When can a force majeure clause be applied during the COVID-19 crisis?

While the COVID-19 pandemic continues to create financial turmoil around the world, many organizations are hoping to avoid or postpone contractual obligations by invoking a force majeure clause which excuses a party from completing obligations due to unforeseeable circumstances. Global supply chains, large-scale conferences, sporting events and businesses have all been disrupted by the pandemic. Legal department leaders at construction and infrastructure companies, energy companies and businesses involved in the supply of goods are among those who may hope to cancel or renegotiate contracts in the face of job cuts and supply chain restrictions.

While relying on a force majeure clause may seem like an easy solution, in-house counsel must consider many factors before attempting to use this clause.

“It’s certainly a topic on everybody’s mind,” says David Outerbridge, partner at Torys LLP. “Not just force majeure, but the all types of protective measures you see in contracts including termination rights, the right to seek further payments or pause contracts are top of mind for many.”

In some cases, the wording of a force majeure clause may implicitly include circumstances such as diseases and pandemics, but failing that, there may be a more general clause to indicate that a factor is beyond a party’s control. A thorough examination of the contract to identify a force majeure or other helpful clause is the first step, Outerbridge advises.

“In each case it really depends on the terms of your contract,” he says. “The concept of force majeure is not a general legal principle. It only applies if you have a contract that gives you the force majeure right.” Whether or not the clause can be applied depends on the wording of the clause, the nature of the obligation and the impact of the crisis on the obligation. Ideally, in-house counsel should approach their business counterpart and address the concern on a co-operative basis to ease the passage out of the agreement, Outerbridge suggests. If both parties are in agreement, the situation will be relatively simple but if one party disagrees, the other party will have to provide evidence to indicate entitlement to exit the contract.

“Typically, the force majeure clause requires notification of what the force majeure clause is and some type of demonstration that there is no way to mitigate the problem,” says Outerbridge. “You don’t want to be in a situation where the other side disagrees.”

When there is a cluster of contracts relating to a specific project, certain aspects of an agreement may be retractable while others are not. For example, in a construction contract, a force majeure may allow the party to cancel the construction agreement, but there may not be a force majeure clause on a related lending contract, so close attention must be paid to all related contracts for each project.

In some cases, in-house counsel might want to consider a modification or delay of a contractual obligation, rather than a full retraction. If the force majeure clause allows a contractual duty to be postponed rather than eliminated or it allows a reduced obligation to pay for a period of time, this may be desirable in some circumstances.

“Have a look at your ultimate business goal,” says Outerbridge. “Not just a short-term view, but a long-term view because eventually we will be out of this, so a more measured approach may be possible to meet your business needs.”