What effect will COVID-19 have on force majeure?

What effect will COVID-19 have on force majeure?

A failure to share relevant facts in a disciplinary process with a dismissing officer could render the dismissal unfair

Pharmaceutical, healthcare and biotech companies are, like many businesses across a breadth of industries, continuing to feel the effects of the COVID-19 pandemic.

The global crisis has prompted prolonged disruption to supply chains, causing parties to scrutinise each other’s rights and obligations under their existing contracts. As a result, “force majeure” has become an increasingly attractive prospect for parties who, through no fault of their own, can no longer perform their contractual obligations.

While force majeure is an established contractual principle, somewhat surprisingly, the term “force majeure” has yet to be defined in common law by the English Courts – though existing case law does offer some clarity on the meaning of the term “force majeure” and its contractual interpretation. In light of this grey area, commercial contracts typically attempt to cover all bases by including not only (i) a definition of force majeure but also (ii) a non-exhaustive list of both illustrative force majeure events and events that do not constitute force majeure.

Force majeure clauses are capable of temporarily suspending (or sometimes even extinguishing) parties' contractual obligations when an extraordinary event or circumstance beyond their control prevents one or all of the parties from fulfilling those obligations. Such clauses, if properly constructed, may help parties to avoid becoming embroiled in a costly breach of contract claim (for example, in circumstances where Party A is no longer able to supply a pharmaceutical drug to Party B in the quantities specified under the contract due to an outbreak of COVID-19 at Party A’s manufacturing facility).

Does the current pandemic constitute a force majeure event?

This will depend entirely upon the wording of the specific clause in the contract and will require some careful consideration by the parties. As mentioned above, commercial contracts will often include specific force majeure events, such as fire, flood and natural disaster. It is considerably less common to see ‘pandemic’ or ‘epidemic’ listed as a specific force majeure event – in all likelihood, this wording would apply to the current COVID-19 pandemic.

Many force majeure clauses will, in addition to lists of particular events, refer to events “beyond the parties’ reasonable control” and the like. That said, parties would be well advised to include specific lists of events as well as catch-all wording in their force majeure clauses since there is no guarantee that more general wording will be sufficient. For instance, in the case of Tandrin Aviation Holdings Limited v Aero Toy Store LLC (2010), the court held that the “unanticipated, unforeseeable and cataclysmic downwards spiral of the world’s financial markets” did not trigger a force majeure clause, despite the general wording of the clause that referred to a trigger event being “any other cause beyond the Seller’s reasonable control”.

Prevented, hindered or delayed

Contracts often provide that a triggered force majeure event will only come into play if said event prevents the parties from performing the contract (it is not enough for the parties to argue that the contract has become more difficult or unprofitable to perform by virtue of the force majeure event). This is a high threshold and will require parties to demonstrate that performance is legally or physically impossible. In some cases, the contract will stipulate that performance must be ‘hindered’ or ‘delayed’. These are slightly lesser standards and may be triggered where performance is made substantially more difficult by the force majeure event.

It’s important to note that parties will often be contractually obliged to mitigate any loss suffered by virtue of the force majeure event. Take, for instance, the example referred to at the beginning of this article - if Party B were seeking to rely on a force majeure clause, it would need to explore whether alternative supplies were available from another manufacturer (even if this would be at a higher cost to Party B). It would be prudent for parties to keep written records of any steps considered or taken in this regard.

Additionally, if seeking to rely upon a force majeure clause, parties must ensure that any steps required by contract are taken in order to protect themselves (such as service of any appropriate notices within any specified timescales and in accordance with any formalities required for the service of notices). Some contracts may also require the parties to mitigate any loss or to provide regular updates to one or all of the contractual parties.

Over the course of the next few months and years, we are likely to see developments in the English case law relating to force majeure in the COVID-19 context – and perhaps a common law definition of ‘force majeure’ awaits us. Until then, however, life science companies entering into new commercial contracts should take real care to ensure that the parties’ risks and responsibilities are allocated in accordance with the parties’ intentions. Ultimately, in the aftermath of COVID-19, force majeure is likely to assume a more prominent position in contract negotiations than was previously the case, and we should expect to see businesses increasingly seeking to tighten up the existing terms on which they contract.

First seen in Pharma Letter. Reproduced with permission. 

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