Navigating Force Majeure during the COVID-19 pandemic

It is perhaps appropriate that the COVID-19 pandemic has resulted in much time and attention being focussed upon the force majeure clause commonly found in contracts of all types. With COVID-19, there truly is a “superior force” interfering with our daily lives and with the ability of many to perform their obligations or to receive what they thought they had bargained for. 

Much has been, and will continue to be, written about the operation of “force majeure” clauses. It might be obvious to say that each clause must be read for what it actually says and that each individual clause must be read in the context of the contract in which it is found. By and large, there are no generalisations about whether a “force majeure event” has occurred, or as to the consequences, even in the midst of a pandemic.

If a party to a contract asserts that an event of force majeure has occurred, there are some important considerations that parties, advisers and mediators must not overlook:

• risk allocation: the question is never just about what the force majeure clause says; force majeure is a subset of the risk allocation under the contract and there must be an holistic review of the risk allocation under the contract in the events that have occurred, even if they were unforeseen.

• force majeure or change in law: particularly in a pandemic, the obstacle to performance of a contract might be the governmental response to the pandemic, not the pandemic itself. Might it have been a change in law or regulation that creates the problem? There is often a complex question as to the relative priority of the change of law and force majeure clauses when both might be potentially applicable. Does the specific prevail over the general? While both clauses might be applicable on their terms, they often have different consequences and change in law risk might have been more readily accepted by one party, rather than the unforeseeable risk of a pandemic

• no “get of out of jail free” card: most important in the context of a mediation, force majeure is not intended to be a fortuitous excuse to escape a burdensome or unprofitable contract. Well intentioned parties recognise that the occurrence of force majeure triggers a collaborative effort to find a way that both parties can meet their obligations and receive their benefits, so far as possible, and to the extent permitted by, the (by definition) unforeseen circumstances. It might be that this is not possible, and loss must lie where it falls, but this should only be the outcome after extensive exploration. 

Force majeure disputes should be ripe for resolution by mediation, if all involved appreciate that the application of the clause is intended to trigger a negotiation, not a windfall, and that a continuing dispute over risk allocation under the contract will be prolonged, expensive and uncertain.