Covid-19 and Commercial Contracts Force Majeure Clauses

As has been widely analysed and discussed, the current pandemic may, depending on the circumstances and the specific wording, provide force majeure relief to a party impaired or adversely affected from performing its duties under a commercial contract. Many forms of contract contain some sort of force majeure terms and some contain material adverse event clauses. Some force majeure clauses are simple and short and therefore, are of limited application. Contract parties need to consider in more detail what should be in their contract to deal with unexpected events that are beyond their reasonable control.

Contractual clauses are likely to be more certain to rely on than the common law doctrine of frustration. It will depend on who has the bargaining power as to what clauses may be included in the agreement.

Force Majeure Clauses

Force majeure provisions potentially do not carry any entitlement to additional monetary compensation even though the contract may subsequently become more expensive to perform. Commercial contracts often include a termination right where a force majeure event has subsisted for a prolonged continuous period of time. For instance, under the conditions of contract which are often used as the basis for procuring large industrial projects, these periods are 84 days and 140 days, respectively. Under commodities supply contracts these periods tend to be longer.

As the outcomes of COVID-19 continue, it is right to envisage that some commercial contracts will approach or meet these force majeure termination thresholds. The termination right varies between contracts with some being exercisable by either party, and others by only the unaffected party. However, parties should be wary of a “price majeure” moral hazard which may incentivise a party to exploit a force majeure event by using, or threatening to use, its termination right to bring a commercial contract to a premature end if it has become economically burdensome to perform due to the impact of COVID-19 or to drive better commercial terms if COVID-19 has resulted in a reduced number of competitors.

Any party seeking to terminate a commercial contract for prolonged force majeure should be certain that the requisite elements for force majeure have been in place for either the appropriate continuous or aggregate period of time, or all relevant notice formalities have been complied with. The termination provisions for prolonged force majeure may require substantially all of the performance of the contract to have been prevented, and not merely certain elements. Any party seeking to terminate should also naturally be wary that it is in full performance of its own obligations to avoid a potential counter-claim for breach of contract.

Going forward, employers should consider having more extensive clauses, which spell out in more detail what steps employers can take when events beyond their control impact on their businesses. Especially where employees don’t, as a rule, work from home, there’s a need to have provisions that deal with the need for employees to work from home, including as to health and safety, remote access to computer systems, and performance management.