On Coronavirus: Force Majeure Clauses in Commercial Contracts
March 20, 2020
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The situation the country finds itself in is truly unprecedented. Businesses and individuals are likely to be thinking long and hard about whether they can honour their commitments over the coming weeks and months. In light of this, I thought it was sensible to prepare some thoughts and guidance on force majeure clauses in commercial contracts. I hope you find it useful.
First and foremost, if you have a properly drafted contract in place with a customer or supplier then it is highly likely you will have a force majeure clause within it. This clause is intended to excuse one or both parties from performing some or all of their obligations under a contract due to an event outside of their reasonable control. The current Coronavirus pandemic certainly falls into this category.
What to do if you are the supplier
If you are the supplier in the contract and your ability to supply goods or services has been impacted, or is about to be, then I highly recommend you take the following steps:
Check that you have the clause in your contract, and then check the specific wording to determine what action you need to take in order to rely on the clause. If you have contracted with customers based on your own standard terms, then this should be a straightforward exercise. If, however, you contracted with certain customers on the basis of the customer’s terms, then you need to check the force majeure provision in each of those contracts. If these are numerous, I recommend focusing on your key customers first.
It is likely your force majeure clause will require you to notify your customer that you have been impacted by a force majeure event, what the force majeure event is, how long it is likely to impact on your business and what steps you are taking to minimise the impact of the force majeure event on your business. You can do this by email in the first instance, but I do recommend following up by letter. And check the notices clause in your contracts to see how notices should be served.
What about if you are not directly impacted but your supply chain is?
If a third party in your supply chain has been unable to supply goods to you, which has resulted in you being unable to supply to your customers, then you need to check the wording in your force majeure clause. Some force majeure clauses expressly exclude subcontractor or third-party supplier default. If this is the case, it might be difficult to invoke your force majeure clause. However, there is the possibility that you can still argue you have been affected, albeit indirectly, by the pandemic. In which case you still have the ability to invoke your force majeure clause. That being said, you should still take steps to find an alternative supplier or source in order to minimise the impact of the force majeure event on your business.
Don’t forget, you still have a duty to mitigate the impact
To be able to rely on your force majeure clause, you have a common law duty to minimise the impact of the pandemic on your business and customers. Accordingly, you should be
looking at the steps you need to implement in order to continue your business. This may involve initiating your business continuity plan. Other options to consider include allowing workers to work from home, where this is possible; looking at splitting your workforce into teams, in order to minimise cross contamination, and to ensure you have a separate team available to maintain business should a member of a team become ill and the other members in that team have to self-isolate; and communicating with customers and third parties in your supply chain to try and prioritise orders and adjust other timescales for delivery, where possible.
If you don’t take the right steps, you may not be able to rely on your force majeure clause.
What if customers claim they cannot pay due to a force majeure event?
At the time of writing this note, the banks have not been impacted by the pandemic and the ability to make payments electronically is still available. Therefore, it is highly unlikely a customer can claim it is unable to make a physical payment to you due to the force majeure event. An inability to pay is more likely due to cash flow issues caused by the pandemic. In normal situations, businesses would be looking at debt collection options for such payments.
However, in these unprecedented times, it may be more advisable to work with your customers to agree an adjustment to their payment terms, such as a payment holiday or longer credit periods. Communication and a pragmatic approach will be critical to enabling as many businesses as possible to survive this crisis.
What if your customers are consumers?
If you wish to rely on your force majeure clause and you provide goods and/or services to consumers, you must ensure that the force majeure event is a genuine event outside of your control and that it has genuinely affected your business. Our opinion is that the current pandemic and its impact on the UK is definitely an event outside the control of any business. However, you must ensure it has genuinely impacted on your business to be able to rely on it.
What if you don’t have a force majeure clause in your contract?
You may still be able to rely on the principle of frustration of contract, but that won’t be easy. My colleague Chris Charlesworth has written on frustration and you can read his thoughts here.
No-one really knows what will happen in the coming weeks and months, but it will undoubtedly pay to be prepared. Look at your contracts in detail and try and understand what it means for your business. And, if in any doubt, please seek professional advice.