While dealing with one of our client’s agreement, the other party was asking for compensation for not fulfilling the obligations under the contract. When the client contacted us, we asked them to invoke a “force majeure” clause due to the spread of Coronavirus. The other party refused the accept that Coronavirus or COVID-19 is an event that can qualify as a “force majeure” event. That led to this discussion.
What is Force Majeure?
Force Majeure has been defined in many ways and let’s looks at some of those definitions:
Force majeure refers to a clause that is included in contracts to remove liability for natural and unavoidable catastrophes that interrupt the expected course of events and restrict participants from fulfilling obligations.
Force majeure or vis major (Latin)– meaning “superior force”, “chance occurrence, unavoidable accident”, is a common clause in contracts that essentially frees both parties from liability or obligation when an extraordinary event or circumstance beyond the control of the parties, such as a war, strike, riot, crime, plague, or an event described by the legal term as an act of God, (hurricane, flood, earthquake, Volcanic eruption, etc.), prevents one or both parties from fulfilling their obligations under the contract. In practice, most force majeure clauses do not excuse a party’s non-performance entirely, but only suspend it for the duration of the force majeure. Source: Investopedia
Force majeure is generally intended to include occurrences beyond the reasonable control of a party, and therefore would not cover:
· Any result of the negligence or malfeasance of a party, which has a materially adverse effect on the ability of such party to perform its obligation.
· Any result of the usual and natural consequences of external forces
· Any circumstance that is specifically contemplated (included) in the contract- for example, if the contract for the outdoor event specifically permits or requires cancellation in the event of rain.
Under international law, it refers to an irresistible force or unforeseen event beyond the control of a state making it materially impossible to fulfill an international obligation and is related to the concept of a state of emergency.
Force majeure in any given situation is controlled by the law governing the contract, rather than general concepts of force majeure. The law of the contract often specified by a choice of law clause in the agreement, and if not is decided by a statute or principals of general law that applies to the contract. Source: Wikipedia
Force majeure translates literally from French as a superior force. In English, the term is often used in line with its literal French meaning, but it has other uses as well, including one that has roots in a principle of French law. In business circles, “force majeure” describes those uncontrollable events (such as war, labor stoppages, or extreme weather) that are not the fault of any party and that make it difficult or impossible to carry out normal business. A company may insert a force majeure clause into a contract to absolve itself from liability in the event it cannot fulfill the terms of a contract (or if attempting to do so will result in loss or damage of goods) for reasons beyond its control.- Source: Merriam Webster Dictionary.
A party shall not be liable for any failure of or delay in the performance of this agreement for the period that such failure or delay is beyond the reasonable control of a party, materially affects the performance of any of its obligations under this agreement, and could not reasonably have been foreseen or provided against, but will not be excused for failure or delay resulting from only general economic conditions or other general market effects. Source: Contracts Standard.
I also picked a force majeure clause from on the legal agreements and it says:
1. Force Majeure shall mean any event outside the reasonable control of the parties preventing in full or in part, during the execution of this Agreement.
2. These events include but are not limited to: catastrophes, floods, fires, explosions, wars -declared or undeclared, state of alert, riots, civil or social uprising, strikes of any sort, or with respect of any regulation order or instruction from Government organizations or civil or military authorities and in general any event considered to be a force majeure event by law.
3. The party claiming a force majeure event must immediately inform the other party thereof in writing, and within fifteen (15) days of the event occurring, provide sufficient proof of the event and its duration.
4. This party must take all reasonable measures within its power to put an end to this force majeure.
5. If a force majeure event arises, the obligations of the party (ies) affected by such event will be suspended throughout the period of delay caused by the force majeure event and the period within which the obligation must be satisfied will be automatically extended, without any responsibility for the party(ies) affected for the period of suspension.
6. In the event a case of Force Majeure directly results in default to a party’s obligations under this Agreement for sixty (60) consecutive days or ninety (90) days in the aggregate, then either party may immediately terminate this Agreement upon written notice to the other party, provided that such case of Force Majeure still prevails as of the date of such notice.
There is a common theme in all these descriptions. It is an event that is an act of God or uncontrollable by the parties. It includes war, strike, riot, crime, hurricane, flood, earthquake, volcanic eruptions. Only one description mentions about the plague, but no definition says anything of a pandemic. For your information, Pandemic is a decease prevalent over the whole country or the world.
What is Coronavirus?
Coronaviruses are a large family of viruses that may cause illness in animals or humans. In humans, several coronaviruses are known to cause respiratory infections ranging from the common cold to more severe diseases such as Middle East Respiratory Syndrome (MERS) and Severe Acute Respiratory Syndrome (SARS). The most recently discovered coronavirus causes coronavirus disease COVID-19. Source WHO.
What is COVID-19?
COVID-19 is an infectious disease caused by the most recently discovered coronavirus. This new virus and disease were unknown before the outbreak began in Wuhan, China, in December 2019. Source WHO
Can the spread of Coronavirus qualify as a “force majeure” event?
WHO and all the Governments have accepted the spread of Coronavirus all over the world. All the Governments have taken steps to prevent the spread. Since there is no known vaccine available to treat the patients, the Governments have restricted the movement of people and have literally locked them at home. Some of the major septs include:
· Stopping of international flights and thereby restricting transmission of decease from one country to another
· Stopping all local transportation means like metros, tubes, buses, taxis, etc.
· Asking people to stay at home for anything between 60 hours to 21 days
In other words, public life has come to standstill. Most of the businesses have seen a reduction in the activities from employee attendance to zero sales. Most of the major Governments have announced relief packages even up to 10% of their GDPs.
That means the functioning of businesses is disrupted and hence performance of any obligation or routine duties is not possible. Hence COVID-19 shall be considered as an event leading to a Force Majeure.
I would like to quote an extract from Courier-Journal:
Michael Hicks, a Ball State University economist, told The Courier-Journal on Friday that the factory closings in China will drastically hit the supply of goods to the U.S. and other countries, but the effects have been tempered so far. That will change soon, he said.
“I don’t think many U.S. firms have felt the actual effect of export delays yet. They would all have some inventories in place. And some products manufactured before the quarantine are still in transit,” Hicks said in an email.
“However, we are single-digit weeks away from widespread disruptions to American factories,” he added.
The next hit, Hicks said, could come from consumers holding up on buying cars, RVs, appliances, and homes because of the massive losses on Wall Street.
Don’t look for a quick resolution to the crisis, the economics professor said. The Chinese reportedly authorized exporters to claim force majeure, which involves extenuating circumstances that have prevented a company from fulfilling contractual obligations.
“That is a clear signal they expect this to persist for many more weeks,” said Hicks, director of Ball State’s Center for Business and Economic Research.
He added that while it’s too early to call this a recession, “we are in the very beginning of the coronavirus effect on our economy.”
To end this discussion, I would also like to add another case. We were trying to engage a speaker for an event to be held in November 2020. The gentleman wanted an advance to book his time. We were prepared to pay the advance but added a “force majeure” clause to the contract and the gentleman refused to sign the contract. While discussing, he claimed that he would accept a force majeure clause for an event other than COVID-19 as disruptions due to COVID-19 are already known and you should plan the event accordingly.
This post is shared by Mr. Nandan Bendarkar. He is a Senior Chartered Accountant , Management Committee Member and President at APEC Region, GMNInternational and a passionate teacher-trainer. You can reach him on https://ae.linkedin.com/in/nandanbendarkar