“Unprecedented”, “force majeure” - practical tips for dealing with legal fallout from Covid-19

As a lawyer, I’m accustomed to being someone people turn to when they don’t know what to do. I don’t pretend to have all the answers but I generally know where to go to find them. The answers lie in the statute books, in jurisprudence, in guidelines, in conventions; in short, they draw on what has happened in the past, often combined with a good dose of common sense.

Force majeure

In recent weeks, the word “unprecedented” has featured in the news over and over again — and with good reason. The Covid-19 pandemic and its fallout is a near-perfect example of “force majeure” — an event or situation that that nobody could predict, and which is caused by something beyond human control.

Force majeure often crops up as a defined term in contracts or, in some countries, in the legislation. The reason for mentioning force majeure in a contract is to excuse one or both parties for non-performance if something happens that is beyond their control. True force majeure events are very rare — so much so that the force majeure clause, if one is included at all, is often badly written and overlooked. Typically a force majeure event will only affect one party to a contract.

Yet now we are all in a situation that is unprecedented and beyond human control. Every country in the world is affected and governments are racing to pass emergency laws to help limit the fallout. Businesses have, where possible, had to find alternative ways of working. Where this is impossible, they have had to close their doors, back out of contracts, accept payment delays, lay off employees … Answers that draw on the past are of little use, because there hasn’t been a situation like this before. It will be interesting to see what the courts make of disputes arising from it.

What do you do when faced with these questions? The good news is that we can still use common sense. I’ve set out some practical suggestions for managing common issues below. The aim is to help you reach agreements that keep your business going if possible and to help you avoid ending up in court.

I have a contract that can’t be performed because of the Covid-19 restrictions

  • Check the contract (if you have it in writing).
  • Contact the other party and explain the situation. Speak to them by phone/videoconference - don’t just send an email.
  • If you/the other party will be able to perform the contract later, negotiate a new delivery date.
  • Ensure you reach agreement on payment. If payments will be delayed, make sure both parties agree on the length of the delay.
  • If it’s time critical and either you or the other party won’t be able to perform, negotiate a “no fault” termination. Don’t forget to make an agreement about payment for work that was done before the termination.
  • Whatever the outcome of your negotiations, record it in a written agreement. In many cases a simple email or letter exchange will be enough, though you may want something more formal if it is a high value or complex contract.

A customer of mine is refusing to pay, citing the Covid-19 crisis

  • If you have provided products or services, you are entitled to payment. Your customers can’t just refuse to pay.
  • Contact your customer and remind him/her that you are owed payment. Let him/her know when you expect the payment.
  • Be understanding. Many businesses — especially small ones — are experiencing cash flow problems as a result of the crisis. If you can help your customer by negotiating a payment plan or by agreeing to payment at a later date, it will go a long way to building loyalty.
  • If necessary, follow the process in your country for pursuing unpaid debts.

I can’t pay my supplier(s) because I haven’t received payment from my customers

  • Check your contracts. What do they say about payment?
  • Contact your supplier(s) and explain the situation. See if you can negotiate a delayed payment.
  • Find out whether you are eligible for government support. In several countries governments are facilitating access to low interest loans for businesses facing difficulties as a result of the Covid-19 crisis.
  • Make sure you cancel any outstanding orders with suppliers you won’t be able to pay.

Is there a clause I can put in my contracts to ensure I get paid even in a crisis?

  • Your contracts simply need to set out the price of your products/services and the date by when your customers must pay you.
  • If you are concerned that a customer will be unable to pay, consider asking for money up front or, for larger sums, a letter of credit or a bank guarantee.

Can I put something in my contracts to protect against crisis situations?

  • For the future, a well written force majeure clause will help you in a crisis, as long as the crisis is genuinely beyond your control.
  • Ensure you have a right to terminate each contract you sign, not only in a crisis, but as a matter of course.
  • Include a mediation clause. This requires the parties to the contract to attempt to resolve disputes with the help of an impartial third party — the mediator — before starting litigation or arbitration.

What else can I do to protect myself?

  • Be reasonable in your negotiations. If you look for a “win-win” when negotiating your contracts, and respect the contracts once they’re signed, you will have more credibility with your customers and suppliers.
  • If something goes wrong, let the other party know as soon as possible. Common courtesy goes a long way to minimising the risk of disputes.
  • Whatever you agree, get it in writing. Make sure it is clear and unambiguous.
  • Always check what your contracts say before taking action.

If you’re struggling with any of these questions please get in touch for a no-fee, no-obligation discussion.