“Force Majeure” is a clause written into many contracts, which allows a supplier or customer to suspend its obligations under some circumstances.
The Covid-19 virus has wide reaching ramifications for businesses, especially SMEs. Many companies are either implementing or hastily developing plans for employees to work from home or shut down for a period now that the disease has been declared a pandemic.
Most contracts and standard terms of trade include a Force Majeure provision as a matter of routine, although rarely does this ever get invoked by either contracting party. Such a term normally provides that if either party is unable to perform its contractual obligations as a result of causes beyond their reasonable control they can suspend performance for a set period of time and ultimately terminate early.
Force Majeure events are usually listed to include events such as strikes, civil commotion, fire, war, natural disaster but also crucially epidemic and pandemic. Clearly the continuing rapid spread of Covid-19 has the ability to allow suppliers and customers to bring Force Majeure into play.
What should businesses do?
- Review as a matter of urgency existing terms and conditions of business – both your own and those of your key suppliers and customers. Check to see if they contain a Force Majeure provision and, if they do, what rights it gives rise to. Typically, it allows obligations to be suspended for a period of time but this can vary wildly from 4 weeks to 6 months.
- Does it give rise to an ability to terminate the contract? Consider whether any suppliers or customers will wish to use this legitimately or even use it as an excuse to wriggle out of their contractual obligations prematurely.
- Look at your own resources – if large numbers of staff are absent you may need to consider invoking Force Majeure. Compile a list of contracts and relevant notice provisions.
- Review debtors as a priority – chase down any payments that may due or slightly overdue. Cash flow is likely to become a major issue for many businesses in the next few months as Covid-19 reaches its peak.
Paul Tyrer was interviewed by Business Live on the topic above. See the article here.