What is a ‘force majeure clause’?
"Force majeure" translates literally from French as "superior force". In a contract, deciphering what it means is often a point of negotiation. A force majeure clause provides that if certain unforeseen events or circumstances beyond your reasonable control occur, you will not have to fulfil certain obligations under your contract, or you may even be able to end it.
It depends on what your contract says, but just because your contract says you can – should you? Here are 8 steps to help you work that out:
Step 1: Review your contract to see if it includes a force majeure clause
If your contract does not include a force majeure clause (or one with similar language), there are other legal rules that may let you avoid liability for breach of contract. (These include when the performance of a contract is ”frustrated” (ie. made illegal) by a government directive (such as the shutting of our borders). This leads to the cancellation of a contract but if you claim it and get it wrong, the other party to the contract can claim against you for “repudiating” the contract. Takeaway: Get legal advice before you rely on “frustration”).
Step 2: If your contract includes a force majeure clause, check if it covers pandemics
If you are dealing with a problem caused by the corona virus market chaos, check if your force majeure clause expressly refers to epidemics or pandemics. If so, it increases the likelihood of the clause applying. But if it doesn’t, you need to see if the coronavirus outbreak will fall under another part of the force majeure clause, like as an “act of God”.
Step 3: Identify what the standard of proof is
Does the clause require that your performance of the contract has been made “impossible” due to the corona virus outbreak ? Or, is there a lower standard like requiring your performance to have become “impracticable”? This is discussed more at Step 4.
Step 4: Decide if the coronavirus is the reason why you cannot perform under the contract
This one’s important – the coronavirus outbreak must be the real reason you cannot satisfy your contractual obligations. Depending on the relevant standard, you may not be excused simply because your ability to perform has become more difficult or expensive. If you can still perform it but in a different way (such as by getting materials or labour from another - more expensive - source), there’s an argument that you may not be let out of your obligations. Also, if you could have foreseen that coronavirus would delay your ability to deliver on a contract, the force majeure clause may not apply. For instance, if you rely on components coming from China which closed its market in late January 2020, you may not be able to rely on that as a reason for not being able to deliver on a contract in May 2020. Arguably, that should have been enough time for you to find another source.
Step 5: Check what you need to do before you can rely on the force majeure clause
For example, some clauses may require that you provide a certain number of days’ notice to the other party or make efforts to reduce your losses. Some contracts might require you to have a business continuity plan to fall back on before you can invoke force majeure. Have you complied with those obligations?
Step 6: Consider the risks of declaring force majeure against carrying on with the contract
Before invoking the coronavirus as a force majeure event, make sure you consider the potential ramifications of doing so – such as your business reputation and the risk of litigation from the other party. How important is this contract to you – is better to try and vary the contract to suit the current circumstances?
Generally, if the force majeure clause is applicable and you invoke it, you will be relieved of those performance obligations that have been prevented by the force majeure event (here, the coronavirus outbreak) without being in breach of contract. However, you may still have to perform certain aspects of the contract, as the event may only influence some, not all, of your responsibilities. Will relying on the force majeure clause put a strain on your business relationship? Maybe you would be better to change your contract.
Step 7: Document changes to your contract if you want it to continue
Open and honest communication with your business partners and clients is key in times of crisis. If you cannot meet all that you are supposed to deliver under your contract, let the other party know as soon as you can. Then, if you have an existing signed contract make the necessary changes to it with a written variation to a contract.
Here’s an example: The delivery date for your services is being postponed to because your key staff have become ill. This will impact payment schedules and milestones that need to be met before the delivery date. These are all changes that should be documented.
Best practice is that you do a separate variation document which is signed by all the parties. This should record what clauses are being deleted and list in full what is replacing them. There should also be clause that the variations will apply over the original contract (and any previous variations) to avoid any confusion in the future. The original contract and the variation should be kept together.
You can vary a contract by email but take care to word it by referring back to the relevant parts of the original contract that are being changed. It is smart to attach the original contract to the email containing the variation. Also, ensure that people who had authority to sign the original contract, approve the email and you see evidence of that approval.
OR - Terminate the contract (if you are allowed under the force majeure)
Using the example above, let’s say you and your client cannot agree to rescheduling the delivery date; but rather agree to cancel the order and let you keep their deposit towards your accrued costs. Hopefully your contract sets out a clear process on how to end it. Consider if you can cancel the contract, or if only the other party is allowed to. Also, how much notice do you need to give and can you get to keep the work you have done to date. Best practice is to end a contract in writing by giving notice and covering off all the details that are outstanding.
Step 8: Review your contract and how you might do things differently next time
While there might not be another pandemic for a while, there could be a natural disaster or a terrorist attack which might impede your ability to meet your obligations under a contract. As the last year has shown us, these things do happen in Aotearoa. This is an ideal time to consider what clauses your contracts should have (like force majeure clauses and cancellation policies) and how you want to handle your business relationships going forward. If you want to add such clauses to existing contracts, you will need to communicate that addition to your clients. If you have them in your contracts going forward, you need to understand what they mean so you can alert your clients to them from the outset. Then you will both know what to expect in another time of crisis.
Get in touch with me if you want to talk through your contracts and your strategy of dealing with your business relationships either now in the current crisis and/or in the future when we come through it.