Some businesses—particularly in the global shipping industry—are hoping a provision contained in the fine print of many contracts can avert disastrous financial losses caused by the coronavirus outbreak.
The provision is a legal term known as force majeure. Taken from French civil law, force majeure is “a contract provision that excuses a party’s performance of its obligations under a contract when certain circumstances beyond their control arise, making performance inadvisable, commercially impracticable, illegal, or impossible,” according to a recent coronavirus and force majeure story in The National Law Review.
Force majeure has been invoked in the past by companies seeking to explain contractual failures stemming from the Sept. 11 terrorist attacks, Hurricane Sandy, SARS, and Ebola. But the international response to the coronavirus—quarantines, shutdowns, and travel bans—has upended business as usual around the world in an unprecedented way, said attorney Gregory Bombard, a partner at the law firm Duane Morris.
Companies seeking to escape liability for failing to deliver the terms of a contract are scrambling for the legal cover to do so, he said. “They want to know: Who bears the risk if we can’t deliver?”
Invoking force majeure means fulfilling the terms of the contract is literally impossible, Bombard said. Not too expensive. Not really, really inconvenient. Impossible.
“It’s not necessarily a free pass for companies to cite force majeure,” he said. “It’s very fact specific and case specific.” Courts have historically been reluctant to enforce force majeure claims, he said.
During the coronavirus crisis, some industries might have stronger force majeure claims than others, according to a recent blog post by the law firm Baker McKenzie.
“Force majeure claims are particularly relevant for contracts with a long-term or ongoing supply,” the post said. Those included contracts dealing in commodities like iron ore, coal, and copper; liquid natural gas; ship building; supply contracts for textiles, foodstuffs, and mechanical equipment; electrical equipment and electronic components; and medical equipment manufacturing.
“The effect of the outbreak on suppliers is perhaps most obvious,” the post said. “With emergency measures impacting on goods, workers and logistics, many suppliers appear unable to fulfil their contracts within the prescribed time, or at all. But invoking force majeure may also be of interest to buyers, either because taking delivery under the contract has been impacted or due to disruptions in downstream markets.”
Some businesses have only just started to dig out their contracts to re-examine the wording of their force majeure provisions. The global shipping industry, however, has already seized on it as a possible life preserver.
The China Council for the Promotion of International Trade (CCPIT), a quasi-public Chinese government agency, has issued 3,325 so-called “force majeure permits” to Chinese shippers since February, worth $38.5 billion, according to the Financial Times. The permits attempt to shield Chinese shippers from potential lawsuits stemming from their failure to deliver on contractual terms.
One of the world’s largest shippers, CMA-CGM, alerted its vendors in February that it is currently in a “force majeure situation.”
Invoking force majeure is an industry-wide response to a situation that has been worsening each day since the beginning of 2020, said Patrik Berglund, CEO of Xeneta, a Norwegian company that advises Fortune 500 companies on global shipping.
“I’ve never seen so much bad news travel so fast,” he said, noting he does not believe the coronavirus crisis is nearing its end. “If you’d asked me a week ago, I’d have been optimistic. But not now.”
By invoking force majeure provisions, everyone is looking for some form of protection from uncertainty and disruptions, Berglund said.
Invoking force majeure is “a pointing game to try and pass on the costs/consequences of substantially reduced global value generation—I don’t think it will play out nicely or quietly,” he said.
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