic hardship or a drop in consumer demand does not constitute force majeure.
Courts have previously held that epidemics are force majeure events. The term force majeure originates from French civil law, meaning “superior force”. In 1869, a French court held that an epidemic of typhoid fever in a particular city was a force majeure event that prevented an actor from performing in that city.
The threat of the danger, the degree of probability of harm, and the extent of the feared injury must be taken into account.
But negotiation must be activated before returning to the court. Here are some high-level considerations that we must keep in mind for the buyers and sellers as follows:
Key considerations for buyers:
- Narrowly limit force majeure events to matters that are truly outside of the seller’s control, for instance excluding strikes, labour issues, or anything involving the seller’s workforce.
- Do not include tariffs, government embargoes or acts of government among the enumerated events, and consider including an additional protection that prices are inclusive of “all costs, including taxes, imports, duties, and tariffs”.
- Revise language that would allow the seller to claim that anything not explicitly listed that prevents performance is a force majeure event.
- Require prompt notice of any force majeure event, to allow for immediate evaluation of the supply chain impact.
- Include a clause that allows the buyer to exit the supply agreement if the seller is not able to resume performance within a certain period of time.
Key considerations for sellers:
- Negotiate as broad a list of force majeure events as possible, such as labour issues, equipment breakdowns, raw material shortages, etc.
- List specific risks like epidemics, pandemics, quarantines, acts of government, and government travel bans.
- Seek to include broad catch-all language for foreseeable or unforeseeable circumstances beyond its reasonable control that prevent performance.
- Strictly adhere to the notice period amid any disruption or potential disruption.
- Consider what the buyer’s rights are when exercising force majeure, for instance whether they are a mechanism for suspending performance under the contract, or for demanding a price increase.
- Remember that exercising force majeure may trigger the right of the buyer to terminate the contract and source from an alternative supplier if performance does not resume after a certain amount of time.