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Force Majeure and COVID-19: What Should You Know

A large number of businesses had to suffer due to the implications of the novel coronavirus. Due to the global pandemic, businesses have come across situations where they may have to delay their obligations under the existing contracts. Or they have to get out of them altogether because of a force majeure event.

Today, we are going to discuss some of the commonly asked questions regarding force majeure. Furthermore, you will also get to know how and when it applies:

What is Force Majeure?

Force majeure is a contractual defence that lets a party discontinue or suspend the contractual obligations under specific circumstances. Also, it might work to limit the liability of the contracting party. The authorities determine whether an event is force majeure or not according to the case. Moreover, they also take into account the terms of the relevant contract and the applicable law.

Most force majeure provisions comprise a list of particular events which are not predictable and beyond human control. Now, the occurrence of a global pandemic like COVID-19 or its consequences is likely to fall under a force majeure event. Especially, if the provision makes a point to include references like an epidemic or pandemic.

Type of Events that Qualify as Force Majeure

Each of the provisions should be taken into account according to its precise terms. Some of the basic features that are common to most of the force majeure provisions are:

  • The event was outside the party’s control.
  • It was impossible for parties to foresee the event. As a result, they were unable to avoid the effects.
  • The event impacts the ability of one or both parties to perform their contractual obligations.
  • The party/parties did all they could to provide notice and to avoid or lessen the event and its consequences.

Usually, a provision of force majeure applies when the performance becomes impossible. A force majeure provision prevents one from performing due to the occurrence of particular qualifying events that fall under force majeure or events that qualify as force majeure like acts of God, war, fire, diseases, labour strikes, pandemic, epidemic, and national emergencies. It also includes natural disasters, governmental regulations, and other acts that are beyond the control of the parties.

Some of the remedies that are talked about in the contract or might be available under the law are extensions of time for completion or performance, the ability to suspend or terminate performance (fully or partially), and or avoiding the liability entirely. The contract will also talk about the obligations of the affected party by force majeure. This allows them to use the advantage of the protection the provider offers.

How Does a Party Prove an Event was Outside Its Control?

  • This information is fact-specific. Many contracts contain particular lists of force majeure events that qualify beyond the control of the party. Moreover, they are not reasonably foreseeable.
  • If a party wants the global pandemic outbreak to be considered as force majeure, the provision should include disease, epidemics, or pandemics.
  • If the particular references are not included in the force majeure provision, then acts of God, national emergencies, governmental actions or regulations or acts beyond the control of the involved parties may qualify COVID-19 and its effects as force majeure events.

How To Demonstrate the Material Impact of COVID-19?

The degree of the implication of a party’s performance on the obligations depends on the circumstances and facts of each situation.

  • The party that asserts force majeure should form a causal link between the party’s inability to perform and the relevant event. For example, there are many restrictions to curb control of COVID-19, rendering the party unable to timely perform the contract.
  • The contract is going to dictate the situations and circumstances under which the party can be excused of the performance. For example, the performance is interfered with, prevented, hindered, or impeded.
  • The assertion of the force majeure event is not applicable if the disruption affects the profitability of the contract only unless the profitability aspect has been addressed exclusively.
  • Poor business conditions or an economic downturn are usually inadequate to constitute a force majeure event. Even if there is proof that the business going down was due to the novel virus.

What is Sufficient Notice?

There is a requirement of the party asserting the excuse of performance to notify the counterparty of the relevant events of force majeure. They also need to offer the needed support. Some of the contracts mention the procedures and timelines in detail for such notice. Also, there is strict compliance in some states regarding the notice provision when notifying of force majeure.

If the force majeure provision does not talk about notice, the noticing party would still want to provide preliminary notice regarding the possibility of the force majeure event once it becomes obvious that delay is inevitable. As soon as they have the details, they can amend or supplement the notice.

The parties of the contract should be careful when making a claim of breach of contract. It’s important to not make a premature claim. The counterpart might also seek ways to terminate the contract once it gets the notice. If an authentic force majeure event is asserted, then the party asserting the event is not going to be liable for breach of contract.

The Consequences from COVID-19 – Will They Constitute Force Majeure?

  • The degree to which COVID-19 and its consequences constitute a qualifying force majeure event tends to be highly fact-specific. Also, it depends on the terms of the contract and the specific facts. Furthermore, the law and how the relevant jurisdictions interpret force majeure provisions also play a part.
  • The applicable law might allow a party to excuse performance under other theories in case of unexpected events. Even if a contract does not include a particular force majeure provision.
  • It is quite likely that the law will evolve as a result of the COVID-19. Many court rulings are going to result from this pandemic.

Steps You Can Take If Force Majeure Applies to Your Contract

  • First of all, review your contract to determine if it includes the provision for force majeure. It should include the particular circumstances and events that qualify for force majeure treatment. Also, it should include the terms and conditions in the contract like the events of default, dispute resolution, and governing law.
  • Observe and analyse if the performance of any of the parties under the contract will be impossible due to direct or indirect consequences of COVID-19 not for some other reason.
  • See that you take all the necessary steps to reduce and minimise the effects of COVID-19. This includes the downstream impacts and consequences on your ability to perform under the relevant contract.
  • You should be punctual and timely to comply with any notice requirements such as formulating the documentary support and the particular notice method. For example, by registered or an overnight mail to the particular address.
  • Pay attention to the potential consequences or the downstream impact of the counterparty suspending its performance under the contract if you happen to notify it for a force majeure event.
  • Check out which of the potential insurance coverage you can make use of including business interruption insurance or an insurance-policy that is event specific.
  • Write down all the steps that are taken to avoid to mitigate the impact of COVID-19 or its consequences and effects on your ability to perform under the contact as well as the other relevant facts and the steps you have taken to provide notice.

This covers up almost all questions that you might have had. For more legal assistance regarding force majeure, you can consult the top-ranking law firms in Dubai.

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