The impact of force majeure clauses in contracts post COVID-19

by | Nov 15, 2020

Way back in April when we were all still in the shock phase of this coronavirus pandemic, I did a series of short videos highlighting the things I thought we should be dealing with as a matter of urgency in our businesses

One of those was getting out our supply contracts to check the force majeure clause, the clause that allows a party to the contract, the buyer or the seller, to not be in trouble if something happens that’s beyond their control, such as a global pandemic

As expected, force majeure clauses have been invoked widely, including by some of Australia’s biggest companies, and our biggest trading partners. For example, the Chinese Government clearly sees the coronavirus as a force majeure-triggering event. It has provided Chinese companies with certificates that say so.

According to a recent survey, 47 per cent of in-house lawyers have identified contract problems resulting from the pandemic. So now, teams of lawyers are pouring over existing contracts and creating new ones in the light of the COVID-19 disruption.

One of the problems of course is that the courts shut down. Who would have foreseen that? Looking to the future though, here is a list of seven things you will have to consider when you update your contract – with the help of your lawyer of course.

  1. Future clauses may not apply to any future waves of COVID-19 because it’s no longer an “unforeseeable event”.
  2. According to the lawyers I have spoken with, there is no magic wording that will protect you, even with the experience we have all been through. Every supply chain, and every supply contract, has its own peculiarities. It is up to you to be aware of these.
  3. While there is no magic formula, force majeure clauses are being redrafted with COVID-19, and the circumstances of both parties specifically in mind. The parties will work out exactly what each will do, given the experience of 2020.
  4. Definitions of trigger events will be broader and will try to capture everything possible that is outside the control of the parties. Most probably, these clauses will specifically mention pandemics, supply chain breakdowns, and government directions (e.g. lockdowns).
  5. Clauses will have specific payment obligations. Many current force majeure contracts do not specify who pays how much to whom, and when. As a result, cases often end up in court, with a Judge deciding on compensation. Expect future clauses to be much more specific.
  6. The time period of disruption will be more important. COVID-19’s effects have been deep, widespread, and long-lived, so a “standard” clause of 30 days is clearly inappropriate. Watch for clauses to get longer as they try to take account of different types of trigger events, and their potential period of disruption.
  7. Exit from force majeure events. At the moment, most clauses spell out what happens when a force majeure event is triggered, but not what happens when the disruption ends? Again, expect more detail around this in future clauses.

I know all this legal stuff is complicated and probably boring. But as we have all seen, the consequences of not thinking the unthinkable, and being as prepared as possible can be fatal for our businesses. This leads us to another change we need to make in our businesses: risk management.

It has been reported that UK firms that had done some planning for the effects of Brexit are the ones that have coped reasonably well. The simple act of considering one set of adverse circumstances means that solutions can be deployed quickly, regardless of the form the disruption takes.

The take-home message is to take on board the simple, timeless motto of the Scouts – “Be prepared”.

Bronwyn Reid, Owner, Small Company Big Business

This post first appeared on on November 12, 2020.