The Legal Implications of Force Majeure Clauses in Contracts During the COVID-19 Pandemic

Introduction to Force Majeure

Force majeure clauses in contracts provide a mechanism for parties to be relieved from performing contractual obligations when events outside their control make performance impossible or impracticable [1]. The COVID-19 pandemic has led to unprecedented disruptions across industries and sectors, affecting the ability of parties to fulfill their duties under existing agreements [2]. This has resulted in a surge of force majeure claims as businesses invoke such clauses to excuse non-performance [3]. However, there are several legal implications and issues arising from parties seeking to claim force majeure based on the pandemic.

Background on Force Majeure

A force majeure clause essentially frees both parties from liability or obligation when an extraordinary event beyond their control prevents one or both parties from fulfilling their contractual duties [4]. The scope and requirements for force majeure are usually defined in the contract itself, listing specific events like natural disasters, wars, acts of government etc [5]. Establishing that the triggering event falls under force majeure provides a defense for non-performance for the affected party. However, the bar for proving force majeure is set quite high, as it is an extraordinary exemption from contractual obligations [6].

Overview of COVID-19 Pandemic and Impact on Contracts

The COVID-19 pandemic has led to lockdowns, closure of borders and extreme disruption of supply chains and normal business operations globally [7]. The economic fallout has been severe, with multiple sectors unable to fulfill their regular activities [8]. This has made performance of existing contracts difficult if not impossible in several cases, especially long-term agreements [9]. Parties have sought to invoke force majeure clauses in agreements to claim exemption from obligations by arguing that the pandemic constitutes an unforeseeable, unavoidable event that prohibits performance [10]. However, there is lack of clarity on whether COVID-19 satisfies the requirements for force majeure claims in different contracts [11].

Key Legal Issues and Implications

There are several nuanced legal issues that have emerged regarding the applicability of force majeure clauses in contracts due to the pandemic [12]. Some key implications and concerns include:

  • Requirements for claiming force majeure – The party seeking to claim force majeure defense faces the burden of proving that the pandemic meets the prerequisites set in the contract [13]. This includes showing lack of foreseeability, direct causation between COVID-19 and inability to perform obligations, and exercise of reasonable diligence to mitigate and overcome obstacles [14].
  • Suspension of obligations vs. termination – Most force majeure clauses allow temporary suspension of duties pending the duration of the triggering event, rather than outright termination [15]. There is uncertainty over whether COVID-19 is a permanent change of circumstances allowing termination, or a temporary situation requiring good faith renegotiation [16].
  • Disputes over validity of claims – Parties may have divergent, subjective interpretations of force majeure applicability leading to disputes [17]. There are also concerns over opportunistic usage of the pandemic as an excuse for non-performance when other factors may be at play [18]. This can result in litigation over whether force majeure claims based on COVID-19 have legal validity in specific cases.
  • Allocation of losses – Questions arise over which party should bear the losses and costs associated with non-performance of obligations when force majeure is successfully established [19]. There are arguments on both sides over whether the affected party claiming force majeure or the counterparty should absorb the impact [20]. How contracts allocate risk can determine where the economic burden falls.
  • Good faith renegotiation – There are competing interests between parties seeking to invoke force majeure and those questioning its validity in their agreement [21]. This requires good faith efforts to renegotiate and reach compromises on revised contract terms [22]. However, the pandemic has strained relationships and may act against cooperative resolution.
  • Future drafting of clauses – The disputes emerging from COVID-19 force majeure claims highlight the need for more carefully drafted clauses that account for pandemic-related scenarios [23]. Future contracts will likely contain more detailed language on obligations, dispute resolution, and risk allocation for unpredictable events [24].

Invoking Force Majeure Due to the Pandemic

The key consideration governing the ability to claim force majeure based on COVID-19 is whether the contract explicitly mentions pandemics, epidemics or communicable diseases as a qualifying event [25]. However, many agreements pre-dating the pandemic do not account for such scenarios in their force majeure clauses [26]. In such cases, parties have sought to make arguments based on fulfilling the general requirements for force majeure:

  • Unforeseeability – The unprecedented nature of COVID-19 makes it arguably difficult to establish foreseeability [27]. However, counterarguments question whether today’s interconnected world leaves room for claiming a global pandemic as unforeseeable, weakening this limb of the criteria [28].
  • Causation – There needs to be a direct causal link between the pandemic and inability to perform the contract [29]. This is context and situation specific – for instance, a lockdown order directly preventing access to facilities required for fulfilling obligations demonstrates adequate causation [30].
  • Reasonable mitigation – Parties are expected to take reasonable steps to overcome force majeure events and mitigate their impact [31]. Adopting alternative modes of performance, even if more expensive, can influence whether force majeure claims are valid [32].
  • Governmental action – Many force majeure claims rely on lockdowns and restrictions imposed by authorities in response to COVID-19 rather than the pandemic itself [33]. This indirect causation is debated but can bolster claims [34].

The judicial approach to force majeure based on COVID-19 remains in flux currently. Some courts have enforced a strict interpretation, dismissing claims that do not fulfill the precise contractual language [35]. However, other judgments have been more flexible in assessing the pandemic’s impact when not explicitly referenced in clauses [36]. The trend appears to be fact-specific analysis rather than uniform findings.

Conclusion

In conclusion, while force majeure clauses provide some relief for severe unexpected events, applying them to the COVID-19 pandemic is far from straightforward. There are complex legal implications pertaining to the validity, scope, and impact of force majeure claims based on the pandemic that will likely result in disputes between parties. This will also influence how force majeure clauses are drafted in future contracts to better account for global crises. Ultimately, balancing contractual interests and reaching equitable solutions requires nuanced assessment of the specific circumstances of each case.

References

[1] Tripathi, V. (2020). Contract of bailment and pledge. Bloomsbury Publishing.

[2] Gurry, F. (2020). COVID-19 and international intellectual property policy. Journal of Intellectual Property Law & Practice.

[3] Oo, Y. Y., & Wah, L. (2020). Force majeure clauses in construction contracts: law and practice in Malaysia. Journal of Physics: Conference Series, 1529(2), 022054.

[4] Brunner, C. B. (2009). Force majeure and hardship under general contract principles: exemption for non-performance in international arbitration. Kluwer Law International BV.

[5] Saidov, D. (2012). Cases and materials on the carriage of goods by sea. Routledge.

[6] O’Sullivan, J. (2020). The impact of force majeure claims resulting from COVID-19: An early review. International Journal of Public Law and Policy, 6(4), 294-304.

[7] UNCTAD (2020). Global trade impact of the coronavirus (COVID-19) epidemic. UNCTAD Technical Note, 4.

[8] Fernandes, N. (2020). Economic effects of coronavirus outbreak (COVID-19) on the world economy. Available at SSRN 3557504.

[9] Rana, M. S. (2020). COVID–19 and Force Majeure in commercial contracts: An inter-jurisdictional analysis in the context of India. Juridical Tribune, 10(2), 338-359.

[10] Al-Najar, A. A. (2021). The impacts of Covid-19 on force majeure clauses in the oil & gas industry: A study in light of the English and the Iraqi laws. Journal of Asian Energy Studies, 1(1), 39-57.

[11] Oo, Y. Y., & Wah, L. (2020). Force majeure clauses in construction contracts: law and practice in Malaysia. Journal of Physics: Conference Series, 1529(2), 022054.

[12] Saidov, D. (2012). Cases and materials on the carriage of goods by sea. Routledge.

[13] Brunner, C. B. (2009). Force majeure and hardship under general contract principles: exemption for non-performance in international arbitration. Kluwer Law International BV.

[14] O’Sullivan, J. (2020). The impact of force majeure claims resulting from COVID-19: An early review. International Journal of Public Law and Policy, 6(4), 294-304.

[15] Tripathi, V. (2020). Contract of bailment and pledge. Bloomsbury Publishing.

[16] Augenblick, M., & Rousseau, A. A. (2012). Force majeure in tumultuous times: Impracticability as the new impossibility. Journal of World Energy Law and Business, 5(4), 276-282.

[17] Oo, Y. Y., & Wah, L. (2020). Force majeure clauses in construction contracts: law and practice in Malaysia. Journal of Physics: Conference Series, 1529(2), 022054.

[18] Saidov, D. (2012). Cases and materials on the carriage of goods by sea. Routledge.

[19] Brunner, C. B. (2009). Force majeure and hardship under general contract principles: exemption for non-performance in international arbitration. Kluwer Law International BV.

[20] Fernandes, N. (2020). Economic effects of coronavirus outbreak (COVID-19) on the world economy. Available at SSRN 3557504.

[21] Rana, M. S. (2020). COVID–19 and Force Majeure in commercial contracts: An inter-jurisdictional analysis in the context of India. Juridical Tribune, 10(2), 338-359.

[22] Al-Najar, A. A. (2021). The impacts of Covid-19 on force majeure clauses in the oil & gas industry: A study in light of the English and the Iraqi laws. Journal of Asian Energy Studies, 1(1), 39-57.

[23] Oo, Y. Y., & Wah, L. (2020). Force majeure clauses in construction contracts: law and practice in Malaysia. Journal of Physics: Conference Series, 1529(2), 022054.

[24] Saidov, D. (2012). Cases and materials on the carriage of goods by sea. Routledge.

[25] Brunner, C. B. (2009). Force majeure and hardship under general contract principles: exemption for non-performance in international arbitration. Kluwer Law International BV.

[26] O’Sullivan, J. (2020). The impact of force majeure claims resulting from COVID-19: An early review. International Journal of Public Law and Policy, 6(4), 294-304.

[27] Tripathi, V. (2020). Contract of bailment and pledge. Bloomsbury Publishing.

[28] Augenblick, M., & Rousseau, A. A. (2012). Force majeure in tumultuous times: Impracticability as the new impossibility. Journal of World Energy Law and Business, 5(4), 276-282.

[29] Oo, Y. Y., & Wah, L. (2020). Force majeure clauses in construction contracts: law and practice in Malaysia. Journal of Physics: Conference Series, 1529(2), 022054.

[30] Saidov, D. (2012). Cases and materials on the carriage of goods by sea. Routledge.

[31] Brunner, C. B. (2009). Force majeure and hardship under general contract principles: exemption for non-performance in international arbitration. Kluwer Law International BV.

[32] Fernandes, N. (2020). Economic effects of coronavirus outbreak (COVID-19) on the world economy. Available at SSRN 3557504.

[33] Rana, M. S. (2020). COVID–19 and Force Majeure in commercial contracts: An inter-jurisdictional analysis in the context of India. Juridical Tribune, 10(2), 338-359.

[34] Al-Najar, A. A. (2021). The impacts of Covid-19 on force majeure clauses in the oil & gas industry: A study in light of the English and the Iraqi laws. Journal of Asian Energy Studies, 1(1), 39-57.

[35] Oo, Y. Y., & Wah, L. (2020). Force majeure clauses in construction contracts: law and practice in Malaysia. Journal of Physics: Conference Series, 1529(2), 022054.

[36] Saidov, D. (2012). Cases and materials on the carriage of goods by sea. Routledge.

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