Common law countries: For common law governed contracts, the words used in the contract determine if there is a valid excuse for non-performance.
Civil law countries: For civil law governed contracts there are usually force majeure-type provisions included in the law which apply where the contract doesn’t address the issue. However, if specific contractual provisions are included, these will usually take priority.
Check if there is a force majeure clause in the contract: it could be buried, or, refer to "exceptions", "unforeseen events" or "acts of God" rather than force majeure.
There may be other provisions that provide protection when performing a contract becomes difficult. For instance a “hardship clause”, which might apply when an unforeseeable event makes the performance of the contract excessively burdensome, and can lead to an adjustment of the commercial terms. The exact wording of the clause is important to determine its scope.
Other useful clauses could include material adverse change, price adjustment, liability limitations and exclusions, extensions of time, variations or changes in law (for example, laws prohibiting employees from working, or transportation controls, which slow down the supply chain).
If there is no force majeure clause, then, under common law, parties will be unable to rely on force majeure, although the common law doctrine of frustration may apply to discharge a contract if it has become illegal or impossible to perform or performance has become radically different. However, in civil law jurisdictions, a business may be able to fall back on the force majeure protections in the law.
Civil law, including the OHADA Uniform Act on General Commercial Law,usually includes three criteria to allow for force majeure (although it will not apply to an obligation to pay):
A doctrine of hardship is also gradually being introduced in certain jurisdictions allowing a rebalancing of the contract where performance is still possible, albeit significantly more burdensome, for one of the parties.
Once you have determined the clause or law to apply, you will need to establish the events it covers. Look at how events are defined in the force majeure, hardship or other clauses, and decide whether coronavirus fits the definition.
If neither epidemics nor pandemics are mentioned, the clause could still be triggered where it covers labour and supply shortages (which are caused by coronavirus) or broadly defines events as exceptional, beyond one party's control, unavoidable and not attributable to the other party.
To rely on contractual provisions that excuse performance of obligations, the event that you rely on must be the only one affecting contractual performance (unless clearly stated otherwise). In other words, "but for" coronavirus, a party must have been willing and able to perform.
If the link between the event and the non-performance is clear, you need to understand the effects of notifying a contractual excuse to your counterparty. These will differ from contract to contract. Once a force majeure event is notified, for example, the effects will vary depending on how long the performance is affected. The contract may allow for the right to suspend, seek an extension of time, or for either party to terminate it.
Whether you decide to trigger a force majeure or hardship clause, you must ask yourself:
You must also respond quickly to notices received from your counterparty as failure to do this within stipulated time limits may constitute acceptance of the counterparty's force majeure or hardship claim.
Properly record and store evidence of all communications with your counterparties about the disruption and its effects, including order or service cancellations.
Under common law you must mitigate the effects of a force majeure event so, document reasonable steps taken to do so. Although there is no specific doctrine of mitigation across all civil law jurisdictions, there are some specific regimes – such as for example the OHADA law relating tothe sale of goods – which expressly include the principle of mitigation, according to which a party must have taken all reasonable steps to limit its loss or preserve its gains. Elsewhere the general principles of mitigation will be implied in other ways, such as good faith or damages calculations.
If force majeure has been claimed, agree with your counterparty a date when obligations will resume after the event and its effects have ended, especially if the contract is unclear.
The supply chain will need time and resources to resume operations or clear backlogs and the party claiming force majeure won't want to be in breach once the event is over. There may, in limited cases, be room to explore (or a contractual right to request) a further extension of time for performance. However, you are more likely to get relief during the remobilisation period by highlighting to your counterparty that the event is over but the preventing effects are still being felt.
As the effects of coronavirus are felt at different times, force majeure notices could continue to be issued after it is downgraded from a pandemic. Is the location of the force majeure event mentioned? For example, would your clause be triggered if there were still an epidemic at the place of delivery but not the place of manufacture?
Assess your supply chain contracts so you know which counterparties are likely to be affected by coronavirus (if they haven't already) and by other future obstructive events. Engage with them early to plan how to manage these situations.
Do force majeure clauses in your existing and future contracts clearly and expressly allocate force majeure risk? Do you have a hardship clause in your contract and have you considered its effects? Depending on your relationships with counterparties, think about amendments to prepare for future outbreaks.
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