Updated 26.03.2020: Can your company escape liability in the event of late or non-delivery? The outbreak of the corona virus has seriously put the world on hold. This poses major challenges for companies that will deliver goods and services in accordance with what has been agreed.
To avoid major losses, it can be crucial to get an exemption from contractual obligations or to have them altered with reference to force majeure.
What is force majeure?
Force majeure is defined as an extraordinary event beyond the control of the parties that impedes fulfilment of contractual obligations. In addition, there is a requirement that the incident was unforeseen and that the parties could not avoid or overcome the consequences of the incident. Typical examples of this are war, natural disasters, uprisings, strikes and the like.
In other words, force majeure means that it is impossible or disproportionately onerous to fulfil the obligations under the original agreement between the parties. These days, this could be an issue that presents itself to businesses which have entered into agreements for the sale of goods and services, but which are unable to deliver due to the corona situation and its effects.
Typical industries that experience difficulties with deliveries are the tourism, hotel and restaurant industries. The same applies to hairdressers or skin care businesses, which have now been prohibited from continuing operations by the Government to avoid virus infection.
Is the corona outbreak a force majeure event?
Whether the corona outbreak is a force majeure event or not, must generally be determined based on an interpretation of the specific agreement between the parties. Agreements for delivery of goods and services, often contain a force majeure clause.
If the agreement is unclear or does not regulate force majeure, the agreement may be supplemented by statutory or non-statutory rules on force majeure. We have examples of statutory rules on force majeure in the Sale of Goods Act’s rule on a force majeure-like situation; "Control liability." "Control liability" means that a buyer cannot claim compensation for losses due to delay or defects on the part of the seller, if this is due to:
- an impediment beyond the seller's control;
- which the seller could not be expected to have taken into account at the time of the agreement,
- and for which the seller could not be expected to have avoided or overcome the consequences
There is no condition that force majeure makes fulfilment impossible, as long as fulfilment becomes disproportionately onerous.
However, if neither the agreement nor the law governing the agreement has rules on force majeure, it is conceivable that the non-statutory rules on force majeure apply. The non-statutory force majeure rule may exempt the contracting parties from fulfilment as long as the impediment persists.
As soon as the event which can be characterized as force majeure disappears, the parties are usually obliged to fulfil their obligations again, unless the contractual assumptions have subsequently failed, or the agreement is unreasonable due to changed circumstances.
Whether the conditions for force majeure in agreement, law or non-statutory rules on force majeure are fulfilled, must be considered in each case.
The effects of force majeure and the nature of performance
Whether you can invoke force majeure and what the effects of this will be, will depend on the specific situation and what the contractual obligation is.
If the contractual obligation is only to provide money, it will not be much relevant to be able to invoke force majeure. In principle, a buyer will not be exempt from his obligation to pay on the basis that he did not benefit from what was ordered. An example: A company that has booked 80 hotel rooms will usually not be able to cancel free of charge, unless there is a basis for this in the cancellation policy. However, if the hotel itself cannot deliver according to the agreement, this may be a different situation.
For those who are going to deliver a product or service, force majeure may be more relevant. The effects will typically be that the obligations are terminated, modified or postponed as long as the impediment exists. For example, the seller will be able to get an exemption from his obligation of delivery and compensation in purchase contracts, and in a construction contract the contractor will be able to extend the construction time (extension of the deadline).
It is important to note that the seller must have done what is possible to overcome the impediment, for example by ordering the necessary raw materials from another manufacturer if possible.
Remember to notify of force majeure in time
If a party wishes to invoke force majeure as an impediment to the fulfilment of contractual obligations, the party will have to notify the other party of the circumstances within a reasonable time for any exemption from the contractual obligation to be retained.
The need for specific force majeure clauses
It is often beneficial to adapt force majeure clauses in agreements to the contractual obligations and the industry in which the parties operate.
We recommend that force majeure clauses govern:
- Which events qualify as force majeure.
- What duty to act the parties have when force majeure events occur, including when a party must notify.
- The effects of the events on the contract
Existing and future agreements in view of the corona situation
The current corona situation will, within the traditional definition, in many cases be regarded as a force majeure event that can exempt or modify the contractual obligations, provided that it has in fact impeded fulfilment of the contract.
However, it will be different for new contracts that are signed after the corona outbreak and its consequences are a fact. Then, the corona outbreak and its effects may be something that one could reasonably expect to have taken into account at the time of the agreement.
It is therefore important to discuss the current corona situation for existing and future contracts, as well as make necessary reservations if the corona situation should persist.
You should do this now
Companies affected by today's corona situation should:
- Evaluate existing agreements and how the corona situation affects or can affect the obligations.
- Identify the opportunities you and contractors have for invoking force majeure as a result of the corona situation.
- Notify contracting parties and partners of any force majeure, if this prevents fulfilment of contractual obligations.
- Limit financial losses due to the corona situation and consider alternative measures to fulfil agreements where possible.
- Contact insurance companies to try to cover any loss or to get coverage for legal assistance if a conflict has already arisen
- Consider including any pandemic / epidemic (including corona outbreaks) in future contract negotiations as examples of force majeure events.
If you and your business have questions or challenges regarding corona and contracts, please feel free to contact us for an assessment of the situation.
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