The spread of the coronavirus (COVID-19) has caused businesses to consider the impact that this pandemic will have on short-term and long-term business operations and transactions. It has already delayed contractual discussions, particularly in light of the global market’s response to the spread of the virus. The pandemic poses a range of risk management and liability issues, and one concern is the invocation and application of force majeure clauses.
Force majeure will likely affect companies across a broad spectrum of industries, including oil and gas, renewables, petrochemical, hospitality, construction, healthcare, manufacturing, insurance, commercial, industrial, procurement and supply chain logistics, warehousing, retail leasing, and maritime.
In commercial transactions force majeure will impact not only M&A deals that are under contract — on either the buyer or seller side — but also credit facilities currently in place and those at the term sheet/commitment letter stage. Additionally, this issue is already affecting various vendor, supplier, O&M, and other operational agreements.
Disagreements on the interpretation of force majeure clauses in existing agreements may force many companies into disputes that could tie up resources and significantly impact supply chains and project delivery schedules.
In some commercial transactions a force majeure clause may relieve a party from performing its contractual obligations entirely, while in other instances, performance may be suspended until the force majeure event ends. Whether a force majeure clause applies to a pandemic depends on the wording of the clause and the jurisdiction whose law governs the contract. In some instances, a pandemic may not be considered a force majeure event, particularly if such an event (or similar event) is not specifically referenced in the clause, which is often the case. Issues may arise as to when the event actually occurs, by declaration of state of emergency, declaration of global pandemic, or a lesser standard. Creative and persuasive contractual interpretation and legal advocacy are key in these circumstances.
Companies should also evaluate significant contracts to assess breach risk due to the COVID-19 pandemic and develop strategies to mitigate that risk. For example, deadlines in contracts for declaring force majeure should be identified and understood, and in the vendor/supplier context, identifying other supply options could mitigate force majeure risk. Penalties for nonperformance or delay should be examined in the context of a force majeure event to determine whether they apply. Force majeure, if ever considered contract boilerplate, will certainly no longer be overlooked in the aftermath of COVID-19.*
Read more in upcoming posts about how force majeure will affect other industries and practices.
*Note this [blog] is for general information purposes only and is not a full analysis of the matters presented and may not be relied upon as legal advice.