The outbreak of COVID-19 (coronavirus) and its impact on the economy will likely lead to situations in which it is challenging or even impossible for companies to meet their obligations under contracts, such as, deliveries and other performances.
Force majeure refers to a situation in which a party of the contract is exempted from liability for damages arising from non-performance of the contract on the ground that it is impossible to the party to comply with the contract or it would require unreasonable efforts due to an unforeseeable impediment beyond its control. Failure to pay is not excused by force majeure and it does not typically apply to the party liable to make a payment, e.g. in the case of sale of goods or services the buyer.
Statutory provisions and contractual force majeure clauses
The Finnish Sale of Goods Act contains a provision on seller’s force majeure and it can be applied even without an express force majeure clause. The Act is however non-mandatory and therefore secondary to the wording of a force majeure clause, if there is one. A force majeure clause typically contains specifications on what constitutes a force majeure event and sets obligations to the party invoking the clause. The condition may also include a right for the opposing party to terminate the contract due to a prolonged impediment.
If Finnish law is not applied to the contract, it depends on the applicable law, whether one may invoke force majeure without an express condition. However, most international contracts include a detailed force majeure clause with a list of examples that are regarded as force majeure or excluded as such. If a pandemic or epidemic is not expressly mentioned in the clause, the assessment should be based on whether the situation at hand can be comparable with the examples cited as force majeure or the ones excluded.
What are the preconditions for a force majeure event?
Naturally, compliance with the contract is the premise for any contractual relationship, and hence there should be a high threshold for invoking force majeure. When evaluating whether the coronavirus constitutes a force majeure event, the following should be considered:
- Unforeseeability. Ordinary commercial risk, such as, unfavorable developments in prices or demand, is not considered aforce majeure event. Instead, the situation shall be exceptional and unforeseeable. Timing and the information available at the time of the conclusion of the contract are important in evaluating foreseeability. The coronavirus may have an unpredictable effect on the existing agreements. However, the situation may not be the same for contracts concluded after the outbreak of the virus.
- Impediment beyond control. Naturally, the coronavirus itself is beyond the control of the contractual parties.The question is which of the consequences of the epidemic should also be considered as beyond the control of the parties. Impediments directly due to prohibitions imposed by authorities may be regarded as force majeure events, whereas impediments resulting from following recommendations or self-imposed precautions may not.
- Impediment cannot be overcome. It is probable that the coronavirus will cause supply problems such as shortage of goods and raw materials. However, a party cannot invoke force majeure solely on the basis that the preferred supplier cannot be used but should instead actively seek alternative suppliers and means of completing contractual obligations.
- Impossible or would require unreasonable effort. The threshold for what can be overcome is not absolute. It is possible to invoke force majeure when a contractual obligation could in theory be fulfilled, but this would in practice lead to unreasonable financial or other consequences for one party in relation to the benefits to the other party. This kind of situation could arise for example if the delivery would entail disproportionate costs to the seller and, at the same time, it would be possible for the buyer to obtain a similar product at a lower cost elsewhere.
Ultimately, the assessment of whether an impediment caused by coronavirus constitutes a force majeure situation under the applicable law and contract is to be made case-by-case basis. The party invoking force majeure has to be able to demonstrate that all the above-mentioned criteria are fulfilled and any additional conditions of the contract are met.
How to proceed in a force majeure event
The party who wishes to invoke force majeure should notify his counterparty of the impediment as soon as possible, but no later than within the period set forth in the contract. The notification should contain the cause of the impediment and its expected duration. Even after the notification the party facing an impediment should continue to actively seek ways to overcome the impediment and keep its contracting party informed of the situation. Force majeure notifications and related material (instructions issued by authorities, strike notices etc.) should be documented carefully as evidence of the severity of the impediment and timely notification.
The party receiving a force majeure notification should also carefully document any notifications and material received and, if necessary, request further information. The first step to resolving a force majeure event should always be negotiations between the parties; could the situation be resolved by an extension in delivery time or by executing the contract in an alternative way? Further action should only be considered if the situation cannot be resolved through negotiations. This could mean withholding payments, termination of the contract or damage claims depending on whether the situation is considered a force majeure event or a breach of contract.