How to Protect Your Business from Disasters With a Force Majeure
The COVID-19 outbreak caused severe disruption and uncertainty to global trade. Businesses were forced to consider whether the impact of the pandemic and resulting economic challenges could cause them to default on their contractual obligations,
Today, things have not changed much, with wars, disease outbreaks, climate change, and economic turmoil still causing immense difficulties and uncertainties for businesses.
Whether these difficulties lead to an inability to supply goods due to a strain on the supply chain, an inability to deliver services due to high costs of materials, or the cancellation of planned events due to disruptions by natural disasters, terrorism, and other disastrous occurrences, there is a lot of uncertainty in the world.
Many businesses have already started to issue warning statements to their customers and suppliers in advance of potential disruptions caused by economic uncertainties and the various other challenges being experienced.
How can you protect your business from unexpected events like these? Can your business delay performance or fail to fulfill its obligations under a commercial contract due to a pandemic outbreak or other unforeseen event without facing liability?
The often-standard force majeure clause contained in commercial contracts may help to mitigate such risks and help parties navigate the difficulties caused by all the uncertainties currently being witnessed in the world.
Protect Your Business With a Force Majeure Clause
A "force majeure" (from French: 'overwhelming force') is a contract provision that relieves the parties from performing their contractual obligations when certain unforeseen events or circumstances beyond their control arise that make performance impossible, inadvisable, illegal, or commercially impractical.
A force majeure clause may relieve a party from performing its obligations under a commercial contract due to the occurrence of events which are unforeseeable or outside of its control.
You can only rely on a force majeure clause if it has been drafted into your contract. A force majeure clause cannot be implied.
As force majeure has no defined meaning in English law; the effect of a force majeure clause will depend upon the way it has been drafted into each individual contract.
Typically, force majeure clauses can cover:
- acts of God, such as natural disasters and extreme weather events
- terrorist attacks, civil war and breaking off diplomatic relations
- compliance with a law or order, rule or direction of the government
- epidemics or pandemics
Your force majeure clause may give you the right to suspend performance of the contract for a certain period of time or allow either you or your counterparty to terminate the contract entirely on the occurrence of a force majeure event.
For example, the coronavirus could have been claimed as a force majeure to protect your business from the aftermath of the pandemic. On 11 March 2020, the World Health Organization classified Covid as a global pandemic. If your force majeure clause covers the occurrence of a pandemic, then the coronavirus outbreak is likely to constitute a force majeure event.
If your force majeure clause does not cover pandemics, you must carefully consider whether the outbreak or its effects could fall into any of the other force majeure events specified in your contract. For example, you may find it possible to argue that the Covid-19 quarantine or isolation restrictions affecting your supply chain constitute a ‘work stoppage’, or that any international travel restrictions imposed which restrict performance could constitute ‘compliance with an order of a government.’
Law courts often interpret the precise wording of force majeure clauses strictly. If the situation is unclear, you should seek specialist legal advice on whether the disaster or uncertain event would constitute a force majeure event under your contract.
Invoking the Force Majeure Clause
Even if the disaster or uncertain event such as a war, natural disaster, or pandemic qualifies as a force majeure event under your contract, you may not necessarily be able to invoke your rights under the force majeure clause.
Most force majeure clauses require you to demonstrate that the event itself has prevented performance of your contract. This means that if the coronavirus outbreak is simply causing performance to be more difficult, costly, or time-consuming for your business, this may not necessarily be enough to invoke the clause.
Additionally, it may not always be desirable to invoke your force majeure clause for commercial reasons. You may need to consider the following matters:
- Is the force majeure clause / event open to interpretation? Your counterparty may dispute your entitlement to any force majeure remedies and seek to enforce performance of the contract.
- Could your insurance policy cover any losses or business interruption instead?
- Will other parties / business be facing similar problems with supply or performance? Could you negotiate new terms to navigate the issues?
- Would exercising the force majeure clause damage your ongoing relationship with the counterparty? Is there a reputational risk if the matter became public?
Breach of Contract
It is possible that the effects on your business of a disaster or unexpected event like a pandemic outbreak may not be covered by the force majeure clause as drafted or you may not have the option of relying on a force majeure contract at all.
If this is the case, any failure to perform your obligations under the contract (even if the failure is attributable to the coronavirus) may constitute a breach of contract which you could be liable to the counterparty for.
However, there may be other mechanisms in the contract or under English contract law generally which may assist you and it is imperative to obtain legal advice should you find yourself in this situation.
Seek Legal Assistance
If you are considering entering into new contracts or are reviewing your contracts in light of all the uncertainties in the perilous world we are currently living through today, you should seek legal advice on strengthening your force majeure clause.
If you are currently facing threats of litigation over failed performance caused by an unexpected event like the war in Ukraine, or you are considering invoking your force majeure clause for another reason, it is important to seek legal advice on your rights of termination and breach of contract well beforehand to protect yourself and your business.