With the spread of the novel coronavirus across the globe and the introduction of strict measures and restrictions, companies and businesses now face a new set of challenges.
How does this affect the on-going obligations of businesses and companies?
Could it be considered a force majeure event?
Existing Agreements and Force Majeure Clauses
Force Majeure clauses are provisions in contracts which set out what are each party’s obligations in the event of an “Act of God” or other unpredictable, extraordinary events, beyond the defaulting party’s control, which prevents performance of contractual obligations.
With the spread of the COVID-19, businesses (and their legal advisors) now turn to force majeure clauses in an attempt to safeguard their interests and excuse themselves from non-performance of existing obligations.
Yet, the existence of such a clause in a contract doesn’t automatically excuse non-performance (or breach) of the agreement.
The exact terms of each contract need to be carefully considered to determine whether the novel virus falls within the ambit of such a Force Majeure Clause and in particular within the non-exhaustive list of events that such clauses often include.
Whether assertions of force majeure will be successful will be heavily dependent on the facts relevant to the particular contracts and businesses at issue.
Even if a contract provides for the occurrence of a pandemic or other health risk, parties are still bound to mitigate as far as possible the effects of this virus.
What steps can be taken?
Being proactive and taking action is important as businesses can foresee that the disruption will continue for some weeks.
By way of example, businesses could:
1. Consider carefully terms of agreements with key suppliers and customers,
2. Discuss and if necessary, re-negotiate and agree in writing extensions of key deadlines and contractual obligations,
3. Consider and secure alternate supply streams in the event that the operations of existing suppliers are affected,
4. Try to mitigate any mitigate any potential disruptions,
5. Plan for employees to continue working remotely,
6. If you have Business Interruption Insurance in place, consider whether coverage is provided for the effects of this new virus.
Even if such steps are not successful and a force majeure clause will need to be invoked, a company’s attempt to mitigate the effects of the virus will be highly relevant in whether reasonable steps were taken to continue to satisfy contractual obligations, and whether performance was truly impossible.
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