We recently considered what effects COVID-19 could have on contracts in our post “The impact of the Coronavirus on contracts.” Now, months later, countries across Europe as well as the United States are beginning to lift restrictions and many companies have started to contemplate how and when to reopen. However, with scientists predicting the possibility of a “second wave” of COVID-19, contracting parties should consider whether they will be able to rely on the same provisions in their contracts such as force majeure.
Generally, force majeure involves an event that is outside of one or more of the contracting parties’ control. What constitutes a force majeure event will be determined on the facts and circumstances of each case. In a recent case out of the UK, 2 Entertain Video Ltd v. Sony DADC Europe Ltd [2020] EWHC 972 (TCC), the court considered whether Sony’s warehouse which was broken into and set on fire, resulting in a total loss of stock and destruction of the warehouse during the UK riots in 2011, constituted a force majeure event.
The force majeure clause in their contract only applied if the event was determined to be beyond the reasonable control of the affected party. While the court held that the riot itself was not within the reasonable control of the affected parties, the judge delved further into the facts of the case and stated that the risk of intruders and the arson were foreseeable. Therefore, on that reasoning, the court held that the circumstances did not qualify for force majeure relief since Sony could have taken reasonable precautions against them. This case reiterates that force majeure clauses will only be upheld in exceptional cases.
How should companies prepare for a second force majeure event?
Review contracts. Should a second wave of COVID-19 occur, parties should look at the wording of the contract afresh so as to determine what may prevent them from fulfilling their obligations under the contract and whether the event falls within the scope of force majeure relief in their contract. Parties should also pay close attention to the terms for what constitutes a trigger event, how and when notice is to be given as well as provisions relating to mitigation and termination rights.
Prepare. Contracting parties should begin to plan and prepare for the possibility of a second wave as this will help to reduce the potential impact that lockdowns and new restrictions may cause. Failure to do so may result in force majeure relief being unavailable. For example, failure to prepare for the second wave could lead to allegations that the cause of the party’s inability to perform its obligations is due to its lack of preparation rather than a force majeure trigger.
Claims for force majeure relief. The re-imposition of restrictions due to the second wave of COVID-19 will affect contracting parties differently. Some parties may not be able to resume performance while others who may not have needed assistance the first time around may start seeking force majeure relief. If a counter party has provided notice for force majeure relief, it is important to look through all the options afforded under the contract and assess what steps may be taken to alleviate the problem of non-performance or delayed performance.
Take a collaborative approach. If contracting parties come together and discuss alternative ways for performing under the contract, this may prove helpful as depending on the circumstances, keeping a client, tenant or supplier may be mutually beneficially.
Looking forward. As a result of the pandemic, it is essential that new contracts expressly deal with the possibility of COVID-19 related restrictions that may have an impact on performance. Additionally, for parties who have not expressly placed force majeure provisions in their contracts, it is recommended to include these provisions moving forward.
The contents of this article are for informational purposes only, and must not be relied upon as an alternative to legal advice from an attorney.
