Companies Should Avoid Invoking Force Majeure to Merely Escape Difficult Economic Situation, Lawyers Say
As industry sees an increase in parties invoking force majeure clauses (see 2002140027) due to the COVID-19 pandemic response measures, courts will more closely review force majeure disputes to determine whether companies are simply trying to escape a difficult economic situation, commercial litigation lawyers said. Before invoking the clause, parties should make sure compliance with their contracts is impossible due to the pandemic. “The courts … are going to be very astute to look for people trying to use COVID-19 as a force majeure excuse where actually the contract was just not economic for them anyway,” Sean Upson, a lawyer with U.K.-based Stewarts law firm, said during an April 9 webinar.
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In some cases, the lawyers said, compliance with a contract may not be impossible -- just more difficult. If there are alternative ways to complete the contract -- such as through a different supplier or by a different transportation method -- a force majeure clause may not apply, Stewarts lawyer Lucy Ward said. “It is not uncommon for a party which would not be able to or does not intend to comply with its obligation to seek to use the force majeure event to escape those obligations,” Ward said. “The fact that performance has become harder or not economically viable is not good enough. Performance must actually be impossible.”
In supply chain contracts, a supplier of goods who invokes the clause needs to prove there is no other way for them to source the goods, Upson said. “They need to prove they can’t source the goods from another country, or they can't manufacture it from a plant in a different country, or they can't now [source] it from China where the restrictions are easing up,” he said.
Upson said the law firm has seen an uptick in force majeure questions from clients, and while every contract is different, he said the firm believes the COVID-19 pandemic should qualify as a force majeure event, especially if the clause mentions an epidemic, a pandemic or an act of God. “I think we can be fairly sure that COVID-19 can, in principle, be a force majeure event,” Upson said. But he also said the clause is “not a get out of jail card. It actually requires quite a bit of analysis to work out whether it actually applies in a particular situation.”
Some force majeure clauses were wrongly invoked during the 2008 financial crisis, which may provide insight as to which situations may not qualify now, Stewarts lawyer Mo Bhaskaran said. In one case, Aero Toy Store LLC invoked the clause after it tried to delay the purchase of a private jet by citing the financial crisis. Aero lost the case. “The fact that the contract had become expensive to perform -- even dramatically more expensive -- was not a grant to relieve the party,” Bhaskaran said.
Force majeure clauses will likely receive more attention after the pandemic, Bhaskaran said, and a larger number of them may be updated to cover future virus outbreaks. “Few if any clauses drafted prior to the middle of February 2020 could have been drafted with the world we're facing today even remotely in mind,” he said. “Suffice it to say that force majeure clauses in the future are likely to be considered with a significant amount more interest than in the past.”