Why companies should forget force majeure to counter COVID-19 disruption

By Forbes Solicitors

12 May 2020

_81b7250-edit.jpg

By Michael Chambers, partner and head of dispute resolution at Forbes Solicitors.

The widespread disruption of COVID-19 is causing many companies to question whether they can claim ‘force majeure’ in respect of their contractual obligations. Businesses are generally considering such action in the belief it will relieve them of delivering against the contract, which may help to mitigate losses as they address the economic impact of the virus.

While this may hold some degree of truth and seem a plausible way of cancelling orders or withholding payments, it is not often the most effective form of action to take. 

What is force majeure?

Force majeure is a contractual clause designed to offer some form of protection against uncontrollable circumstances like natural disasters.   

The term literally translates as ‘superior force’, with the clause commonly referred to as an ‘Act of God’. It became somewhat of a buzzword ten years ago when an Icelandic volcanic ash cloud swept across Europe, leading to flights being grounded. The unforeseen and natural event couldn’t be particularly blamed on any responsible party, leaving travel companies asking whether they could activate the clause to avoid financial claims resulting from cancelled flights and holidays. Other businesses negatively affected by the ash cloud looked to force majeure to protect against losses and damages caused by the restricted movement of goods and missed delivery deadlines.

Like the volcanic ash cloud, COVID-19 is beyond the control of businesses, prompting the general assumption that the contractual clause exists and has been written into contracts exactly for these circumstances. This may not necessarily be the case. 

Activating force majeure

Like many other contractual clauses, force majeure is not a standard term. Companies will first need to determine whether their agreements include the clause and then consider its definition. The specific criterion of the clause will vary from contract to contract. In some instances, the clause may well list what constitutes an uncontrollable event such as extreme weather, natural disaster, war or widescale social unrest like rioting, or even disruption caused by public protests.

Following the outbreak of Severe Acute Respiratory Syndrome (SARS) in 2003, many insurance policies and contractual agreements have made exceptions or allowances for the impact of diseases and epidemics. If the force majeure does not specify disease or epidemic, a court may not interpret the clause as being valid. 

However, it the clause does define a disease and epidemic as an uncontrollable event, a court will then need to evaluate exactly how the circumstances have affected the contracting parties and what actions were taken, or could have been taken, to regain some level of control of the situation. It’s for this reason that companies may wish to forget about force majeure as a means of addressing the operational and economic impact of COVID-19.

Forgetting force majeure

Companies need to put the potential activation of force majeure into context. Coronavirus has caused global disruption, affecting almost every business and sector. It’s highly likely that any party looking to pursue a force majeure claim would be doing so against another organisation which has also suffered losses because of the pandemic.

Courts would need to give these situations careful consideration, taking the time to work through the ripple effects of the disruption and determining how reasonably each party worked to fulfil original obligations. This will undoubtedly take time and companies should consider this against a backdrop of a high volume of other force majeure claims being brought before the courts.  

Contesting parties may find themselves caught up in a lengthy queue of cases and that disputes, because of their complex nature, become drawn-out. It could be more time and cost-effective for companies to work through their differences using mediation. 

Negotiating a way forward

Mediation can be used to bring both contesting parties to the table to find a more constructive means of resolving disputes. If both parties utilise an independent mediator and seek professional advice, they are likely to spend less time, resource, energy and money trying to find an agreeable solution.

This will also help to reduce the longer-term economic and operational impacts of COVID-19, as it will enable both parties to get back to business sooner, rather than later. It may even leave an opportunity for both businesses to be able to work together in future by maintaining a constructive relationship. Companies considering this approach should give careful thought to how they’ve been negatively affected by the virus and what will help them to positively move forwards. They are then advised to consult an experienced mediator such as a lawyer to help review their case and enter into negotiations with the other affected party.  

Force majeure is a particularly useful and valid clause. However, when business disruption and losses are so far-reaching, it may not prove the most effective means of protecting business performance. 

Latest news

1

fulfilmentcrowd reports record-breaking performance LeeThompsonfulfilmentcrowd

fulfilmentcrowd reports record-breaking performance

20 Dec 2024

2

Record year for Grant Thornton Northern deals team The team

Record year for Grant Thornton Northern deals team

20 Dec 2024

3

New partner among family team hires as Brabners strengthens personal offer Cara Nuttall Chris Fairhurst And Hannah Saxe

New partner among family team hires as Brabners strengthens personal offer

20 Dec 2024

4

Amazing Accrington bring in almost £400k in funding to Hyndburn Clayton Boxing Club press.jpg.jpg

Amazing Accrington bring in almost £400k in funding to Hyndburn

19 Dec 2024

5

BAE Systems solar powered aircraft achieves new stratospheric success The flight

BAE Systems solar powered aircraft achieves new stratospheric success

19 Dec 2024

Background image for hub sign up block

LBV Hub

Leverage Lancashire Business View platforms

Post your news
Post your events
Post your offers
Build your network
Improve your SEO
Gain coverage in the magazine
Sign-up
Events
The Lancashire Festival of Business
FOB 315
Exhibitions
30 Jan 2025

The Lancashire Festival of Business

Impact Conferencing, Burnley, BB12 6QP

09:30 - 16:00

Skills Bootcamp in Procurement - Cohort 3
Blue-Modern-Land-Travel-Youtube-Thumbnail-2-1024x576.png.png
LBV Hub Awards
14 Jan 2025 - 18 Mar 2025

Skills Bootcamp in Procurement - Cohort 3

Community & Business Partners CIC, Blackburn, BB2 3UA

09:30 - 13:00

Preston Tech Connection - January Meet-Up
Nov Preston Tech Connection event banner-4.png.png
LBV Hub Networking
15 Jan 2025 - 15 Jan 2025

Preston Tech Connection - January Meet-Up

Society1 Coworking Space, Preston, PR1 3LT

18:00 - 19:30

R.I.S.E. and Shine
thumbnail_Emma Weston Illustration WENDY BOWERS RISE Illustrstion.jpg.jpg
LBV Hub Seminars
16 Jan 2025 - 16 Jan 2025

R.I.S.E. and Shine

East Lancashire Chamber of Commerce, Clayton le Moors, BB5 5JR

08:45 - 11:00

The Business Network Central & East Lancashire
LBV Hub Networking
16 Jan 2025 - 16 Jan 2025

The Business Network Central & East Lancashire

Mytton Fold, Langho, BB6 8AB

11:30 - 14:15

LBV120 Magazine Launch Event
DSC9389
Networking
17 Jan 2025

LBV120 Magazine Launch Event

Lancastrian Suite, Town Hall, Chorley, PR7 1DP

08:30 - 10:30

Red Rose Awards 2025
Red Rose Awards 2025
Awards
13 Mar 2025

Red Rose Awards 2025

Winter Gardens Blackpool

18:00 - 11:59

Advertise with us

Reaching 50,000 members, our print, digital and event platforms offer a fantastic way to raise your business profile and help you grow.

Find out more LBV118 Online Graphic
Subscribe now

Weekly news bulletin