The current spread of the Covid-19 virus may, other than being a health risk to every one of us, also have an impact on businesses’ possibilities to comply with their contractual obligations.
With employees being forced or recommended to work remotely, suppliers may find it difficult fulfil their delivery undertakings whereas buyers may find themselves in a situation where they risk not being provided with their ordered products or services in time. In such situations it is prudent to take a closer look at a very common, but rarely used, boilerplate clause in the agreement, namely the force majeure clause.
A force majeure clause may be drafted in various ways, but is normally based on the notion that a contractual party shall be relieved of its contractual obligations under the agreement in case of certain extraordinary circumstances. The position will to some extent depend on the governing law of the contract, as the concept and effect of force majeure varies significantly even across European jurisdictions. However, there are many common themes and similarities across the board, and much will boil down to the language of the force majeure clause.
We have set out below a few key points to consider when evaluating the impact of the force majeure clause due to Covid-19 in an agreement governed by Swedish law.
The scope of the clause
Some force majeure clauses are limited to certain specified situations such as fire, riots and civil disorders but may also include epidemics and pandemics, while other force majeure clauses include wide wordings along the lines of “any circumstance outside a party’s control” or “acts of God”. Reviewing the scope is the first step.
The impact on the performance
It is crucial for the applicability of the clause that there is a clear connection between the extraordinary circumstance and the non-performance under the agreement. While the mere fact that there is an ongoing pandemic may not be sufficient to invoke a force majeure clause, a governmental order that people may not leave their homes due to the pandemic may be. Note also that the clause might not relieve the invoking party of all its duties, but only the duties that are in fact prevented.
The possibility to prevent or foresee
Normally, a force majeure clause will require the obstacle to have been beyond each party’s control and impossible to prevent or foresee. The Covid-19 virus is likely to fulfil this criterion in most businesses.
The possibility to circumvent
A well-drafted force majeure clause cannot be invoked if it is possible for the affected party to circumvent the obstacle by reasonable means. For example, if an alternative solution or workaround leading to increased costs exists, the force majeure clause is unlikely to be applicable.
The applicable law
How contractual clauses are interpreted vary, as mentioned, between jurisdictions. Therefore, it is important to be aware of which legislation the force majeure clause would be interpreted under, should a dispute arise.
The consequences of invoking the clause
Normally, invoking a force majeure clause means entire or partial relief of contractual duties. Often this is however accompanied by a right for the other party to for example terminate the agreement if the force majeure event persists for a certain period of time.
The formal requirements
Some force majeure clauses include an obligation to inform the other party in writing within a very short time frame and to keep the other informed continuously during the force majeure event.
The applicability over time
As there needs to be a connection between the obstacle and the non-performance, a force majeure clause may normally only be invoked for as long as that obstacle persists (or, if earlier, until it can be circumvented by reasonable means). Force majeure clauses may normally only be used temporarily.
If the agreement does not include a force majeure clause, the clause determining applicable law will be of utmost importance. In such case, the legal landscape in the relevant jurisdiction will determine a party’s possibilities to be excused from its obligations. In Sweden, the Contract Act for example excuses some breaches of contract due to events which were not possible to foresee or prevent.
If you have any questions on the above or any other related matter, please do not hesitate to contact Mikael Nelson, Head of Corporate Commercial.