Cases of coronavirus, or COVID-19, are surging past 115,000 across the globe with over 4,000 whose lives have been claimed. Fortunately, c.65,000 people have recovered. The World Health Organization (WHO) is designating the chances of the coronavirus becoming a global risk as ‘very high’ (though falling short of calling it a pandemic for the moment).
Many clients and suppliers alike are starting to get nervous and to wonder whether these circumstances may progress to present themselves in lower quality service delivery. In turn, we are finding that more organisations, both client and supplier alike, are showing an interest in seemingly equal measures, in the force majeure clauses within their contracts.
So, what should you do if your suppliers decide to trigger the force majeure clause in your agreement?
Force Majeure Defined
Force majeure is commonly included in contracts today to protect parties from liability if a significant event occurs that is genuinely outside of either party’s control and, therefore, makes it materially impossible for obligations to be fulfilled. Examples being war, flood, earthquakes and so forth.
Because force majeure can cancel or suspend an obligation in the contract, it’s vitally important to determine: a) whether a particular reason provided is in fact force majeure, and b) what obligation exactly does this cancel or suspend, as it may only be part of an obligation rather than the entire blanket commitment.
Force majeure is more or less consistently applied throughout international jurisdictions, though there are some regional nuances.
The Current Crisis
Force majeure does not simply apply to supply chains in product delivery, it also applies to the delivery of services and solutions, should personnel or technology be restricted in some way, preventing the delivery of those services or solutions on time.
Already we have seen reports of some suppliers triggering their force majeure clauses, blaming the coronavirus for delays, but do they have the right and justification to do so?
According to the WHO, as of last week, the coronavirus had infected over 115,000 people in over 100 countries, with total numbers of cases outside of China still increasing at a rapid rate. And, while this may be cause for concern, the WHO is yet to define this as a pandemic, which would trigger national-level response mechanisms.
Some countries have restricted travel, airlines have cancelled flights, and in much of Italy, Iran, and, of course, China, they find themselves in ‘lockdown’. But, does that mean that force majeure is valid in your supplier’s case?
Force Majeure in Your Contract
Typically, force majeure clauses will seek to do one of two things, 1) to define the circumstances in which force majeure will come into effect (i.e. global pandemic), or 2) to define what circumstances do not constitute force majeure (implying that all those not defined can be covered by the clause).
Some will, in fact, include pandemic or epidemic in their wording, but sometimes a catch-all definition of ‘Acts of God’ is used. More morally questionable suppliers often hope this provides enough ambiguity to legitimately trigger a break in obligations to provide reasons why services/solutions have not been delivered on time.
7 Questions to Ask Should Your Supplier Try to Trigger the Force Majeure Contract Clause
If your supplier attempts to trigger the force majeure clause in your contract, consider the following:
Q1: How strong is your strategic supplier relationship (and how well do you know your contract terms)?
Before you start to talk with your supplier, it’s helpful to ensure that you are fully informed (refreshed) about your contract terms and the obligations it itemises regarding both performance and force majeure. Being informed contractually does not mean gearing up for a fight for them not hitting their KPIs. Most strategic suppliers will actively be working to support you, not against you.
Contractual knowledge is about understanding the framework you are all working within and how it may help you to overcome the challenges you’ll face in keeping your services and project solutions running appropriately.
Where your relationship is strong, but you want greater certainty in the continuity of service, it would make sense for your ICF team, through their discussions with your supplier, to look for evidenced based assurance of how they intend to deal with the potential of higher than usual staff absences.
It’s helpful to not just look at the supplier’s policies for their own business continuity and disaster recovery when supplying client services, but also their audit trail of what mitigating actions they have already put into place and how they are monitoring the performance of that business continuity. If your ICF team has a strong relationship, the supplier will usually share this information with you.
It will give you better evidence of certainty of continuing service than just having a ‘chat’. As with any assurance, keep records either through emails or meeting minutes of what you are being told. Ensure both you and your supplier have on-going visibility of those records in the event any intentions are misunderstood later in the relationship.
Q2. Is force majeure genuinely applicable?
As already mentioned, that means first looking at your contract to see what events/situations are specifically mentioned which might activate the clause and whether there are any catch-all phrases such as ‘Acts of God’. If any ambiguity exists, then fall back on the fundamentals of was the event/situation unforeseeable, unavoidable and insurmountable.
Q3. Is it likely that this claim is genuine?
How were productivity levels before the coronavirus outbreak? Were your suppliers meeting their targets, how committed were they, what levels of commercial trust did you have? This can help to form your opinion of the validity of their claim.
Q4. Can they prove it?
In cases of force majeure, the burden of proof is on the party looking to rely on it to evidence that the circumstances outside of their control did/would in fact prevent them from performing their contractual obligations.
Q5. Have they notified you correctly?
There are often provisions in force majeure clauses that require the party to provide notice of the potential force majeure event within a specified time limit.
Q6. Has the supplier undertaken all it could to mitigate?
For force majeure to be triggered, the supplier must have been materially prevented from carrying out its obligations by an event or situation that is genuinely and completely out of their control and was not predictable. So, from when it was reasonably expected that they should have identified the issue, did they do all that they could to prevent its ramifications?
Q7. Could they claim ‘frustration’?
English law provides suppliers with an additional response should force majeure be impossible to prove. ‘Frustration’ is an English contract law doctrine that acts as a device to set aside contracts where an unforeseen event either renders contractual obligations impossible, or radically changes the party’s principal purpose for entering into the contract. However, this can be a challenge to evidence.
Conclusion – How Worried Should You Be?
Every contract will be different. The wording, context, tone and clarity of its guidance will vary and, therefore, specific advice should be sought. Many force majeure clauses tend to be quite vague, which means that it’s likely to be up to the courts to decide whether they are valid in the individual circumstances you find yourselves in.
However, what is inevitable is that: 1) we’ve seen some suppliers ‘try it on’ and use this health crisis to serve their own means, 2) the coronavirus situation will get worse before it gets better (currently in the UK we are in what the government has termed the Containment Phase, but should this escalate to a Delay Phase, which, according to some pundits, may not be too far away, then logistics and work environments may become more challenging), and 3) there may well be some cases where force majeure is claimed legitimately and more flexibility will be required in these internationally disrupted times.
We are living in ‘interesting times’ where an expert grasp of contract law is becoming an ever-increasingly important skill to have.
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