Force majeure in a retail context in light of COVID-19
In general commercial contracts, force majeure clauses can often be overlooked as standard ‘boilerplate’ with little negotiation between the parties. COVID-19 and the disruption caused to businesses has highlighted how important these clauses can be for all types of commercial agreements and we anticipate that there will be significant focus on force majeure wording going forwards.
- A force majeure clause is a contractual provision that sets out what should happen to contractual obligations that become impossible or difficult to deliver due to events outside the (reasonable) control of the parties. They often excuse one or both parties from performance of the contract in some way following (and during) certain events (non-exhaustive lists of such events are often included). The affected obligation(s) are usually suspended and the party/s are not liable for the failure to perform them.
- For example, if a pandemic occurs resulting in complete lockdown of a country (as we have seen most recently with Covid-19), a widely drafted force majeure clause may allow a supplier to suspend delivering goods to a purchaser temporarily until such measures are lifted, without resulting in the supplier agreement being terminated.
- A force majeure clause may allow one or both parties to terminate the agreement if the event/disruption continues for a period, there is a material impact on the contract, etc.
- Example of a (short form) force majeure clause:
“Neither party shall be in breach of this agreement nor liable for any delay in performing, or failure to perform, any of its obligations under this agreement if such delay or failure result from events, circumstances or causes beyond its reasonable control. In such circumstances, the affected party shall be entitled to a reasonable extension of the time for performing such obligations. If the period of delay or non-performance continues for one month, the party not affected may terminate this agreement by giving seven days written notice to the affected party.”
1. Good drafting – consider tailoring these clauses to the particular circumstances/transaction. Consider what matters will trigger the provisions (and when); and what matters are not outside a party’s reasonable control (eg, a widely drafted force majeure clause that includes pandemics may benefit retailers who cannot operate during a lockdown, as they will not want to purchase products that they cannot sell onwards). What are the consequences, what steps should be taken, and when?
2. Payment obligations – force majeure clauses often focus on the obligations that are delayed or impossible to perform. What about payment obligations – if not impossible, do they continue even if no services are being provided? Retailers may wish to suspend payment obligations and only be obliged to pay upon the service being completed.
3. Notice provisions/formalities – follow any notice or other formal requirements to serve force majeure notices or termination notices. If obligations are varied, ensure that they are documented (in accordance with any variation / no oral modification provisions).
4. Other relevant provisions? – consider other provisions that may assist, eg, change control notices, payment provisions (conditional upon provision of goods/services?), etc.
5. Insurance – retailers should consider appropriate policies and notify insurers promptly where relevant.
6. Maintain records – if a force majeure event arises, keep records as to why contractual performance was delayed/prevented and steps taken to mitigate effects eg, were supplier distribution centres closed, and did this affect the distribution of goods to a retailer?
7. Breach/termination? – bear in mind if/when force majeure applies. If a party wrongly seeks to rely on force majeure, it will potentially be in breach of contract. Similarly, wrongly seeking to terminate an agreement on the basis of force majeure may amount to a repudiatory breach, entitling the other party to accept the repudiation, terminate the agreement and claim damages. Consider the reputational and relationship damage this will have on your company.