Coronavirus and force majeure clause
As an entrepreneur you know that almost every agreement contains a force majeure clause. And you also know that you hardly ever have to rely on it. But what if your supplier cannot deliver due to the Coronavirus? And what if you cannot deliver due to the outbreak?
Due to the serious consequences of the Coronavirus on the general public health, measures are being taken on a large scale. The outbreak has led to:
- Company closings by government order,
- Disruptions of business processes due to illness or quarantined personnel
- Decreased personal contact between companies
- Decrease in sales and/or purchasing as a result of these circumstances at your own company or at suppliers.
All these circumstances can lead to your supplier not being able to fulfill contracts, or perhaps you yourself defaulting in relation to your customers.
What is force majeure?
If a contracting party fails to fulfill its obligations, this will lead to an obligation to pay compensation for the resulting damage. Force majeure is an exception to this main rule.
If you want to invoke force majeure, you must be able to argue that the shortcoming:
- Is not your fault, and
- Is not for your account on the basis of “prevailing views”, and
- Is not for your account “by law”, and
- Is not for your account under a “legal act” (such as a contract), e.g. because the customer’s general terms and conditions exclude force majeure.
The first basis for invoking force majeure seems simple: Obviously, the outbreak of the Coronavirus is not the fault of the entrepreneur who cannot fulfill the contract. However, it may be that the default will still be for your account.
In principle, contracting parties have no influence on the spread of the Coronavirus. But this does not automatically mean that you do not have to do anything yourself to avoid the consequences. If you cannot fulfill a contract because your employees are infected with the Coronavirus, the counterparty may ask whether you have done everything to prevent this.
For example, your contracting party may argue that you could have canceled the annual ski trip to Northern Italy. Or that you have not made your employees aware that extra attention is required for personal hygiene. After all, under the Working Conditions Act (Arbowet), employers are obligated to inform their employees about the health aspects of the work.
We can’t say that an appeal to force majeure will always fail for arguments like this. But it is wise to take this into account.
For example, what you can do is:
- Compose a written prevention policy with specific measures to prevent the virus from spreading in the workplace.
- Prohibit attending unnecessary meetings.
- Inform employees about the official travel advice from the Ministry of Foreign Affairs
- Prohibit work trips to high risk areas.
Attribution by law
Under law, you are responsible for the services performed by persons hired for the completion of the contract. This is the main basis of “attribution of default by law”. In that case you cannot invoke force majeure. Even if you take measures in your own company, a subcontractor or other auxiliary party hired by you may not comply with this in his organization.
For example: You have an engineering firm and hire external freelancers. One of the hired freelancers has just returned from Milan and is infected with the Coronavirus. As a result, you cannot carry out the assignment on time.
In such cases, the default of your hired subcontractor is usually at your expense. We recommend that you be aware that hiring subcontractors means an increased risk. Our advice is to discuss this risk with the subcontractors you do business with.
In this context, also note that you have a responsibility towards your contracting party. For example: extra hygiene measures within your own company buildings reduce the risk of visitor contamination, which limits your risk of liability to those parties.
Regulation of force majeure in the contract
The law allows parties to fill in what exactly falls under force majeure and what the consequences are. The vast majority of contracts therefore contain a force majeure clause.
A good force majeure clause includes:
- A definition of force majeure with concrete categories of force majeure, e.g. natural disasters, terrorist attacks etc.
- A definition of what is not covered by force majeure
- The consequences of force majeure, for example a suspension of the contract without an obligation to pay compensation
- The possibility to terminate the contract if the force majeure lasts longer
Many contracts contain such an extensive clause, but there are also many contracts that only repeat what is already stated in the law. The law only contains a general description of force majeure. As a result, much uncertainty remains as to how the statutory regulation will work in a situation such as with the Coronavirus outbreak.
Many force majeure articles stipulate that supply restrictions do not constitute force majeure. These types of provisions are written so that a party does not invoke force majeure if, for example, its supplier has no stock, or if the subcontractor cannot fulfill his contract because he has made too few personnel available. An unpleasant side effect of these conditions is that they are generally used to ward off an appeal to force majeure, for example when new regulations prevent fulfillment of the contract by the supplier. Or if a supplier unexpectedly goes bankrupt or dies.
Also with the Coronavirus, the force majeure clause in the contract can provide a starting point for your contract partner to object to your appeal to force majeure. It’s therefore particularly important these days to be aware of your agreements with your contract partners about force majeure situations.
Are you currently dealing with the consequences of the Coronavirus in your company? Avoid unnecessary liability and financial losses and contact the experts at Crowe Peak.