Force majeure clauses in the wake of COVID-19 and contingency plans going forward
The fast evolving COVID-19 pandemic has led to a significant increase in parties referring to certain types of emergency provisions in their contracts, including force majeure clauses. Such clauses are being used both as a shield and as a sword. We have been analyzing such clauses and issues in the context of concrete situations arising in various business sectors including real estate, construction, retail and energy and have below compiled practical points to keep in mind. A few initial points relevant to force majeure can be found in a previous update published in February. Link at the end of the page.
Interpretation of force majeure
- The specific contract, its clauses and their interpretation, are key. A force majeure clause may be worded in broad terms, in which case it needs to be assessed whether the COVID-19 pandemic in the particular circumstances can constitute an event that is “not reasonably foreseeable”.
- However, in other cases the clause is more specific and mentions “epidemic” or “pandemic” as particular examples of force majeure events, which makes the interpretation clearer. In such case, it is important to note that it would still need to be established that the underlying cause of the disruption to the relevant performance is in fact the COVID-19 pandemic. In all cases mitigation is important and it needs to be established that there are no alternative means to effect performance.
- A right to invoke force majeure may also be available under general contract law principles (Finland and Sweden), i.e. even if the contract does not contain a force majeure clause.
- The consequence of force majeure can be contractually mandated, but is normally temporary and cannot be used to justify an indefinite avoidance of obligations. Instead, force majeure typically operates merely as a basis to postpone performance. In addition, there may be consequences if invoking force majeure is ultimately considered unwarranted. Such factors need to be taken into consideration in a risk-benefit analysis.
- Check the wording of the clause carefully
- Check the applicable contract law
- Consider the consequences in a thorough risk-benefit analysis
- Document or otherwise preserve the factual circumstances that you want to refer to
Giving notice is paramount
- Aside from the substantive assessment of force majeure, it is important to remember the duty to give notice to the counter party and to adhere to any such specific contract provisions.
- If there is a subsequent dispute concerning a force majeure event, the wording of the notice is likely to be important in the interpretation of your actions and the circumstances.
- Ensure that notice is given properly
- Ensure that the notice is drafted with due consideration
Other potential remedies
- Other statutory provisions can also potentially be relevant to your situation. As an example, the Sale of Goods Act (Finland and Sweden) holds that a seller is not liable to the buyer for delay in delivery if it was due to an impediment beyond the seller’s control that was not reasonably foreseeable and that the seller could not reasonably avoid or overcome.
- A further provision is Section 36 of the Contracts Act (Finland and Sweden), which provides that a contractual provision can be modified or set aside if it is unconscionable or its application would lead to an unconscionable outcome.
- Consider if other statutory remedies or defences are available
- It is important to assess any reporting or notification obligations under your potential insurance, in some cases there may be a duty to report situations that are likely to give rise to a loss or entail a seizure of deliveries.
- Check your insurance cover and any relevant obligations
- Finally, for contracts that are currently in the process of being negotiated, it should be considered whether a specific provision is necessary to cater for the possibility of a future suspension necessitated by the virus or another related or similar pandemic.
- If it can be argued that the contracting parties were aware potential consequences and regional scope of the spread of the COVID-19 virus at the time of entering into the contract this may negatively impact the possibility to subsequently invoke force majeure.
- Check whether you need to amend or supplement force majeure clauses