The circumstances surrounding the spread of COVID-19, and the measures being taken to protect the public’s wider interests, have already caused many businesses to default on their payment or performance obligations under existing contractual arrangements.
In the context of this rapidly evolving situation, now is the time to check your rights and obligations under contracts you committed to pre COVID-19.
One clause that is normally always there but rarely adequately considered, is a ‘force majeure’ clause.
Force majeure clauses are commonly included in all sorts of contracts including leases, construction contracts and finance agreements, without a second thought.
Essentially a force majeure clause provides what happens when circumstances occur that are beyond the control of the parties, preventing a party from fulfilling their obligations under a contract. Typically, a force majeure includes acts of God (such as an earthquake), wars and riots, strikes, embargoes or other government intervention, and extreme weather.
These clauses typically provide that a party is not responsible if they are unable to fulfil their obligations under a contract, need to suspend contract payments, require extensions of time for completion, or can’t pay rent, due to a force majeure (and yes, every time I type ‘force majeure’, I have to say it out loud with my best French accent).
It is worth being aware of the potential application and impact of this oft disregarded clause, in the current climate. Does your contract or lease include a force majeure clause? If so, pay careful attention to the exact wording of the clause. Does it or could it include a public health crisis such as the current COVID-19 pandemic, a mandated closure of your premises, or an inability to obtain supplies on inputs essentially frustrating your ability to perform the contract? What are the consequences of a force majeure as set out in the agreement? Which parties can rely upon it and are there any steps or pre-conditions required to invoke it? There are no precedents for this situation so the ‘devil is in the detail’ and construction of the wording.
If you are looking at entering into a new contract or agreement, pay careful attention to the force majeure clause and consider how widely or narrowly you want it to apply, or if you even want to include the clause at all to minimise the opportunity for reliance upon it.
There is no doubt, COVID-19 is a ‘force majeure’ to be reckoned with.