The humble force majeure clause has been tested by the COVID-19 pandemic like never before. But what can we learn from this pandemic and how will it shape the future of contracts and business planning in a post COVID-19 era? These few words thus far have huge implications for contracting operations. Change is in the wind for sure.
First of all, we already know any similar pandemic will force contract professionals to focus on the force majeure clauses in their contracts. A force majeure clause responds to conditions beyond the control of parties that make it impossible or impractical for them to perform contractual obligations (or continue their job performance). Its exact wording is critical in defining the basis, scope and conditions for that relief from work.
And we all know too well how COVID-19 has forced countless company closures, not to mention thousands of workers out of work worldwide. Many of us are asking if it will ever get back to normal.
But we can’t give up. And for that reason, it’s important to consider, other types of disruption we might someday face that could become as threatening or worse than COVID-19 -- events like:
- a global fuel shortage that would wreak havoc on transportation;
- a worldwide internet outage forcing us into manual operations that would stop automation processes;
- a cyberattack on world banks leaving us unable to withdraw from or deposit to our own bank accounts.
Unthinkable? Yes, but that’s the point -- not planning for any such unprecedented event could become our worst nightmare when it hits unexpectedly.
But we do have options for planning ahead. One is having in place a contract ‘vaccine’ for COVID-19. Another is learning what the phrase, think the unthinkable means when it comes to contracting preparedness in event of force majeure events.
Contract vaccine for COVID-19
We all know the COVID-19 virus has swept across the world causing massive disruption, not just to our daily lives, but to businesses and supply chains globally. Seeking relief from contractual obligations means parties to the contract must scrutinize and rely on force majeure clauses and contractual terms.
Regardless of whether parties have been burned by the pandemic or have weathered the storm well, it will profoundly impact the future, not only contractual terms but also supply chain and business planning strategies in the long term. Organizations that learn from this and adjust contracts and processes as needed ahead of time will get a competitive advantage in the new world post COVID-19.
Does a contract vaccine exist for a COVID-19 clause?
While the medical world searches for a vaccine for COVID-19, does a contract vaccine exist in the form of a COVID-19 clause that will fix the issues parties are grappling with today?
It is fair to say a silver bullet clause does not exist to protect a party from the consequences of something as unexpected and with such far reaching impact as COVID-19. The issues remain varied and the complexity of supply chains paints a challenging picture to have a one-size fits all approach. Therefore, we continue to rely on the more traditional and practical steps like reviewing contract language -- including force majeure clauses -- to see if they support catastrophic events, and providing for renegotiating or collaborating to resolve challenges arising in specific circumstances.
In the short term at least, force majeure clauses will undergo something of a revolution that provides these clauses an increased focus. While we continue feeling the effects of the pandemic we are seeing parties specifically referring to pandemic when drafting the contract language to ensure coverage exists.
The deeper key elements we expect businesses to review are these:
- Trigger events – we need to ensure force majeure clauses include a catch all for "anything outside the party's reasonable control" and specifically include references to issues such as disease, epidemic, pandemic, government intervention, labor shortages and supply chain failures.
- Payment obligations – we need to realize the pandemic itself is not affecting a company's ability to pay. But if the company is not receiving any goods or services, it will want relief from this obligation too. That said, the supplier may have fixed costs or overheads that the supplier needs to recover to stay afloat throughout the pandemic period.
- Standard of proof – we need to determine if the event could hinder, prevent, delay or disrupt the party's performance. Within this context, the word prevent means the contract is physically or legally impossible to perform. It’s not merely more costly or more difficult to perform. We need to acknowledge this difference.
- Mitigation – we need to determine whether and how the impact of a pandemic can be mitigated. That is an interesting component of force majeure considering the current pandemic. Often mitigation might include sourcing from a third party, but considering that the whole world has been impacted similarly, evidencing and discharging a duty to mitigate can be challenging and complex.
- Links to other remedies and business continuity plans – we need to define these more clearly to avoid any impact in the first place. Such links to other plans do not inadvertently create a termination right that would enable a party to exit a contract during an issue like a pandemic for reasons not related to the pandemic.
In the short term, force majeure clauses will be adapted to reflect the inconvenience that each party has actually experienced in seeking to rely on or comply with the provisions in the contract. And, in the long term, case law emerging from this pandemic will shape contract drafting. While that approach may eventually give us some clarity, it is still a way off, and, therefore, the temptation to draft specific contract language for all the scenarios possible to be a solid 'belt and braces' solution means we are likely to see much longer force majeure clauses appearing.
Sometimes clauses specific to COVID-19 determine when the contract will start (or restart) or they specifically detail the relief a supplier will be entitled while the pandemic continues. This, of course, brings about its own challenges in being able to define the COVID-19-related hardship and when it is expected to end. However, within the context of an event like the COVID-19 pandemic, parties will likely recognize it’s an unprecedented situation: the pandemic is not the fault of either party and the ongoing wider business relationship obviously needs to last beyond the pandemic. So, this calls for a pragmatic approach from all parties.
However, despite these drafting changes, one question arises: will the force majeure clause be effective against the next pandemic or equivalent event? No one can be sure. Similarly, force majeure clauses today are being interpreted in the light of the 'unprecedented' COVID-19 pandemic and its nuances around government action, employees and supply chain impacts.
It could change, so what might happen next?
Lessons beyond COVID-19 – think the unthinkable!
Although the contract drafting changes may help insulate a business in some instances, clearly, there are wider lessons to be learned from this pandemic. Therefore, although the contract may be the first line of defense, scenario planning and business continuity arrangements will surface as top priorities.
Within this we challenge ourselves to think the unthinkable. If you had said 12 months ago we would be in a situation today where over half the world's population was living in some form of social distancing arrangement or where they can't leave their own homes – no one would believe you – let alone understand what you meant by this term "social distancing"!
Our businesses need to identify the issues that may impact us but cannot be mitigated and ask, how would we deal with such a scenario?
Imagine yourself dealing with either of the following:
- A global fuel shortage: goods and deliveries cannot get through; logistics companies run out of fuel; your employees can't get to work (or indeed go anywhere else); food supplies are short; and power and heating can't reach homes and buildings.
- A cyberattack on world banks: all banks suspend activities so no cash can be accessed or moved; staff can't be paid; suppliers can't be paid; and your customers cannot pay you. No payments can be made by credit or debit cards for food or other essential items.
- What would you do in a prolonged global internet outage? If you have automated building control, can you even get in?
- What systems do you have in place that you can no longer use?
- And, if everyone has relied on the internet, how would any of us adapt to reverting to the 'old way' of doing things now?
If you are tempted to discount these as unrealistic, would you still have believed these unthinkable events as unrealistic if COVID-19 appeared on that list?
Of course, some of these may be so remote a business will not invest time or resources in coordinating continuity arrangements for every single permutation. But some careful thought will enable a business to strategically decide where and how it wants to protect itself. Do remember, however, when the next event happens it is still unlikely you will have thought of that exact event with the exact impact that it may have.
The challenge for all contract drafters is the same. Attempting to cover every scenario with different results depending on the impact would result in a clause longer than the contract itself. We must challenge ourselves to think the unthinkable but not to automatically attempt to draft contract language for the unthinkable.
We hope we never experience the next pandemic. The important thing for businesses to learn from this experience in practice means we need to:
- update template contracts to capture lessons learned for force majeure clauses;
- factor learnings into future business; and
- continue planning arrangements to mitigate exposure as much as possible.
Overall, the pandemic gives us the perfect opportunity to learn from how we adjusted to the Covid-19 pandemic. By focusing on the successes and addressing the weaknesses we can gain competitive advantage. Thinking the unthinkable may inspire opportunities and will safeguard against the worst if we carefully plan future business operations.
Top tips would be:
- Collate information from both customer and supply chain teams.
- Identify our weaknesses and how and where they exposed us. Did it come from the contract clauses?
- Ask ourselves, how did we respond to notices from suppliers or examine our ability to source key components.
- Discuss what went well and what the success stories were and celebrate these.
- Update business continuity plans and ask supply chain partners do to the same.
- Challenge ourselves to think the unthinkable and factor scenarios into our planning.
Seize the opportunities our learnings identify so we are all better positioned for the next pandemic event arrives.
ABOUT THE AUTHOR
Clare Francis is a commercial law partner specializing in business-critical projects ranging from contractual joint ventures, business outsourcings to wholesale contract portfolio reviews.