Coronavirus and commercial agreements: what you need to know
Square One Law commercial law specialist Helen Brain is predicting a rise in businesses trying to action ‘force majeure’ clauses in contracts to mitigate any knock-on effects of the Coronavirus.
A force majeure clause can assist businesses when unexpected external circumstances arise outside their control, preventing them from performing their obligations under a contract including, for example, supplying goods or services in a certain time frame.
Most clauses are drafted to include the ability to suspend or delay contract obligations, or in some circumstances where the event preventing performance continues for some time, terminate contracts.
With China responsible for a significant proportion of manufacturing and globally connected supply chains, the role of force majeure clauses is already being observed in China. It appears the Chinese government has issued some force majeure declarations to a number of Chinese businesses to assist with invoking these clauses.
However, force majeure, as a phrase, has no fixed definition in English law. Its scope and impact varies according to the contract terms agreed between parties. Successful triggering of a clause rests on the actual wording used and the details of the force majeure event.
If the contract states that the party has to be ‘prevented’ from meeting its contractual obligations in order for the clause to be invoked, the party wishing to make a force majeure declaration must prove: that an event has occurred which is beyond the reasonable control of the parties; this event could not have been avoided or mitigated; and the relevant party can demonstrate that performance is legally or physically impossible as a result.
Conversely, the use of the words ‘hinder’ or ’delay’ in force majeure clauses usually have a wider scope and may be satisfied where performance is more onerous (but not impossible). However, the requirements for invoking a force majeure clause are unlikely to be satisfied by a simple increase in the expense of performance, which include, for example, the expense of rerouting cargo due to closed ports.
Helen said: “For the timebeing, the use of force majeure clauses is likely to be primarily applied to those companies trading with companies in China or other territories significantly impacted by the Coronavirus. Longer term there is real potential that businesses may need to review the force majeure clauses in their existing contracts with other British firms to counter any wider knock-on effects of the virus.”
Currently, though it is businesses that are importing from these markets that face the biggest challenges. The problem that businesses may face is that supply chain issues, buyer issues, or price distortion due to market disruption resulting from the outbreak, may not be enough to satisfy the express force majeure terms in their contracts.
“For example, a claim that the lack of manpower at a particular Chinese port is delaying acceptance of goods may not be enough to satisfy a force majeure clause.
“However, if a city-wide quarantine or shut down is ordered on the port, this may well suffice. It is all a matter of the context of the ‘event’ and specific terms of the contract.
“If a party is successful in a force majeure declaration, it may result in its refusal of incoming purchased materials and in turn sellers are having to find alternative buyers for the materials in some already saturated markets.
“Given the globally connected supply chains in operation, these issues, potentially coupled with ‘Brexit effects’, may become increasingly relevant over the coming weeks and months to many businesses.”