In a very short space of time, the world has been transformed: these are clearly exceptional times.
Equally clearly, it isn’t difficult to envisage a lot of business disruption in the months ahead. With supply chains disrupted through lock-downs in various parts of the world, aircraft grounded, and large numbers of people working from home, it clearly isn’t business as usual.
And just as clearly, things could get worse. As these words are written, the UK doesn’t yet have a formal lock-down in place, and pubs, restaurants, shops and leisure facilities remain open—unlike in a number of other countries around the world.
So where does your business stand if coronavirus disruption prevents you from fulfilling a contractual obligation? Fairly obviously, for some businesses, that is going to be a real possibility.
Force majeure to the rescue?
Many commercial agreements contain so-called ‘force majeure’ clauses.
Stripped to the basics, the purpose of such clauses is generally to protect businesses in the event that circumstances beyond their control prevent them from discharging their contractual obligations.
Mostly, a force majeure clause will be of interest to businesses that are supplying others.
But force majeure clauses can also be useful to buyers, in situations where downstream markets have been disrupted—you may have seen press reports of Chinese buyers invoking force majeure in respect of cargoes of oil and liquified natural gas.
Crucially, force majeure under English law requires the affected party to be otherwise willing and able to discharge their contract obligations, but prevented from doing so by the force majeure event in question.
Putting it more bluntly, you can’t declare force majeure just because external circumstances have impacted the profitability of a contract.
So will force majeure protect you?
The degree of protection offered by force majeure depends on several things.
First, it’s prudent to check that the contracts in question actually contain force majeure clauses. In an ideal world, they should—but that’s no guarantee that they actually will contain force majeure clauses.
Second, check whether the coronavirus disruption in question is actually covered by the clause. In other words, is the disruption in question explicitly listed as a permissible force majeure event, or similar enough to any listed examples of such events?
Third, it’s important that you can show that you have taken all reasonable steps to avoid or mitigate being unable to discharge your obligations, and that these steps have simply been overwhelmed by the scale of the force majeure event in question.
Fourthly, check what is supposed to happen when force majeure is invoked. Is the contract to be terminated? Does the obligation remain, with you being required to discharge it as soon as you are able? Or if the obligation is part of a wider contract, are you simply excused that particular obligation? From a revenue and profitability perspective, such distinctions matter.
Finally, check what is supposed to happen when force majeure is actually invoked—and make sure that this is done. Typically, for instance, prior notification is required. In some cases, business might want to be providing notice now.
Are your force majeure clauses fit-for-purpose?
Here at The Legal Director, our view is that it is almost inevitable that the present coronavirus crisis will see some businesses caught out, with force majeure clauses that prove inadequate in the circumstances.
Often, that will be because of force majeure clauses that have been poorly thought-out, and which don’t properly reflect the actual nature of the business and its trading relationships.
Generic ‘boilerplate’ clauses are rarely a good idea, and businesses that are relying on such clauses may come to regret it.
At the moment, the focus is understandably on looking at the protection offered by clauses written into contractual agreements that are already in force. Going forward, the focus should also be on making sure that force majeure clauses in contracts that are yet to be signed offer the protection that businesses want.
In both cases, our client legal directors here at The Legal Director can help—so pick up the phone, or send us an e-mail.
