In the year 2014, the Moroccan Government attempted to use the force majeure clause in its contract to postpone the African Nations Cup. Morocco had based its request to postpone the tournament by a year, on allegations ’of the highest health risk’. Morocco cited the outbreak of the Ebola virus that killed more than 11,000 people as a case of force majeure in justifying its request for postponement, citing in particular the risk of contamination of its population because of anticipated fans’ in-flow. In that case, the Court of Arbitration for Sport ruled that Ebola did not constitute force majeure, because the virus had not made hosting the event impossible but just more difficult. Morocco was held liable and fined $1 million. Their force majeure claim was unsuccessful.
Juxtaposing to the prevalent Covid-19 crisis which the World Health Organization declared a global pandemic in March 2020, this article provides some overarching guidance on how such clauses in general commercial contracts can be applied in the current circumstances for businesses looking to rely on force majeure clauses.
What is force majeure?
A ‘force majeure’ event refers to the occurrence of an extraordinary event or circumstance which is outside the reasonable control of one or all parties and which prevents those parties from performing their obligations under a contract. The term translates from French literally meaning ‘superior force’. Often referred to as an ‘Act of God’, these clauses can be applied to natural disasters such as floods and earthquakes.
It is worth noting that despite the previous events such as SARS and Ebola, there is no reported case law directly on the operation of ‘force majeure’ clauses in the context of pandemics.
Force majuere clauses may have the effect of excusing the affected party from performing the contract in whole or in part, excusing that party from delay in performance, entitling them to suspend or claim an extension of time for performance, or giving that party a right to terminate.
They all depend on the drafting of the clauses. It is for the party seeking to rely on a force majeure clause in order to excuse its non-performance or late performance to satisfy a court or other tribunal that this is the effect of the clause.
The test for force majeure.
Force majeure requires the satisfaction of three criteria:
•the event must be beyond the reasonable control of the affected party;
•the affected party’s ability to perform its obligations under the contract must have been prevented, impeded or hindered by the event; and
•the affected party must have taken all reasonable steps to seek to avoid or mitigate the event or its consequences.
How businesses can rely on force majeure?
Now, with businesses facing some of their worst losses in years, many are wondering whether the Corona virus pandemic might also fit the bill.
Contractual provisions may set out a specific list of events which are deemed to be events of ‘force majeure’ beyond the control of the parties, such as floods, earthquakes,war among others. A specific reference to a pandemic will make it easier to bring a force majeure claim during this period but it will still require the other criteria for a ‘force majeure’ test to be satisfied.
The relevant force majeure event also need not be COVID-19 itself. Rather, it is the consequences of COVID-19 and its impact upon the ability of the affected party to fulfil its contractual obligations that will be relevant. Even if a party can show COVID-19 or its effects are covered by the clause at issue, that party still has the task of showing that performance is truly impossible rather than merely financially difficult. The failure by Morocco to show this is probably the main reason why their force majuere claim was unsuccessful. Parties must establish the causal link between COVID-19 and its impact on the parties inability to perform.
An event that merely impacts the profitability of a contract may not be sufficient ground for a ‘force majeure’ claim unless there is express contractual provision for such a situation. Economic downturns or other adverse business conditions despite being caused by COVID-19 can’t also successfully found a force majeure claim.
A highly likely scenario with COVID-19 would be the total inability to perform a contract due to self isolation by an infected party to a contract because of the outbreak of COVID-19. This would likely have the necessary impact and causal link to qualify as a force majeure event.
Parties seeking to rely upon a force majeure clause must show that they took reasonable steps to avoid or mitigate the event and its consequences and that no alternative means for performing under the contract were available. However, basing on the continued impact that the spread of COVID-19 is having on global businesses, the reality is that there may be fewer mitigation measures available to parties than in other potential events of force majeure. The affected party’s right to relief for force majeure under the contract will also be conditional upon the issuance of a notice by it to the other party, supported by the required evidence.
Practical recommendations for businesses
- Businesses can consider reviewing their contracts to determine if they include force majeure provisions and, if so, carefully review the definition of ‘force majeure’ in those contracts to determine whether there are any express events such as pandemics and, if not, whether the general language is sufficient to include pandemics and their consequences.
- Businesses should also consider those aspects of the relevant contract that they are not able to perform and satisfy themselves that the inability to perform is strictly due to the consequences of the COVID-19 pandemic.
- Businesses should review what steps they are taking to mitigate the consequences of COVID-19 upon their ability to continue to perform contracts.
- Businesses should also review notice requirements as well as time limits for that notice to be issued.
- Lastly, they should whether insurances such as force majeure insurance may cover any of the expected losses.