In recent weeks, the concept of Force Majeure has been talked about more than ever in light of the ongoing Coronavirus pandemic. This article considers a number of issues that can arise in connection with the drafting of, and reliance on, Force Majeure clauses.
A Force Majeure clause is often found in commercial contracts, including a variety of contracts that Life Sciences companies enter into, to excuse one or both parties from performance, or to suspend performance, where unforeseeable circumstances prevent them from performing their side of the bargain.
The term has no specific legal definition under English law, so you have to look at the specific contract wording to establish whether the particular factual and legal circumstances and their effects amount to Force Majeure in each case. Although these clauses are often superficially quite similar, the detail can be extremely varied not just in terms of how Force Majeure is defined, but also the extent to which the parties are excused from their obligations, whether it triggers a termination right, and the procedures that must be adhered to.
For suppliers, a wide definition of Force Majeure is most helpful. Commonly Force Majeure clauses list particular events, such as “pandemics, any action taken by a government or public authority, including without limitation imposing an export or import restriction…”, as well as referring to events “beyond the parties’ reasonable control” and the like. When assessing whether Force Majeure will apply in the context of the current COVID-19 outbreak, the specific language used in the contractual definition will be key.
Contracts normally require not merely that a Force Majeure situation exists, but also that the Force Majeure event has actually caused the failure to supply (or other contract failure), so this needs to be established too. Note that some clauses require the party affected to be “prevented” from performance. This is a high hurdle and will require parties to demonstrate that performance is legally or physically impossible, not just difficult or unprofitable. Broader wording such as “hinder” or “delay” performance are likely to be given a wider interpretation and such clauses are more likely to apply where performance has been made significantly more difficult as opposed to impossible.
Indeed, it is not difficult to imagine a situation in which government restrictions, supply chain disruption, or a shortage of materials arising out of the Coronavirus pandemic would lead to the delay or prevention of a party’s performance of its contractual obligations.
Often Force Majeure clauses are framed as being of mutual benefit to both the supplier and purchaser under a supply contract. In practice, purchasers made find it hard to rely on “conventional” Force Majeure clauses as it may be difficult for a purchaser of unwanted goods or services to be able to establish that its performance of the contract has been prevented, hindered or delayed by the Force Majeure circumstances where the position is that the purchaser simply does not need the supplies anymore.
Simply having the Force Majeure clause in a contract is not enough. It will normally only be effective once notice has been served in accordance with the terms of the contract. All too often parties fail to serve notice that the Force Majeure event is in operation and in doing so can lose the benefit of the clause. Moreover, there will often be an obligation to take reasonable steps to mitigate the effects of the Force Majeure and in any event, this may well be implied by law. There is also the interplay between Force Majeure clauses and other positive obligations to have and implement business continuity or disaster recovery plans. Often parties will not be able to rely on Force Majeure clauses if they do not have these plans in place or do not seek to implement them as fully as possible. Businesses having difficulty fulfilling their contractual obligations should check their contract terms sooner rather than later and take advice if necessary to make sure they protect themselves.
For further information on Force Majeure specifically in the context of COVID-19, please see our separate piece here.