Covid-19 and Force Majeure
Due to the recent increase in the spread of covid-19, and the consequences thereof, we have produced this information describing in a comprehensive way which rules and interpretations are applicable to force majeure and in which situations force majeure could be invoked. However, the right to invoke force majeure can differ between different countries’ legislation, as well as due to the circumstances in each individual case and what the parties have agreed between each other.
Our conclusion is that it is in principle possible to invoke force majeure in the current situation, this being even more likely given that the situation is likely to worsen in the coming weeks. However, each individual case requires a concrete analysis and evaluation, taking into account the applicable law, the wordings in your contracts as well as how you and your customers and suppliers have actually been affected by the outbreak of covid-19.
We have also put together an in-house expert group to be able to help you as quickly and efficiently as possible. If you are uncertain as regards what applies for your business or your contracts and you wish to consult someone, you are most welcome to contact us.
Force Majeure – an overview
Force majeure is originally a French term meaning superior force. In the legal field, it is a designation of a type of rule that is found in certain contracts and which regulates, in certain circumstances, a permitted deviation from the basic pacta sunt servanda principle (agreements shall be upheld). As a main rule, force majeure refers to exceptional and unexpected events and incidents that hinder contract fulfilment and which could not have been avoided. Force majeure rules may look different in different types of contracts and may also differ between countries, but their general meaning is that a contracting party can, due to an external obstacle, be excused for not fulfilling its contractual obligations and performing in accordance with the contract.
The assessment of whether force majeure applies, i.e. the right not to fulfil a contractual obligation, is based on inter alia the following:
(i) The incident should be extraordinary and beyond the parties’ control. The incident or circumstance should be extensive as well as infrequent, e.g. a war or a natural disaster. A pandemic such as the one caused by covid-19 constitutes such an event that is typically considered extra ordinary and beyond the parties’ control.
(ii) The extraordinary incident should be unexpected. This means that the incident should not have been possible to predict at the time the contract was entered into. If, at such time, it was possible to foresee that the extraordinary incident would occur, this in itself may preclude the possibility of claiming force majeure. At what time a contract was entered into will thus play a crucial part. For example, it will make a big difference if a contract was concluded the summer of 2019 (when no one knew about covid-19) or if this was done in February 2020 when a general spread of the virus was known.
(iii) The extraordinary incident must be an obstacle or result in the fulfilment of a certain contractual obligation becoming unreasonably burdensome. Examples of obstacles that can be brought up as a result of the pandemic caused by covid-19 are that a contracting party’s shipments are delayed or hindered due to widespread illness or due to the fact that restrictions in public transport make it much more difficult for staff to get to work. Further obstacles may be authority decisions, for example that businesses organizing events in Sweden for more than 50 people are forced to suspend such events due to the government ban.
(iv) The obstacle that arises from the extraordinary event cannot be avoided or prevented. This requirement is relatively far-reaching and is, in our opinion, missed by many. As a company, you need to investigate whether it is possible, in a way which is not unreasonably burdensome, to work around obstacles such as shortage of staff by hiring external personnel or requesting overtime from existing staff, or to look into whether you can purchase missing spare parts from a different supplier etc. Generally, if it is possible to circumvent or remedy the obstacle the right to invoke force majeure does not apply as the fulfilment of the contractual obligation is still possible and within the control of the contracting party.
(v) Finally, the party wishing to claim force majeure must notify the other party thereof. Such notice should in our recommendation be made immediately, otherwise there is a risk of losing the right to claim force majeure, as well as a risk that a liability will arise for the damage that could have been avoided if the notification of force majeure had been sent in a timely manner. What constitutes a timely manner will differ from contract to contract and is dependant upon the individual situation in each case. To avoid notifying your counterparty too late and risking liability, notice to your counterparty should be made as soon as there is a suspicion that force majeure may arise.
The effects of Force Majeure
If you arrive at the conclusion that you or your counterparty has the right to invoke force majeure, the results arising from this will differ from contract to contract as well as between the legislation in different countries. In some situations, the delayed party will be completely excused for its delay and may not even have to perform its contractual obligations. In such situations the counterparty cannot, at all or for a certain period of time, take any actions or demand any penalties due to the delay. In other contracts force majeure merely entails that the counterparty loses the right to claim damages in the event of delay, however still being entitled to a price reduction or cancellation.
We hope that this summary can be helpful and useful, however do not hesitate to contact us if you have any questions or queries regarding the above. We are happy to assist you with assessing (i) whether there are force majeure situations in your business and (ii) what result a possible force majeure can have for your contracts/deliveries.