Sent or received a force majeure notice under an English law governed contract? Here is a checklist for issues to consider in respect of the 10 most common questions we have been asked by clients.
The economic effects of COVID-19 are now being felt globally and economic disruption is likely to continue throughout much of 2020 and beyond.
The outbreak has caused many businesses to review contractual agreements and consider: (a) whether they are able to continue to perform their obligations; and (b) what the consequences of not performing will be.
As a result, many businesses are intending to send or have received “force majeure notices” – being notices sent in accordance with a contractual force majeure provision, which purport to suspend (either for a fixed period of time or indefinitely) the parties’ contractual obligations, citing COVID-19 and/or its consequences as the relevant “force majeure event”.
The concept of force majeure is, however, complex and one which varies widely from jurisdiction to jurisdiction. It should not therefore automatically be assumed that an event, such as the current pandemic, will automatically entitle a party to rely on it as being a “force majeure event”. A closer examination of the legal and factual issues must be undertaken.
Below, we have set out the top 10 “most asked” questions we have received from our clients in relation to force majeure notices in contracts governed by English law and our checklist of points in response to each question. Please note that these considerations are specific to English law and may not be applicable to contracts governed by other laws.
- Is the event relied upon in the force majeure notice a “force majeure event” under the contract?
- Does the force majeure clause list the specific force majeure event being relied upon in the force majeure notice?
- If the specific event is not expressly listed (e.g., “pandemic” or “disease” in the context of COVID-19) can it be argued that the force majeure event falls within another type of event listed?
- Is the list of force majeure events in the clause stated as being exhaustive? If not, does the clause – or the wider contract – contain any “sweep up” wording which may permit additional events to be captured by the clause?
- Even if the event does not itself engage the force majeure clause, do the consequences of the event engage the clause (e.g., an “act of government” or “lack of available workforce”)?
- Can the force majeure clause be relied upon even if it is not the real reason for non-performance?
- Is the force majeure event the cause of the delay or non-performance?
- What is the practical effect of the force majeure event on performance?
- Absent the force majeure event, were there any pre-existing reasons why the obligations could not be performed, either on time or at all (e.g., departure of key personnel, deteriorating financial position, previous failure to meet key milestones)?
- Could performance be achieved by an alternative method, even though it would be more burdensome?
- Has performance been affected by other external events or choices made in response to the circumstances which have arisen?
- Is it still possible to rely on force majeure in circumstances where pre-emptive measures were taken prior to the force majeure event occurring?
- Were any pre-emptive measures taken in anticipation of a potential force majeure event, but before the force majeure event arose? This might, for example, include: requiring employees to work from home, restricting corporate travel, or closing plants or factories to take account of decreasing demand.
- Have key factories, plants or distributions centres remained open and operational? If not, why not?
- Have any restrictions been imposed on employee movement (e.g., a travel ban)? If so, what impact may this have had on contractual performance?
- Is the force majeure notice compliant with the force majeure clause?
- Does the force majeure clause specify any formalities which must be followed when serving the force majeure notice?
- Is there any requirement for the notice to be served within a specific timeframe following the occurrence of the force majeure event? If so, is the notice in time or out of time?
- Does the notice contain all information required by the force majeure clause? Is it sufficiently specific?
- If required by the force majeure clause, does the notice explain why the relevant obligation(s) cannot be performed?
- If the notice is defective, consider whether it can be remedied and the tactical implications of highlighting the defect to the counterparty.
- Is it necessary to take steps to avoid the operation of the force majeure clause (if at all possible) or mitigate against the effects of the force majeure?
- Does the force majeure clause expressly require the party relying on it to take all reasonable steps to mitigate against the effects of the force majeure event?
- If so, has this obligation been complied with and has the counterparty explained what steps have been taken to avoid having to invoke the force majeure provision and mitigate against the effects?
- Is there any obligation to implement a “disaster recovery plan” upon serving the force majeure notice?
- Are any contractual “disaster recovery” (or equivalent) obligations triggered by the service of the force majeure notice?
- Has the disaster recovery plan been agreed in advance and/or do you have a right of review and/or approval?
- What are the consequences (and potential losses) which may arise if the disaster recovery plan is not implemented correctly, or at all?
- What should I tell my other supply chain partners?
- What is the effect of the force majeure notice on your contracts with third parties?
- Consider whether informing third parties of your inability to perform or likely delayed performance will amount to an anticipatory breach of your contract, exposing you to a possible claim.
- Are you likely to face any penalties or claims for liquidated damages as a consequence of not being able to perform contracts with third parties?
- Consider whether it is appropriate to maintain open lines of communications with suppliers and customers so that you are in a position to manage their expectations in order to avoid a dispute.
- How can I guarantee supply as soon as possible once the force majeure event is over?
- Does the contract provide for any right of “preferential supply”?
- If not, can a right of “preferential supply” be negotiated into the agreement, so that you will have a competitive advantage when the force majeure event passes?
- The contract contains various exclusive supply obligations – can I purchase from or sell to other third parties instead?
- Consider obtaining an advance waiver from your counterparty so that you continue to trade with third parties during the force majeure event, without being in breach of contract.
- The force majeure event prevents me from complying with the contractual notice requirements – what shall I do?
- Do key contracts require service of documents and notices at a facility or premises which is no longer operational as a result of the force majeure event?
- Are the permitted methods of service practical/achievable during the course of the force majeure event?
- Can alternative methods of service be agreed?
If you wish to receive periodic updates on this or other topics related to the pandemic, you can be added to our COVID-19 “Special Interest” mailing list by subscribing here. For any other legal questions related to this pandemic, please contact the Firm’s COVID-19 Core Response Team at FW-SIG-COVID-19-Core-Response-Team@mayerbrown.com.