By Michael Chambers, partner and head of dispute resolution at Forbes Solicitors.
The widespread disruption of COVID-19 is causing many companies to question whether they can claim ‘force majeure’ in respect of their contractual obligations. Businesses are generally considering such action in the belief it will relieve them of delivering against the contract, which may help to mitigate losses as they address the economic impact of the virus.
While this may hold some degree of truth and seem a plausible way of cancelling orders or withholding payments, it is not often the most effective form of action to take.
What is force majeure?
Force majeure is a contractual clause designed to offer some form of protection against uncontrollable circumstances like natural disasters.
The term literally translates as ‘superior force’, with the clause commonly referred to as an ‘Act of God’. It became somewhat of a buzzword ten years ago when an Icelandic volcanic ash cloud swept across Europe, leading to flights being grounded. The unforeseen and natural event couldn’t be particularly blamed on any responsible party, leaving travel companies asking whether they could activate the clause to avoid financial claims resulting from cancelled flights and holidays. Other businesses negatively affected by the ash cloud looked to force majeure to protect against losses and damages caused by the restricted movement of goods and missed delivery deadlines.
Like the volcanic ash cloud, COVID-19 is beyond the control of businesses, prompting the general assumption that the contractual clause exists and has been written into contracts exactly for these circumstances. This may not necessarily be the case.
Activating force majeure
Like many other contractual clauses, force majeure is not a standard term. Companies will first need to determine whether their agreements include the clause and then consider its definition. The specific criterion of the clause will vary from contract to contract. In some instances, the clause may well list what constitutes an uncontrollable event such as extreme weather, natural disaster, war or widescale social unrest like rioting, or even disruption caused by public protests.
Following the outbreak of Severe Acute Respiratory Syndrome (SARS) in 2003, many insurance policies and contractual agreements have made exceptions or allowances for the impact of diseases and epidemics. If the force majeure does not specify disease or epidemic, a court may not interpret the clause as being valid.
However, it the clause does define a disease and epidemic as an uncontrollable event, a court will then need to evaluate exactly how the circumstances have affected the contracting parties and what actions were taken, or could have been taken, to regain some level of control of the situation. It’s for this reason that companies may wish to forget about force majeure as a means of addressing the operational and economic impact of COVID-19.
Forgetting force majeure
Companies need to put the potential activation of force majeure into context. Coronavirus has caused global disruption, affecting almost every business and sector. It’s highly likely that any party looking to pursue a force majeure claim, would be doing so against another organisation which has also suffered losses because of the pandemic.
Courts would need to give these situations careful consideration, taking the time to work through the ripple effects of the disruption and determining how reasonably each party worked to fulfil original obligations. This will undoubtedly take time and companies should consider this against a backdrop of a high volume of other force majeure claims being brought before the courts.
Contesting parties may find themselves caught-up in a lengthy queue of cases and that disputes, because of their complex nature, become drawn-out. It’d could be more time and cost-effective for companies to work through their differences using mediation.
Negotiating a way forward
Mediation can be used to bring both contesting parties to the table to find a more constructive means of resolving disputes. If both parties utilise an independent mediator and seek professional advice, they are likely to spend less time, resource, energy and money trying to find an agreeable solution.
This will also help to reduce the longer-term economic and operational impacts of COVID-19, as it will enable both parties to get back to business sooner, rather than later. It may even leave an opportunity for both businesses to be able to work together in future by maintaining a constructive relationship. Companies considering this approach should give careful thought to how they’ve been negatively affected by the virus and what will help them to positively move forwards. They are then advised to consult an experienced mediator such as a lawyer to help review their case and enter into negotiations with the other affected party.
Force majeure is a particularly useful and valid clause. However, when business disruption and losses are so far reaching, it may not prove the most effective means of protecting business performance.