1) What do we call Force Majeure? What are its implications for contracts?
According to Greek law, the term “act of God, force majeure”, is characterized by any unpredictable and extraordinary event which man, in the natural course of things, cannot foresee and prevent by extreme diligence and the prudence of an average. For example, provoking damage or causing accidents from incoming weather can be foreseen as the outcome of a ship crashing upon a reef, not previously marked on a nautical chart. The latter is described as a maritime accident caused by “force majeure”. Typical examples of force majeure are wars, coup d’états, unforeseen government bans, sudden and severe illnesses (in some cases), or even “extreme weather”.
Defining an incident as a force majeure event is a matter of fact, judged on a case-by-case basis and with agreement between the parties.
Force majeure can, inter alia, result in:
(a) the temporary or permanent suspension and therefore, the exemption of one or both of the Contracting Parties from their obligations for the duration of the event;
(b) the termination of a contract.
2) Is COVID-19 a reason for force majeure? Is the time of the contractual period relevant?
Force majeure is often inserted in contracts to chart a course of action in the case of unpredictable events which the parties consider to be outside their control at the date of the contract’s termination. In some, the term “pandemic” is introduced. Therefore, even for contracts not specifically mentioned (for an “epidemic” or “pandemic”), the contracting parts could claim that the outbreak of the Coronavirus pandemic is an instance of force majeure. A pandemic is an unavoidable fact even with the utmost diligence from the contracting parties.
Legislative Acts have already imposed the temporary suspension of a large part of public services and private businesses to limit the virus’ spread. It is therefore a question of interpretation whether COVID is an instance of force majeure. In order to do so it must be considered the reasons for suspending the operation of the legal person (were these voluntary or compulsory), the nature and purpose of the contract and the relationship and financial strength of the contracting parties.
The party invoking force majeure must demonstrate that (a) the particular event was impossible to foresee at the time of the draft of the contract, (b) that event has prevented or delayed the performance of the contract and (c) that Party has taken all the appropriate measures to avoid or mitigate the incident and its consequences. These will determine the proper distribution of risks between the parties, i.e. when there is a discharge of liability due to force majeure or not.
The concept of a pandemic, however, has not dealt with similar case law for almost a hundred years, – since the Spanish flu. Without jurisprudence, the timing of the contract as well as the alternative ways of providing and accepting services from the parties are crucial. Because the question is whether Coronavirus should be considered as a force majeure event if, for example:
- a contract was concluded 3 years ago; (b) if it was concluded in January 2020 amid global community warnings of possible lockdown measures; or (c) if it was concluded in October 2020 when COVID-19 is known and even reappears the following winter. That is, the time when the effects of the Coronavirus may not be considered a result of a force majeure.
It could prove to be therefore crucial that businesses should, depending on the time of the contract and the nature of its subject matter have foreseen alternative ways of providing and accepting services i.e. supporting possibly a distance provision, having accurately and timely foreseen if an appropriate infrastructure is in place or a setup which does not require significant financial sacrifice, nor is it particularly time-consuming.
3) What should businesses have in mind?
The acceptance or non-force majeure as a ground for suspension or termination of a contract shall be decided case-by-case on the basis of the contract’s nature, the other contractual terms and the actual circumstances of the case. Attention will be given for particular diligence measures taken by each company to minimize the adverse effects of the pandemic and to continue operating in order to fulfill its existing contractual obligations.
Comment by our office:
The legal interpretation of the suspension or annulment of contracts by the courts globally due to force majeure from March 2020 onwards is expected with great anticipation; the Covid-19 pandemic will be testing not only health care but also, legal systems and the full spectrum of contractual clauses around the world.