On 13th March 2020 the WHO declared coronavirus disease (COV- ID-19) a global pandemic. The declaration although very important because health and life come first before anything else; its repercus- sions are unimaginable and have an immediately impacted the world economy.
COVID-19 has the potential to negatively affect every sector, big or small from sports, transport, real estate and manufacturing. It is already evident from the stock markets of major economies and there is great fear that the world will experience a major economic meltdown in the near future if the pandemic persists.
My main concern as a commercial and real estate legal practioner is the impact of COVID-19 on commercial contracts. Most commercial contracts; if properly drafted will have a “Force Majeure” clause which comes into force in unforeseen events that might affect the contract. The Force Majeure clause is a commonly used provision in various contracts all over the world but what is Force Majeure? Force majeure is a French term that literally means “greater force.”
It is related to the concept of an act of God, an event for which no party can be held accountable. Force majeure refers to a clause that usually removes liability from either parties in a contract for natural and unavoidable catastrophes that interrupt the expected course of events and restrict parties from fulfilling their obligations.
In other words, Force Majeure simply means it excuses a party in a contract from not performing its contractual obligations that become impossible or impracticable, due to an event or effect that the parties could not have anticipated or controlled.
Force majeure also encompasses human actions such as armed conflict or political unrest which would make the contractual obliga- tions impossible or impracticable.
What constitutes a Force Majeure event? It is important to note that for an event to constitute force majeure, the event must be unforeseeable, external to the parties of the contract and unavoidable or irresistible.
Is COVID-19 a Force Majeure event especially now that it has been declared as a global pandemic? Legal practitioners, individu- al or corporate should seriously think about the consequences of their contracts which are already existing or which are being entered into during this period that are likely to be affected by the pandemic or already being affected by the pandemic.
It is also very important to critically think about what happens if the Force majeure event persists? Are parties still liable to perform their duties during the period or what happens to the party’s obligations during the force majeure period?
Properly drafted commercial contracts in many instances usually have provisions of the force majeure clause however, most contracts don’t go far to state what happens to the parties’ obligations during the force majeure period or if the event persists. Below is an extract of a force majeure clause from one agreement.
“ Notwithstanding any provision contained in this Agreement, neither party shall be liable to the other to the extent fulfilment or performance if any terms or provisions of this Agreement is delayed or prevented by revolution or other civil disorders; wars; acts of enemies; strikes; lack of available resources from persons other than parties to this agreement; labour disputes; electrical equipment or availability failure; fires; floods; acts of God; government or regulator action; or, without limiting the foregoing , any other causes not within its control, and which by the exercise of reasonable diligence it is unable to prevent, whether of the class of causes hereinbefore enumerated or not. If any force majeure event occurs, the affected party will give prompt written notice to the other party and will use commercially reasonable efforts to minimize the impact of such event”
The clause is properly drafted but it doesn’t go beyond to deal with what happens to the life of the contract in case the force majeure event persists. In my opinion it is important for parties to think about what happens to their obligations during the force majeure event and have specific provisions on how to deal with such during and after the event.
The agreement should provide for a specific period for which both parties under an agreement can accommodate each other and where the force majeure event persist for an agreed period. Parties should be at liberty to terminate the contract especially where the event has a direct impact on the performance of the agreement.
Moreover, the parties should have the option to issue notice to each other or their clients during the force majeure event. Issuance of notice during the occurrence of the event is extremely important. Despite the fact that WHO or the State have made public announce- ments about the pandemic, it is not sufficient enough and parties to a contract should issue appropriate notice.
As such, the following elements should be addressed in a force majeure clause:
- Definition of force majeure events;
- What happens when an event occurs;
- Who can suspend performance; and
- What happens if the force majeure event continues for more than a specified period of time.
What happens to agreements without the Force Majeure clause?
Unfortunately, in the absence of a force majeure clause, parties to a contract are left to the mercies of the common law contract doctrines of “impracticability” and “frustration of purpose,” which rarely result in excuse of performance and parties may still be liable to perform their obligations under the contract.
However, in the current situation where COVID 19 has been declared a pandemic it might be unreasonable for a party to enforce performance of the contract in instances where the force majeure clause was not provided. In countries like Italy and China where the virus has hit hard, the Government has ordered Banks to suspend mortgage payments and this intervention by the State has ensured that creditors don’t penalize the debtors for breach or none perfor- mance of their obligations.
This is a trend that is likely to adopted by other Countries soon and it might spread to other sectors of the economy. The impact of COVID 19 will affect every aspect of our lives, from our employ- ment, rented spaces, insurance and unfortunately if the pandemic is not contained soon the consequences will be dire and no one will take responsibility even your very expensive insurance will not cover you during this uncertain times.