COVID 19 | Invoking force majeure
COVID 19 | Invoking force majeure
Businesses facing difficulties in meeting their contractual obligations because of disruption caused by the coronavirus should consider invoking the force majeure provisions in their contracts.
We will look at whether force majeure can be invoked and how this might help, the steps that need to be taken to benefit from the protection afforded by a force majeure provision, and whether force majeure offers an opportunity to mitigate business risk arising from the spread of coronavirus and the consequences of invoking this protection.
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Hi, I'm Matthew Sutton a partner in the commercial team at Shakespeare Martineau. Welcome to today's webinar on the coronavirus and force majeure Clauses in business contracts. You'll see on your screen that you are able to ask me questions. So please do ask questions along the way and I will answer as many as I can at the end.
Okay. So today as I say I'm going to spend a few minutes talking about force majeure Clauses in business-to-business contracts and how they may assist businesses in attempts to manage the disruption caused by the spread of the coronavirus the background to this as you know, is the continuing Global spread of the coronavirus and the measures which have been introduced by governments across the world to combat the virus.
The impact of the fire as was first built in China in January as the world's second largest economy and largest manufacturer accounting for 20% of global manufacturing output the disruption of shipments to and from China has already had significant implications for the supply chains of many businesses in the UK causing interruptions and delay the participation continues to deteriorate with governments across the world now introducing quarantine measures and travel restrictions.
And leaving the global economy facing very uncertain times businesses facing difficulties in meeting their contractual obligations because of disruption caused by the coronavirus outbreak should certainly consider invoking the force majeure Provisions in their contracts. So what is a force majeure provision? Well put simply a force majeure provision is a clause in a contract which typically excuses one or both.
Of Contracting parties from performance of the contract in some way following the occurrence of events beyond the reasonable control of the party concerned.
The term force majeure has itself no recognized legal meaning so it's important to remember that whether a business can invoke a force majeure provision in a contract will therefore generally depend upon the wording of the Clause an important. First point to having mind. Therefore is how is force measured defined.
Well some force majeure Provisions May reference specifically pandemics epidemics, or Civil emergencies. However Clauses often simply reference circumstances beyond the reasonable control of a party in the absence of specific wording.
It will be important to consider the scope of the Clause carefully to determine whether it will include the corona Outbreak The coronavirus outbreak or any related government restrictions. It's important to remember in this context that a party can invoke a force majeure provision. Generally only where it is prevented from performing its contractual obligations. The fact that performance may be more difficult or more costly will typically not be sufficient.
For example It's a well-established principle under English law that a changing economic or Market circumstances affecting the proverb and profitability of a contract or the ease with which A party's obligations can be performed will not be regarded as a force majeure event in one particular case the high court found that the inability of a company to obtain Finance due to the collapse of the world's financial markets in 2008 did not trigger the force majeure clause in a contract to purchase an aircraft.
So assuming the scope of the force majeure Clause potentially covers the events taking place currently what steps do we need to take to obtain the benefit of a force majeure provision?
Well frequently force majeure Provisions can be invoked only when notice is given by the affected party within a specified time of becoming aware of the impact on contractual performance. For example, it may be a contractual requirement that notice is given by a party within 3 business days of it becoming aware of being unable to perform its obligations due to the force majeure event.
Failure to give notice within a prescribed time inmate potentially means that the benefit of the Clause could be lost where there is no specific notice provision notice should generally be given by a party as soon as it becomes aware that it is unable to perform its obligations due to the force majeure event.
Force majeure Provisions will also generally require the affected party to show that it is used reasonable Endeavors to prevent or at least mitigate the effects the effects of a force majeure event in this context.
The court of appeal has held that language in a force majeure clauncher clause which refers to events beyond the control of a party can only be relied on if that party has taken all reasonable steps to avoid the Insert the event or to mitigate its results.
Okay, so we've taken the steps necessary to invoke out force majeure provision, what are the consequences of of invoking that provision well generally the effect of invoking a force majeure provision is to suspend contractual obligations for the period during which the force majeure event prevents contractual performance once the event has come to an end the obligations of the parties recommence So effectively once a force majeure provision has been invoked the affected parties liability for failure to perform is usually removed for so long as the force measure the event continues. It's important.
However to remember that force majeure Clauses May often also include a right of termination for either or both parties if the force majeure event continues Beyond a specified period of time It's also important to have in mind that force majeure Provisions may include a right for either or both parties to terminate the contract if the force majeure event continues Beyond a specified period of time so for example a clause my typically say that if a party continues to be unable to perform its obligations for a period of say 14 or 30 days the other party May terminate the contract immediately by giving written notice.
In those circumstances the party terminated the contract will not be liable to pay any compensation to the party suffering from the event of force majeure.
So Faith with the possibility of disruption due to the coronavirus outbreak businesses should consider invoking their Force visual Provisions to do this. It's important to have in mind the following actions review your contracts do they contain force majeure Provisions? If so, it's important to understand the scope of the Clause. Does it specifically referred to a pandemic or are you relying on General word?
I think that refers to events beyond your reasonable control.
Be aware of any steps that need to be taken to trigger the protection which the Clause May afford. Do you have to give notice within a specified time period if you do you need to comply with that time period otherwise protection may be lost. If there are no specified time periods. Then you should give notice as soon as possible consider what mitigation actions can be taken remember? It is often a condition of claiming the benefit of force majeure.
That you've acted reasonably to avoid the event concerned or at least to mitigate its consequences.
Does the business have a contingency plan? Obviously that's important in the context of mitigation has that contingency plan been implemented?
Be aware of the consequences of invoking a force majeure clause in particular. Does it give rise to a right of contract termination to the other Contracting party?
In the context of coronavirus, it's important to consider invoking force majeure Clauses in business contracts. And in this context, it is particularly important to act rapidly when analyzing whether this route is potentially available to you. Okay, so thank you for listening to today's webinar on coronavirus and force majeure Clauses in business contracts. I have had a few questions come in so I will answer.
A cancer a couple now and then send a follow-up to the others along with a recording of the webinar. So the first question I have is what happens if my contract does not contain a force majeure Clause well in those circumstances it is possible that the doctrine of frustration could apply so the doctrine of frustration is an English law concept which provides that if a contract has become impossible.
Possible to perform all the parties obligations are changed radically by the occurrence of an event after the contract has been agreed. It is possible that the contracts that the Contracting parties can set aside their contractual obligations. It's important to remember though in the context of frustration. That courts are generally reluctant to find that a contract has been frustrated.
So it's quite a hard thing to To to achieve before a court again as with force majeure Clauses. It's also important to remember that an event that renders contraction performance more difficult or more costly will not have itself be sufficient to achieve the result of a contract being frustrated. So the contract must be impossible to perform or all the obligations of the parties must have changed.
radically So second question I have received is a chi rely on a force majeure Clause if there are also other reasons why I cannot perform my contract which had nothing to do with the force majeure event. So in the current situation, they may be nothing to do with the outbreak of the coronavirus all the restrictions that may have been introduced to combat the spread of the virus.
Well the short answer to that question is No, you can't rely on a force majeure clause in those circumstances. The high court has determined that in order to rely on a force majeure Clause the force majeure event must be the only effective cause of a part in failing to comply with its contractual obligations. So a Contracting party will not be relieved of its contractual liability under a force majeure Clause. So Contracting party will not be relieved of its contractual liability under a force majeure.
Your claws if it would not have been able to perform its obligations, even if the force majeure event had not occurred.
Okay, so thanks for the great questions. I'll follow up on these after the session and share them with you the next webinar in our coronavirus series is tomorrow at 12:30 on business leases with Justine all thanks very much for watching for All Our advice and guidance on coronavirus. Please contact a dedicated resource Hub at shma.co.uk or contact me at Matthew.email@example.com, thanks very much.
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