The Coronavirus Disease 2019, or COVID-19, pandemic has caused governments to impose strict emergency responses, such as social distancing and city lockdowns, to stop the further spread of the disease. The disease and its consequences are causing businesses to struggle in continuing their operations. Parties to commercial contracts may also find it difficult or impossible to fulfil certain obligations as supply chains are disrupted and customer demand diminishes. At this stage, it is important for affected parties to establish the existence and application of a force majeure clause in their contracts.
A force majeure clause typically provides that the occurrence of extraordinary events will suspend performance obligations, excuse breaches and/or permit termination. The extraordinary events are often described generally—“events beyond the control of the parties”—and include specific examples, such as outbreak of war, strikes or extraordinary weather. In some cases, the extraordinary events are defined more narrowly. The clauses also usually specify a procedure the affected party must follow to claim the benefit of the clause, such as giving notice and continuing to perform to the extent possible.
Parties who believe their performance under a contract has been adversely affected by COVID-19 should first carefully analyse the force majeure clause to determine if it may apply to their circumstances. They should pay special attention to the presence or absence of specific language that may cover COVID-19, such as “pandemic” or “disease”, and of general or catch-all language that could also arguably cover this outbreak.
If COVID-19 qualifies as a force majeure, the affected party must also be sure to comply with the requirements for the clause’s application. Since a force majeure is an exception to the duty to perform a party’s contractual obligation, the conditions of the exception must be carefully observed.
In jurisdictions that impose a general duty to mitigate damages from breaches of contract, parties that are not directly experiencing a force majeure must take steps to reduce the damages from their counterparties’ breaches, whether or not their counterparties are entitled to claim the benefit of a force majeure clause.
In the absence of a force majeure clause, an affected party may seek to rely on the doctrine of frustration which has a similar effect to a force majeure clause. However, it is more difficult to apply that doctrine as it imposes stricter standards for its application. Under Singapore law, for example, the claiming party must show that a supervening event is completely unforeseeable and that the contractual obligation is absolutely incapable or impossible of being performed.
A force majeure clause is meant to apply when events that are beyond the control of either party result in the non-performance of a contractual obligation. The parties’ rights and relief under the clause are dependent on the precise language of their contract. Therefore, it is recommended that special attention be given in the drafting of a force majeure clause.
For more information, or if you have questions about the applicability of a force majeure clause, please contact us at info@orionw.com.
Disclaimer: This article is for general information only and does not constitute legal advice.
