PE Live: Covid-19 may not justify force majeure
The declaring party will need to demonstrate a causal link between the pandemic and the reason it is unable to fulfil its obligations
The existence of the Covid-19 pandemic on its own is not enough for a party to declare force majeure, so the claiming party will need to demonstrate a causal link from an event to the inability to perform obligations, according to panellists on the third PE Live webcast today.
While the pandemic is an “extremely serious outbreak and global in reach”, in terms of declaring force majeure “things are not entirely straightforward,” says Richard Nelson, partner, energy practice at international law firm King & Spalding.
This stems from force majeure not being an abstract legal concept but one embedded in a contract. “From a legal standpoint, it only exists in a contract. Whatever rights you have or do not have are only as good as those set out in the contract,” he says, adding that if the clause is deficient or poorly drafted a party may have “no entitlement and no relief at all”.
There is also a widespread misconception, according to Nelson, that if a contract specifies ‘pandemic’ the clause can necessarily be triggered. “That reference, in and of itself, may not be enough to get a party over the line,” he says.
“The reason is that the key test underpinning force majeure is a much broader test. The event in question must not have been foreseeable… certainly by the party seeking to claim FM, and that party had no control, or means of controlling, the event from occurring. Also, the event in question prevented… hindered or delayed a party from performing its obligations.”
He adds that there must be a causal link between Covid-19 and whatever prevented a party from performing its obligations.
Disputes and arbitration
Many companies will be faced with making a force majeure claim, or preparing to consider another party’s claim, and each of these will need to undergo a resolution process. The result of this process will depend on the details of the contract.
“A lot depends on the specific force majeure provision that has been negotiated between the parties,” says Wade Coriell,partner, international arbitration practice at King & Spalding.
There is also a widespread misconception that if a contract specifies ‘pandemic’, the clause can necessarily be triggered
There is a series of common considerations to be aware of, for both sides, when setting contracts up in advance for the best chance of a commercial resolution or when preparing for a dispute.
“The first is to be aware of being too imprecise… Usually under the contract there is a requirement that, if you are going to claim under force majeure, you do so in the form of a notice, and there is a particular time period to provide that notice… and a description of the content of that notice,” says Coriell.
“There will be specific things you have to list, such as the particular trigger. Another is the particular obligation from which you are fully or partially relieved. A third is causation, a link between the triggering event and the obligation that you can no longer, or only partially, perform, [as well as] evidence of that causal link.”
There may be other requirements on the claiming party, such as attempts to mitigate or the provision of an estimate of time that force majeure will apply, he adds.
The third PE Live webcast, “Oil and gas contracts during and post Covid-19”, in association with law firm King & Spalding, is available on demand here.
You can also catch up on the second PE Live webcast, “M&A: Price volatility, logistical challenges…and bargain hunting”, in association with Shearman & Sterling, which is available on-demand here.
And, the first PE Live webcast, “Crisis in oil demand: The longer-term market implications”, in association with professional services firm EY, is available here.