Legal Alerts/13 Mar 2020
Does Coronavirus Constitute a Force Majeure Event?
The new coronavirus has had a global impact on almost every aspect of modern society. Governments and businesses are taking drastic measures to stop the spread of the virus, which has resulted in travel restrictions and the cancellation of public gatherings and events, and in urging people to social distancing. These measures will no doubt have an evident impact on businesses and affect their ability to fulfil contractual relationships all over the world. We have come to a time when it is pertinent for everyone to review the force majeure clauses in your contracts.
Force majeure refers to a situation where a contractual party is temporarily freed from their contractual obligations without repercussions due to an unexpected and unforeseeable change in circumstances. The impact of such a change must essentially affect the affected party’s ability to fulfil the contract. Therefore, a significant rise in costs or a lack of demand due to the pandemic does not typically constitute a force majeure event.
When is a force majeure event at hand?
The existence of the new coronavirus pandemic alone does not entitle parties to invoke the force majeure clause in their contracts. We must look at the wording of the clause and assess the situation on a case-by-case basis. The assessment is simpler when the force majeure clause lists “pandemic” as a force majeure event or refers to unspecified, unexpected and unforeseeable events that are not attributable to the parties or to situations when the performance of contractual obligations is rendered impossible due to a government-issued ban or by virtue of a decision made by a public official. Whether the clause applies can become subject to interpretation if the list of force majeure events is exhaustive and excludes pandemic and if the performance of contractual obligations becomes extremely difficult due to voluntary preventive measures or for some other similar reason.
And what if the relevant contract does not include a force majeure clause? In Finland, invoking force majeure is possible also in the absence of a force majeure clause. For example, the Finnish Commercial Code recognises force majeure. Finnish contract law also recognises the possibility of adjusting an agreement or some of its provisions if the enforcement results in unreasonable effects. However, the threshold for such adjustment in commercial contractual relationships is high.
How to resolve a force majeure event?
A party that is considering invoking a force majeure event must first look into other reasonable options to fulfil its contractual obligations and mitigate the effects of the force majeure event. Once this evaluation is done and if no viable alternatives have been discovered, the party seeking to invoke the force majeure clause must notify the other party thereof without delay. Some agreements may impose more specific time limits and notification procedures, which must be followed. As such, unless specifically stated otherwise in the agreement, you must notify the other party of the force majeure event and its estimated duration and state the impact it has had or will have on the performance of your contractual obligations.
Many agreements oblige the parties to negotiate on solving the force majeure event in the event that it should persist. As the pandemic affects so many, we encourage you to negotiate on the best possible resolution to the situation even in the absence to any contractual obligations to that effect.
Please bear in mind, however, that many force majeure clauses entitle the other party to terminate the agreement if the force majeure persists. As such, you should take a moment to consider before invoking the force majeure clause in your contract.
Borenius’ lawyers are available to assist in addressing any questions you may have regarding your business’ situation.