As a pandemic spreads across the world and millions of people struggle to adjust to a new norm, one of the last things people are focussing on may be how their contracts may be affected by this unprecedented disruption of daily life. This is exactly what the oft overlooked force majeure clause was designed for. Now seems to be as good a time as any to look at what, exactly, a force majeure clause is.
Force Majeure Clauses: A Primer
A force majeure clause generally says that neither party is responsible for an inability to perform under the contract if [insert laundry list of circumstances]. These clauses are usually found at the end of a contract and look something like this:
“Neither party shall be responsible for its inability to perform its obligations under this Agreement where due to: (a) acts of God; (b) flood, fire, earthquake, tsunami or explosion; (c) war, invasion, hostilities (whether war is declared or not), terrorist threats or acts, riot or other civil unrest; (d) government order or law; (e) actions, embargoes or blockades in effect on or after the date of this Agreement; (f) action by any governmental authority; (g) strikes or labour stoppages; (h) lack of availability of supplies, or other reason outside of the reasonable control of the party.”
The intent of a force majeure clause is to recognize that certain catastrophic events can occur that are outside of a party’s control and would prevent that party from being able to perform under the contract. Basically, it gives a party a pass on failure to perform its obligations under the contract in very limited circumstances.
Courts have generally interpreted this as meaning performance was “impossible” due to the catastrophic event, and that the event and its consequences were beyond the reasonable foresight and skill of the parties at the time they entered into the contract. It is not enough that performance is made very expensive by the event, or that a party sat idly by and let the event happen.
Does a Force Majeure Clause Apply to COVID-19?
In some circumstances, declaring that a particular event is one of those described in a typical force majeure clause would be clear cut. For example, if a fire burned down your only factory and you could not manufacture the goods you were obligated to deliver on time, that would be caught by most force majeure clauses. But where does the current COVID-19 crisis fit in the grand scheme of force majeure?
Without getting into a theological debate about whether this is an “act of God”, on its face, the COVID-19 virus outbreak does not neatly fit into most force majeure clauses.
Let’s revisit the list above. Perhaps if you relied on other suppliers whose businesses are forced to close, then COVID-19 could fit into (h). If YOUR business was required to close by the provincial lockdown order, that could fit into (d). But in both those circumstances, you would still have to prove that performance was impossible. Are there other suppliers you could have reached out to, even if it cost you more? Although your business was forced to close, could you still perform through other means like working remotely?
You might be wondering, isn’t the virus a reason “outside of your reasonable control”? Possibly. But could it be argued that the outbreak actually started several months ago, so you had plenty of time to prepare and make contingency plans.
All of which means that you should not assume that COVID-19 absolutely triggers the force majeure clause in your contract. The specific wording of the clause and the particulars of how you are affected must be taken into account. Most importantly, COVID-19 has to actually prevent you from performing, as opposed to just making performance more difficult or expensive.
Let’s say your particular force majeure clause is not effective in the current circumstances. Another avenue to consider is what’s called “frustration of contract”. Basically what this means is that an external event makes the performance of the contract radically different than what the parties originally intended when the contract was signed. But like force majeure, “frustration” requires more than just performance becoming more expensive, difficult or inconvenient – performance has to be prevented.
Frustration of contract excuses both parties from the contract. And because of this significant consequence, courts will set a high bar for a party to be able to successfully argue for it. There is not much case law on frustration of contract in the context of a pandemic, so it’s hard to say whether or how it would be applied to the COVID-19 situation.
Also, check your insurance policy to see what business interruption insurance coverage you may have and whether it may cover COVID-19-related interruptions.
What Can You Do Going Forward With Your Force Majeure Clauses
You might think that we learned some lessons from when the 2003 SARS crisis last raised the issue of force majeure clauses in the context of a pandemic. But many lawyers pay little attention to the boilerplate clauses at the end of a contract, and many contracts do not implement changes that would address this situation. Here are some lessons we learned advising clients in the time since SARS:
- In the list of events, include terms like “epidemic”, “pandemic”, “public health emergency”, “national or regional emergency”. These can be used to trigger a force majeure clause when the WHO declares a pandemic and when local governments declare states of emergency, as they have done recently in response to COVID-19.
- As a supplier/service provider, consider whether you will allow customers to stop paying you during a force majeure. In most cases, a customer can always find a way to pay, though it may be more challenging. And in the event of a catastrophe, ensuring cash flow is critical. COVID-19 has not yet impacted the banking sector, so most payments can still be made.
- As a customer, include the obligation on the party invoking the force majeure clause to mitigate the impact of the event. Even if a business is forced to close its bricks and mortar office, perhaps working remotely could still allow full or at least partial performance.
- Consider including the right to terminate the agreement if the force majeure event prevents performance beyond a certain period of time. At some point, the parties may need to move on and see if there is another provider that is not similarly impacted.
Nobody looks forward to invoking a force majeure clause because usually that means something catastrophic has occurred. But that doesn’t mean they’re not important, or that they should be glossed over when drafting or reviewing a contract. If you need assistance interpreting your force majeure clauses, we’d be happy to help.
Sanjay is a Co-Founder and Lawyer at Spark LLP. Sanjay spent most of his career as in-house counsel at Bell Canada and CIBC before escaping to work instead with dynamic and innovative businesses, helping them to build interesting and exciting solutions for their customers. Sanjay travels a lot, so is the Chief Location Scout for Spark LLP.