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 claimant will need to demonstrate a causal link from an event to the inability to perform its obligations, according to panellists on the third PE Live webcast on 23 April.
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. “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.
He says that there must be a causal link between Covid-19 and whatever prevented a party from performing its obligations.
“The key test underpinning force majeure is a much broader test,” says Nelson. “The event in question must not have been foreseeable… certainly by the party seeking to claim, and that party had no control, or means of controlling, the event from occurring. And, that the event in question prevented… hindered or delayed a party from performing its obligations.”
Many companies will be faced with making a force majeure claim, or preparing to consider another party’s claim. The result of the resolution process will flow from 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.
“If it is truly a force majeure event—an act of God that prevents you from being able to fulfil contractual obligations—you are going to know right away” Coriell, King & Spalding
However, there is a series of common considerations. The first is to be aware of “being too imprecise”. Usually, there is a requirement that to claim 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 that you are fully or partially relieved from. 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.
Coriell also cautions that a contract will usually specify a short window to give notice, perhaps seven or ten days, to prevent potential abuse by firms seeking to escape its obligations.
“It is a requirement that tends to get enforced, by international arbitration tribunals in particular… If it is truly a force majeure event—an act of God that prevents you from being able to fulfil contractual obligations—you are going to know right away or within a reasonably short period of time after the event occurred.”
Once a force majeure claim has been accepted, the parties need to establish its financial impact. “Economic analysis focuses on issues such as foreseeability, causation and perhaps mitigation,” says Christopher Goncalves, managing director, BRG Energy & Climate, at consultancy Berkeley Research Group.
It is important to have clarity under force majeure into the timing of events that triggered the claim.
“Eventually, there will probably also be an argument about when the situation is resolved,” he says. “With Covid-19, this is quite a murky situation—how would you define a point in time when the issue has been resolved? Open-ended force majeure claims are extremely problematic—that might lead more to a MAC [material adverse claim] clause or perhaps a termination situation.”