Force Majeure in Contracts

Date 25 mar. 2020
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Introduction

The new world order that we are seeing as a result of the COVID-19 breakout gives rise to a number of questions regarding the legal position between contracting parties. One key question is whether the COVID-19 breakout can be seen as force majeure.

 

In the following, we go into some of the things that we believe should be considered in relation to contracting parties claiming force majeure as a result of COVID-19, both when a force majeure provision has been agreed on in the contract and when it has not.

 

Force Majeure

Force Majeure can be characterized as the occurrence of an extraordinary event which makes it impossible, temporarily or permanently, for a contracting party to perform its obligations, and which the parties could not have anticipated, prevented nor controlled.

 

In the event of force majeure, the party unable to perform its obligations as a result t hereof will be exempt from responsibility, i.e. no default powers may be exercised towards the party in question for the duration of the force majeure event. The party unaffected by the force majeure event is not entitled to terminate the contract as a result of the force majeure event or the other party’s claim of force majeure.

 

Among typical force majeure events are import bans, boycotts, natural disasters, and war.

 

It remains to be seen whether COVID-19 can be regarded as a force majeure event, and if so to what extent. Specifically, the event must be characterized as being extraordinary, and performance of the obligations in pursuance of the contract must be deemed temporarily or permanently impossible as a result of the event.

 

In order to claim force majeure, being able to prove that performance of the obligations has become more cost or time consuming or similar manageable impediments as a result of the event is not sufficient. Circumstances rendering performance more cost consuming or burdensome are referred to as “hardship” and will generally be sanctioned by the parties having to renegotiate the terms of the contract. Danish law does not apply the concept of hardship, unless the parties specifically have agreed on it.

 

Force majeure is to be assessed separately for each link in a supply chain. Even in cases where a manufacturer can legally claim force majeure, this will not necessarily mean that the receiver of the product can do the same towards the next link in the supply chain.

 

For instance, a manufacturing company that is required by the authorities to close down its business, which is the case in Chinese province of Wuhan, and that as a result cannot manufacture the products agreed on in the contract, will be able to claim force majeure. However, a company in Denmark that as a result of the aforementioned is unable to deliver products to its business partners, cannot necessarily claim force majeure, if the Danish company e.g. has the option to have similar products manufactured elsewhere, whether or not this would imply an increase in spending for the Danish company.

 

Force Majeure in Contracts

It is not uncommon for contracts to include force majeure provisions. If, however, the parties have not included such provision, certain jurisdictions apply a general principle of force majeure as a basis of exemption from responsibility, unless the parties specifically agree to exclude this principle. It is therefore crucial to look first at the wording of the contract and then on the contract’s governing law.

 

If a contract between two parties contains a force majeure provision, this provision may be applied to the events comprised by it. The specific application of the provision to COVID-19 therefore depends on the wording and construction of the provision.

 

If such force majeure provision merely comprises traditional force majeure events - import bans, boycotts, natural disasters, and war – COVID-19 will in principle not be included.

 

If, however, the provision also comprises events such as pandemics, orders issued by authorities, epidemics and international health crises or similar wordings, the parties will be able to invoke the provision, naturally provided that the other conditions for claiming force majeure are met, including the requirements of impossibility and unpredictability.

 

In certain jurisdictions, the concept of force majeure as basis for exemption from responsibility applies whether or not an agreement has been made on this. It is therefore very important to look into the governing law provisions in order to assess whether the relevant jurisdiction operates with a general concept of force majeure. This concept does, for instance, apply in Danish law and will thus apply irrespective of whether the parties have agreed on any force majeure provision.

 

Whether COVID-19 will be seen as a force majeure event in accordance with this concept will ultimately be up to the courts to decide, and a decisive factor will be whether the relevant conditions have been met in the specific situation.

 

Claim Process

Any contractual party wishing to claim force majeure will, by doing so, assume a viewpoint risk. In many situations, this viewpoint risk will be the only opportunity to not be held liable for breaching the contract.

 

The contractual party wishing to claim force majeure and thus assume the viewpoint risk is obligated to notify the other party as soon as possible. It is not unusual that if a provision of force majeure has been agreed on, that such provision will regulate the duty of disclosure, including a duty to keep the other party continuously informed whether the force majeure event is still occurring.

 

Any contractual party claiming force majeure will still be subject to the ordinary duty of loyalty, including the duty to loyally seek to limit the loss of the other party.

 

Handling of Force Majeure Provisions going forward

Contracts that companies have already entered into should be reviewed for the purpose of assessing the positions of the company and the contractual party in the event that a force majeure event should occur. This is especially relevant for companies which face a risk of delivery issues as a result of COVID-19, and if so, if the company is able to fulfil its obligations in some other way.

 

As regards any future contracts which the company may enter into, including standard contracts, the company should consider whether epidemics, pandemics, orders issued by authorities, and international health crises and their consequences are to be considered events that may exempt a party from responsibility and thus be incorporated into the provisions.

 

Conclusion

The option to claim force majeure as basis for being exempt from responsibility in relation to contractual parties firstly depends on the wording applied in force majeure provisions in the contract and the provisions of governing law.

 

In cases where no force majeure provision has been agreed on, it remains unclear whether and to what extent COVID-19 may be seen as a force majeure event. In such case, a specific assessment must be made, especially whether the current situation is extraordinary and that the performance of the contractual obligation is specifically deemed to be temporarily or permanently impossible as a result of the event.

 

In our opinion it will in any case be highly unlikely that the consequences of COVID-19 will be deemed force majeure events in contracts that are entered into after COVID-19 was declared a pandemic by WHO, seeing as the event is no longer to be seen as unpredictable for the company.

 

We encourage companies that already now know that their obligations may become impossible to fulfil as a result of the current situation to carry out a specific review of the matters for the purpose of handling this as best they can.

 

 

If you have any questions or would like additional information regarding any of the above, please feel free to contact Partner Pernille Nørkær (pno@mwblaw.dk) or Junior Associate Sarah Veje Rasmussen (svr@mwblaw.dk).


The above does not constitute legal counselling and Moalem Weitemeyer Bendtsen does not warrant the accuracy of the information. With the above text, Moalem Weitemeyer Bendtsen has not assumed responsibility of any kind as a consequence of any reader’s use of the above as a basis for decision or considerations.