Chapter 5 in the ‘Contract for Beginners’ series: Force Majeure clause during a pandemic
May 6, 2020
Chapter 5 of the ‘Contract for Beginners’ series looks at the topical issues facing Microsoft Partners with COVID 19 and the Force Majeure clause. Since the outbreak of COVID-19, a lot of businesses are suffering from a host of employment issues, but one of the main issues they are facing is whether this virus is considered an ‘Act of God’ or, as it is commonly known in contractual language, a ‘Force Majeure’ and a potential trigger for the cancellation of contracts.
Force Majeure is normally found in the “small print” towards the bottom of your contracts. It’s the section that a lot of people’s eyes glaze over for the fact that it is the most unlikely scenario to happen so why spend time worrying about it. In simple terms, this section will aim at (1) defining what constitutes a ‘Force Majeure’ (2) How long into the Force Majeure event until the Party claiming Force Majeure has to terminate or suspend the contract; and (3) that generally there is no liability or obligation to pay if the services cannot be received or delivered.
Q. Is COVID-19 a Force Majeure?
A. COVID-19 has been declared as a ‘Global Pandemic.’ If your Force Majeure section does not include pandemics or epidemics in its definition, it may instead state that it is ‘any cause preventing either party from performing its obligation due to events beyond the reasonable control of the party so prevented
Therefore, if you are not prevented from supplying your services and your customer is not prevented from receiving the services, it’s unlikely anyone could argue a Force Majeure. Force Majeure does not exist in order to make a contract easy to terminate, it is there for protection in case either party cannot deliver on its obligations under the contract. The “Act of God” has to prevent either party from enjoying a service they previously enjoyed before it occurred.
Q: What if I am providing remote IT services, could the customer still invoke a Force Majeure?
A. As stated above, if you are not prevented from delivering services, (due to remote working or ability to access systems remotely, for example) and your customer is able to also remotely give you access and therefore receive the services (while also complying with ‘Social Distancing’ as well as ‘Lockdown’ guidelines), it would be difficult to rely on a Force Majeure event.
Q: What if a customer is trying to use ‘Force Majeure?’ to terminate our contract?
A. A few practical and (hopefully) sensible tips:
- Are you a business that can continue to provide your services to your customers despite social distancing and lockdown?
- Can your customer give you remote access to systems to enable you to continue to deliver the services?
- Are you still able to deliver the quality of services you would deliver but for the Force Majeure Event?
If the answer to these 3 questions is YES, then it would be difficult to argue a Force Majeure Event.
Q: What are the consequences of establishing force majeure?
A. In most contracts, establishing force majeure will relieve you from performance deadlines, thereby avoiding the risk of a default termination, and an extension of time to target dates. Commonly, parties bear their own costs arising from any force majeure delay but there are exceptions where compensation may be payable after a certain duration or certain costs are payable from one party to another. Extended periods of force majeure can lead to a right for one or more parties to terminate the contract. If you don’t want this to happen, it is important to engage in discussions sooner rather than close to the deadline. It may be preferable for these to be held on a without prejudice basis.
What has this pandemic taught us? When drafting a force majeure clause for any new contract, you should consider adding pandemics, epidemics and other crisis situations to the list of force majeure events. It’s also wise to consider amending your current standard terms of business to make sure that their force majeure clauses cover pandemic situations and crises.
This is the fifth blog in the series, contracts for beginners, please look at the others available.
- Chapter 1 in the ‘Contract for Beginners’ series: Time is of the Essence
- Chapter 2 in The ‘Contract for Beginners’ series: how to manage project delays
- Chapter 3 in the ‘Contract for Beginners’ series: Employment contract termination
- Chapter 4 in the Contract for Beginners series: legal action for non-payment
At Law 365 we have created an eBook addressing the critical Coronavirus issues impacting our clients right now – These include:
- Force Majeure.
- Employment Issues.
- Business Contingency Plans.
- Insurance queries as well as project delays caused by COVID-19.
- Payment issues.
- GDPR and termination rights.
If you found this excerpt interesting, you’ll love our free eBook, download it now.
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