Coronavirus: Triggering the World’s Force Majeure
We are now starting to understand the global impact of Coronavirus and that it goes well beyond health issues. Its impact is reverberating throughout the global economy. Factories, cities and, literally, countries have been shut down. With the vast number of consumer goods companies relying on Chinese manufactured goods, the global supply chain is rife with delay, creating uncertainty for consumers. This is compounded by work from home policies mandated by companies along the supply chain and restricted freight and shipping travel. Beyond the consumer goods supply chain issues, we are inundated with daily stories of conference, event and travel cancellations, which brings the trickle down impact to our local hotels, restaurants and conference centres. But who is responsible for the break in service? Is non-performance of contractual obligations a breach of contract, which could expose the non-performing party to risk of liability? The answer is: it depends. Bottom line: do not assume that Coronavirus will excuse your failure to perform contractual obligations. With the direct impact that Coronavirus is having on businesses, the contracting parties will be paying close to attention to this provision. Those with supplier agreements, manufacturing agreements, distribution agreements, and the like, should be carefully reviewing the force majeure clauses of their contracts to determine who bears responsibility for non-performance of contracts.
What is a Force Majeure?
A force majeure provision is a point of negotiation between the contracting parties that may or may not be included in the agreement. It addresses each party’s liabilities and/or obligations for extraordinary events or circumstances that fall beyond the control of the parties (such as extreme weather, war or acts of god) that prevent a party from fulfilling their contractual obligations. Non-performance of contractual obligations is related to a state of emergency type of situation. Depending on how the parties negotiate and draft the force majeure provision, a party’s non-performance can be either excused or suspended. To be clear, the non performance must emanate from occurrences that are outside of the control of the party. It does not extend to negligence or malfeasance. The force majeure will excuse non performance of some of the obligations but generally will not invalidate the agreement in its entirety. For example, it may validate the delay of a full delivery but will not excuse payment for partial delivery.
Will a Force Majeure Protect Against Claims of Breach of Contract Due to Coronavirus?
Where there is no contract or no force majeure contained in the contract, non-performance because of Coronavirus may constitute a breach of contract, which could result in termination of the contract with penalty and, even also, the possibility of litigation. If a force majeure is included in the contract, it does not necessarily mean that it extends to situations like the Coronavirus. A tightly drafted force majeure clause that is prescriptive as to what constitutes a triggering force majeure event may not include a global health pandemic. Care must also be taken to understand how to trigger the force majeure and what obligations must be complied with to rely on the force majeure. For example, is there a notification period? Is there an obligation to supply remaining inventory? How long will the non-performance be excused?
As we become more aware of the real impact of Coronavirus on business and parties enter into new contracts, it is possible that even if the contract contains a force majeure it may not cover non-performance due to Coronavirus. Parties generally have an obligation to mitigate for known or foreseeable contractual disturbances. For parties who have entered into contracts prior to 2020, the impact of Coronavirus was unknown and if the force majeure was broadly worded or specifically worded to include global health pandemics, it is possible to trigger this provision to save against a breach of contract claim. However, this may not be the case on a going forward basis. Now that we understand the impact that it may have on business deals, parties, on a going forward basis, should undertake contingency strategies to address contractual non-performance due to the Coronavirus.
Bottom line: get your contract in writing and carefully consider the business realities that are known and potential that may impact contractual performances. Carefully work with a lawyer to architect how the risk of liability is determined between the parties, in the event of a crisis.