Coronavirus (Covid-19) – Is your business protected through force majeure?
The recent outbreak of the COVID-19 pandemic has impacted the everyday life of citizens drastically. Many companies have already taken extensive measures to protect the health of their employees and stakeholders. As the COVID-19 virus continues its dissemination, the question rises how businesses can minimize the enormous financial and commercial impact the pandemic will have on their business.
Force majeure is a legal concept that allows parties to suspend or cancel the execution of their contractual obligations due to an external event occurring beyond their control. Whether your business or your supplier/service provider can rely on force majeure to be relieved from its obligations under a certain contract, can only be answered after a careful assessment of each individual case. Businesses will have to review each contract of which the execution has become impossible, in whole or in part, due to COVID-19 or the consequences thereof.
Commercial contracts often provide for a force majeure clause (or a material adverse change clause). However, such a clause is not included in every contract, nor does it ensure a relief of a party’s obligations in the event of COVID-19. EY Law has decided to use its expertise to provide clarity on the situation, offering businesses with practical knowledge and clear steps to guide them through the prevailing uncertainty.
Can a force majeure clause be invoked in the case of COVID-19?
If a force majeure clause has been included in the relevant contract, its definition of force majeure needs to be examined carefully to assess whether the event that causes the inability to perform is included. After all, the mere existence of a force majeure clause does not imply that it can be invoked in case a business is confronted with COVID-19 or its consequences. In particular, parties need to determine the exact cause of their inability to fulfil their obligation(s) and check whether such event can be regarded as included in the said definition, either explicitly or implicitly. Keep in mind that the clause does not necessarily need to refer to the word “COVID-19” or “pandemic” to include such an event. Force majeure clauses can also contain a general definition of force majeure events. Some clauses will for example refer to “an act of God” or “epidemics” or use even more general wording such as ” (…)any such circumstances beyond its reasonable control” or a governmental order.
The consequences of invoking force majeure will generally also be determined in the force majeure clause. Whereas some clauses relieve the invoking party of one or more of its obligations, others may contain a duty to mitigate or renegotiate. Naturally, if force majeure is invoked by a party, the other party will be able to suspend the performance of its obligations as well. In some contracts, invoking the clause grants the other party the right to terminate the contract. For these reasons, it might be wise to consider whether invoking the force majeure clause is in your best interest.
It is important to stress that a party wishing to invoke such a clause needs to notify the other party of the force majeure, its cause and its consequences as soon as possible and, if applicable, according to a contractually agreed procedure. Failure to comply with such notice requirements may result in the non-applicability of the force majeure clause or a duty to pay compensation.
Can force majeure be invoked under Belgian law if your contract contains no such clause?
There is no universal concept of force majeure. Therefore, whether or not a contracting party can rely upon force majeure in the absence of an explicit clause in the contract depends on the existence and definition of the legal concept of force majeure according to the applicable law governing your contract.
Under Belgian law, a party will be relieved of its obligations if it proves that it cannot fulfil them due to a cause which is beyond its control such as force majeure. Force majeure is, in other words, implicitly included in contracts governed by Belgian law.
Except if the contracting parties deviated from the legal definition of force majeure, one can be relieved from its contractual obligations under Belgian law if the event or circumstance meets the following cumulative criteria of article 1147-1148 of the Civil code, as supplemented by jurisprudence:
1. Render performance of the agreement or obligation impossible
For force majeure to exist, the event must have rendered the performance of a party’s contractual obligations impossible, either in whole or in part. This indicates that no alternative solution is available to the party invoking force majeure. For example, if using a subcontractor would enable it to fulfil its contractual obligations, no matter the cost, the application of force majeure will be rejected.
If performance of a party’s contractual obligations is not rendered impossible, but merely more burdensome, the event will not constitute a force majeure event. In such a case, a party could seek relief on alternative grounds, such as hardship or frustration clauses in the contract. Parties often stipulate a duty to mitigate/renegotiate if execution is rendered unreasonably difficult.
2. Be unpreventable and unforeseeable
Generally, COVID-19 and its direct consequences are to be regarded as an unpreventable and unforeseeable event. Given the classification of COVID-19 as a pandemic event on 11 March 2020 by the World Health Organization and its rapid dissemination, it will in many cases have been practically impossible for businesses to prevent the negative effects that it has on the fulfilment of their contractual obligations.
However, it is important to note that the unpreventability and unforeseeability should be reviewed on a case by case basis. Naturally, COVID-19 cannot be invoked as an excuse for delayed performance if such delay would also have occurred without the interference of the pandemic. For the same reason, nor COVID-19 nor its consequences will constitute force majeure if the party invoking the force majeure could reasonably have foreseen the implications on its business. For instance, booking a flight to a country when it is clear that the country has publicly announced to immediately cancel all air traffic would not be considered as a force majeure.
3. Be external (not attributable to the party who is seeking exemption from force majeure)
Lastly, the event or circumstance causing the inability to fulfil a party’s obligation may not be attributable to that party.
The practical application of this criterion will also be affected by the specific context. Even though placing employees in self-quarantine with reasonable cause is a decision which is usually made by a party invoking the force majeure, it will not necessarily cause a party to lose its recourse to force majeure. After all, whether force majeure can be invoked by a party requires an assessment of all relevant facts.
Again, the party invoking force majeure needs to notify the other party of such an event as soon as possible. Invoking the legal force majeure provisions grants both parties a temporary suspension of their obligations, without any compensation due. If the force majeure becomes permanent, it will, in principle, lead to the termination of the contract without retroactive effect.
As previously mentioned, parties can deviate from the general Belgian definition of force majeure. The legal definition can be contractually extended, limited or clarified by the parties in their contract.
Step-by-step plan
In short, it is recommended for businesses experiencing the inability to perform one or more of their obligations due to COVID-19 or the consequences thereof to follow these steps:
- Verify the content of each contract: is there a force majeure clause and, if so, carefully review its definition, modalities and consequences.
- Notify the other party of the force majeure, its cause and its consequences in accordance with the applicable notice requirements provided in the contract (if any).
- Mitigate or renegotiate if necessary.
- Document all steps taken to prevent disputes at a later date.
EY Law consists of specialized contract lawyers who can assist businesses throughout all of these different steps. Not only can we analyse whether COVID-19 and its consequences can constitute force majeure in your situation, we can also advise you on which remedies are the most suited for you and guide you through the applicable procedural requirements to ensure their correct application.
Furthermore, EY Law can assist its clients in speeding up the review of a huge volume of contracts with respect to specific clauses through the use of Artificial Intelligence. For more information about this subject, please read: COVID-19 – EY Law uses Artificial Intelligence to speed up urgent contract reviews, https://www.eylaw.be/2020/03/18/covid-19-ey-law-uses-artificial-intelligence-to-speed-up-urgent-contract-reviews/.
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