Covid-19 and Force Majeure Clauses
You may already have heard a lot of talk about force majeure clauses in the context of people looking to terminate or suspend their contractual obligations. The important thing to remember with force majeure clauses is that not all contracts will have a force majeure clause. Also whether you can exercise your rights under a force majeure clause is very much dependant on the actual wording of the clause itself.
What is a force majeure clause?
“Force majeure” is French for superior force. A force majeure clause typically applies if there is an event (known as a force majeure event) which occurs which was unanticipated and beyond the control of the parties. It can allow for the parties to:
- Terminate the contract altogether; and/or
- Suspend performance of their obligations under the contract; and/or
- Be excused from any losses or consequences of any breaches which may flow from non-performance of their obligations under the contract.
What is a force majeure event?
It is dependent on the actual wording of the force majeure clause. Typically a force majeure event is an event which is in the nature of an act of god (for instance; an earthquake, tsunami or flood, act of government, strikes, electrical mains failures, riots and acts of war). It can also include quarantines, government restrictions or any cause which is beyond the reasonable control of the parties.
Can you use a force majeure clause to terminate or suspend contractual obligations due to Covid-19?
Firstly, there must be a force majeure clause in your contract. If there is a force majeure clause in your contract the second step is to look carefully at the actual wording of the force majeure clause to make sure it applies and then to determine what the effect of it is. It is likely that if your business is not able to operate due to Covid-19 restrictions that the force majeure clause will apply. You also need to determine if the clause allows you to do what you want to do. For instance; if the clause only allows you to terminate the agreement and all you want to do is suspend obligations then you need to enter into negotiations with the other party and try and work out a solution that is agreeable to both sides. It is also possible that the force majeure clause may not suspend all obligations under the contract. For instance; it is common that payment obligations are not affected by events of force majeure.
It is important to ensure that you follow any process specified in the clause – for instance you may be required to give notice to the other party of the force majeure event.
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