How should a company act in a situation where the company cannot fulfil its obligations under an agreement due to an obstacle beyond the company's control, so-called force majeure? Can governmental decisions on restrictions to prevent the spread of COVID-19 be considered a force majeure event? No need to panic, we will guide you on what to think about.
The concept of force majeure
In short, force majeure is a legal term that allows a contracting party to be released from its contractual obligations due to unforeseen and extraordinary circumstances beyond its control, which means that the party is fully or partially relieved of the liability that could otherwise follow from such a breach of contract.
Contractual or not?
Commercial agreements usually contain provisions that regulate what should be considered unforeseen and extraordinary circumstances and what effect it will have on the contractual relationship. However, some agreements do not contain a force majeure provision. In such cases, one must rely on the wording of the applicable law and general contract law principles.
Under Swedish law, a breach of contract due to unforeseen events beyond the party's control can be excusable and relieve a party from liability, regardless if this is specifically regulated by a force majeure provision in the agreement. However, the practical meaning of this is not entirely clear. A governmental decision relating to restrictions or a pandemic does not automatically imply that a breach of the agreement should be considered excusable. This would have to be assessed in light of the circumstances in each specific case and what is otherwise stipulated in the agreement. The general view is that one cannot rely on an event of a force majeure nature to a greater extent than is inevitable, e.g. if the obstacle is only temporary.
Does the spread of COVID-19 as well as restrictions from authorities constitute a force majeure event?
Whether the spread of COVID-19, or the authority's decision to limit the spread, means that a force majeure provision can be invoked must be assessed from case to case and the wording of the relevant contractual provision. It is not uncommon for force majeure provisions to explicitly include, e.g. government decisions.
It is possible that the spread of COVID-19 and the restrictions that are now being introduced can be considered a force majeure event (regardless if epidemics or pandemics are exemplified in the force majeure provision), however, several factors must be considered in this assessment.
Conditions for claiming COVID-19 as grounds for exemption
In order to assess whether the spread of COVID-19 can be used as a ground for exemption of a party’s obligations, one would need to look to the consequences of how e.g. restrictions from authorities, export and import stops and employees' illness or any quarantine will affect the fulfilment of a company's contractual obligations. Normally, the company needs to demonstrate that; (i) the company cannot reasonably be expected to avoid or overcome the consequences, and (ii) the company could not have foreseen the consequences at the conclusion of the agreement.
Considerations and actions
If you want to invoke a force majeure provision, or if a counterparty to you invokes a force majeure event, consider the following:
• What is the wording of the provision? Check if the wording of the provision is general or if pandemics and epidemics are explicitly included.
• What are the contractual consequences if force majeure is invoked? A common consequence is that the agreement can be terminated if the force majeure event persists beyond a certain period, nevertheless, other possible consequences should also be considered.
*• Applicable law? *Different interpretations will be made depending on which jurisdiction’s law that is applicable to the agreement.
• What is the specific cause of the obstacle? Sickness of employees, restrictions as a result of government decisions – the list can be made long and whether this can be considered a force majeure event or not depends on the circumstances.
• What formal requirements do you have to fulfil in order to be able to apply the provision? Notify your counterparty promptly and in the manner stated in the agreement (as a minimum, the message should always be in writing).
• Is it an actual obstacle? Keep in mind that force majeure is a last resort; mere unprofitability or difficulties that can be overcome are not sufficient.
• Is the party invoking force majeure able to carry out its obligations in some other manner? Always consider if there are alternatives to fulfilling the contract, e.g. by using other suppliers.
• What consequences will invoking the force majeure clause have on other contractual relationships? Often, a force majeure event has different levels of consequences, e.g. in relation to both customers and sub-contractors. It is therefore important to review the consequences on all levels.
• Review your insurance terms and their scope. Notify your insurance company.
• Keep an eye on how the situation is developing. New government decisions may mean that force majeure can no longer be invoked or that the possibility of invoking force majeure has opened up.
• There may be a dispute. Correspondence with the other party may be relevant as evidence, so think carefully about how you express yourself and secure evidence throughout in the form of written correspondence, such as the grounds for what you are claiming etc.
Last but not least – if you are going to enter into an agreement under the current circumstances and you can already foresee that COVID-19 may affect your ability to fulfil your obligations, be sure to include explicit reservations related to COVID-19 and any new government decisions as a result of COVID-19.
Of course, you are also welcome to contact us at Morris Law if there is anything you would like to discuss.