24.06.2020

COVID-19 and the Future of Force Majeure

Not since Y2K have force majeure clauses been of so much focus.

The COVID-19 crisis has resulted in businesses struggling to meet their contractual obligations and looking at options for relief.  When contracts contain force majeure clauses, these might offer that relief.  While the meaning and effect of existing force majeure clauses has been the immediate issue for many businesses, it is also worth considering how force majeure clauses should be drafted in a post-COVID-19 world.

What is a force majeure clause?

Force majeure clauses in contracts are intended to provide relief and allocate risk on the occurrence of an event which may significantly disrupt a party’s ability to perform its contractual obligations.  Typically, force majeure operates to excuse a party to a contract from performing its contractual obligations due to an event or circumstance that was not foreseeable and beyond the reasonable control of that party.  In general, force majeure events include reference to war, strikes, acts of God, epidemics, and similar events.

Creature of Contract

Force majeure is a creature of contract – it is not a doctrine that is recognised under New Zealand common law or statute.  Accordingly, the rights, obligations and mechanical requirements of a force majeure regime will be as set out in the contract between the parties.  So, whether or not a non-performing party can rely on a force majeure clause will depend on matters including: its exact wording, the connection between the relevant event (i.e. COVID-19) and the non-performance, compliance with notice provisions before declaring force majeure and the steps the non-performing party takes to mitigate or avoid non-performance.  Force majeure events require a careful analysis of both the clause and the surrounding circumstances on a case-by-case basis.

Changing perceptions of ‘abnormal’

Regardless of drafting, a central concept of force majeure is a consideration of what is “unforeseeable” or “beyond the reasonable control of” a party at the time the contract was entered into rather than when the event arises.  However, perceptions of what is abnormal (and an appropriate force majeure event) shift over time in response to changes to the climate, political environment and the like.  For example, if extreme flooding has affected a region every other year for the past 20 years, it may not be reasonable for a contract entered into today to provide for this as a force majeure event.  

Consequently, what is considered a reasonable force majeure event at the time a contract is entered into inevitably lags behind what is considered reasonable at the time of a potential force majeure event.  Contract drafting is therefore constantly catching up to these shifting perceptions of normality.  With that in mind, it begs the question as to how force majeure clauses in new contracts will be interpreted and how they should be re-drafted once the COVID-19 dust settles.

COVID-19 clauses

Once the immediate impacts of COVID-19 are resolved, we expect that businesses will seek to close gaps in the terms on which they contract generally and force majeure may assume a more prominent position in negotiations than before. 

For new contracts however, it will likely be difficult for a party to argue that the effects of COVID-19 were unforeseeable at the time of contracting.  Accordingly, a force majeure clause in a new contract is unlikely to respond to non-performance by a party due to the effects of COVID-19. 

So, if your business is susceptible to ongoing risks stemming from COVID-19 such as disrupted supply chain or labour issues, extra caution may be required around the allocation of these risks and responsibilities.  To address this, specific drafting and separate COVID-19 clauses covering areas of identified risk may need to be negotiated and included in the contract.  We have already seen this practice in particular sectors, including shipping and logistics and large product supply agreements.

To build further resilience into your business, any new upstream and downstream supply chain contracts should be negotiated on a ‘back-to-back’ basis so that equivalent force majeure and COVID-19 relief is available along your supply chain. This will mitigate potential exposure and liability in the event of disruptions.

If you have any questions about COVID-19 or your new or existing contracts, please get in touch with our Business Advice Team or your usual contact at Hesketh Henry.  

 

Disclaimer:  The information contained in this article is current at the date of publishing and is of a general nature.  It should be used as a guide only and not as a substitute for obtaining legal advice.  Specific legal advice should be sought where required.

 

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