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Does the Covid-19 Outbreak Constitute a Force Majeure Event?

Date: 26/03/2020 | COVID-19, Corporate & Commercial, Business & Professional Services

It is not often that the expression “force majeure” appears in the mainstream press but it was reported recently that Primark had exercised their rights under the “force majeure” clause in supply contracts to terminate them. This applied not only to goods which were to be manufactured but also to goods which had been manufactured and were in the process of being delivered to Primark.  The effects on the suppliers are very real.

Force majeure is quite often referred to as “acts of God”.  Its meaning is unforeseeable circumstances beyond the reasonable control of a party to a contract that prevent someone from fulfilling the contract or allow someone to cancel the contract.

Businesses worldwide have been forced to navigate the challenges brought on by the rapid spread of Covid-19 (Coronavirus) including interruptions in supply chains and challenges in meeting contractual obligations.  Some businesses may seek to rely on force majeure clauses or other contractual rights for relief from the performance of certain obligations due to the impact of the outbreak.  The rapid spread of the virus has the potential to cause significant disruption to businesses around the world, including non-performance of contracts.  If a force majeure clause has been included in a contract that you are party to, then you may wish to consider whether the clauses might be triggered by you or used against you.

Force majeure clauses exist to protect parties from events that are agreed to be outside of normal business risk.  The clause excuses one or both of the parties from performance of the contract following the occurrence of certain events.  The underlying principal of a force majeure clause being that the occurrence of such events is outwith the party’s control and therefore a party is excused from, or entitled to suspend, performance of all or part of its obligations.  Meaning that the party will not be liable for its failure to perform in accordance with the clause. It is unlikely that any force majeure clauses will specifically reference Covid-19 due to the recent nature of the worldwide outbreak.

Generally, the scope of each force majeure clause will vary across different contracts.  In the context of a contract using a standard force majeure boilerplate clause, this may refer to ‘epidemics’ or ‘pandemics’ and Covid-19 would constitute a force majeure event in this instance. The World Health Organization (WHO) confirmed on 11 March 2020 that Covid-19 now has the status of a ‘pandemic’.

However, where these words are not specifically used it is worthwhile considering whether the force majeure clause within your contract will catch Covid-19 on a wider scale. This could be in the form of the restrictive measures imposed by the government in order to protect public health, such as the restrictions on ‘non-essential workers’ which in turn could hinder the ability for a company to provide supplies and labour under the terms of a specific contract.  This kind of reasoning will depend on other relevant factors and there will need to be a clear link established showing how the outbreak of Covid-19 specifically relates to non-performance.

Whether Covid-19 triggers a force majeure will be decided on a case by case basis.  Clearly if you are entering into new contracts during this period you should consider the force majeure provisions with particular care.  When drafting a force majeure clause for a new contract, businesses should consider adding epidemics, pandemics and crisis situations to the list of force majeure events.  Businesses should also consider amending their standard terms of business to make sure that their force majeure clauses cover the same.

 

Disclaimer 
The matter in this publication is based on our current understanding of the law.  The information provides only an overview of the law in force at the date hereof and has been produced for general information purposes only. Professional advice should always be sought before taking any action in reliance of the information. Accordingly, Davidson Chalmers Stewart LLP does not take any responsibility for losses incurred by any person through acting or failing to act on the basis of anything contained in this publication.


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