Published: 03 April 2020
Analyst(s): Legal and Compliance Research Team
The coronavirus crisis has caused some organizations to invoke force majeure and left others wondering if it’s only a matter of time before they will have to do the same. Find out how common the use of this provision is now from our survey data and how to weigh up whether to proceed with it.
The epic uncertainty triggered by COVID-19 has raised the issue of whether corporations will invoke the legal escape hatch known as a force majeure provision. Nearly half of the legal leaders we polled recently have either used such a provision or are considering it (see Figure 1).
Such provisions generally let companies walk away from a contract when circumstances change so much that they can no longer abide by their original agreements. Since the coronavirus crisis began, we have seen use of this legal exit strategy across a variety of businesses including freight companies, major ports in India, platinum miners and the retail sector.
It may be the start of a trend. “It is likely that several other companies will attempt to invoke force majeure terms in their own contracts,” Eric Talley, a professor at Columbia Law School, told us.
To gain a little insight into the state of play on force majeure and inform your thinking, we asked legal leaders about the implications of the challenge — and whether vendors have triggered it in the wake of COVID-19. Below you will find more results of our polls as well as advice on issues to think through before triggering it at your organization.
Force Majeure Survey Results
While a lot of organizations aren’t sure yet how this will play out, early signs suggest that it could become a bigger issue. One indication of that: When we asked about the impact force majeure invocations would have on organizations, some 63% of legal leaders said the impact will be at least moderate (see Figure 2).
We also asked legal leaders whether other parties to their contracts were invoking force majeure. Some 15% said such a provision has been invoked (see Figure 3).
To Invoke, or Not to Invoke?
General counsel and their in-house teams must weigh a number of considerations when deciding whether to invoke force majeure, and the ultimate decision depends on each organization’s situation.Here are three issues to consider to help you make an informed decision; for your specific company, of course, a lawyer should advise.
1)Consult Outside Counsel
After in-house teams work with the business to determine which contracts need an in-depth review, and perform an initial assessment, it’s a good idea to have outside counsel perform a second layer of review of force majeure and other provisions. They also should check applicable state law to determine whether contract disruption related to COVID-19 classifies as a force majeure event.
In the event that there is ambiguity that could result in a dispute, the law firm can help you work it out with the other side.
2)Invoking Force Majeure Buys You Time
Of course, an upside to triggering a force majeure provision is that it buys you some time. In the context of the uncertainty triggered by COVID-19, sellers of goods and services should consider whether a pause is necessary for business continuity management.
In fact, legal leaders tell us that determining the impact of COVID-19 on business operations is one of their three crucial priorities now. (The other two are: updating crisis response plans and assessing workforce needs and challenges.)
3)Evaluate Business-Partner Relationships
Another critical thing to keep in mind when weighing the decision is the impact it will have on your relationship with a third party.
For instance, conversations with more than 70 procurement leaders on 26 March revealed that some assurance leaders are wary of how actions taken in response to COVID-19 could harm long-term relationships with suppliers. Very few want to use force majeure clauses in the near term, but openly wonder how to protect their own firms (by force majeure, extending terms, etc.) without harming supplier relationships in a way that was common during the 2008-2009 global recession.
Legal experts agree that it’s a crucial consideration. “A disadvantage of trying to trigger a force majeure is that you may be poisoning the water in a relationship you want to have with this supplier for years to come,” Talley of Columbia Law said. “It may be better to take it on the chops now in order to preserve that goodwill.”
If this is a concern, establish an open dialogue with your critical third parties now to avoid losing them later.
by and Caroline Conroy
We are continuing our research on this topic, so watch for more articles.
Pandemics aren’t your usual business disruption. Unfolding over months, disease outbreaks require extra steps, such as consulting epidemiologists, protecting employee health, preventing discrimination and assessing supplier response plans. General counsel can use these tips and checklists.
The new coronavirus strain (COVID-19) that emerged in China represents a classic business disruption and means turmoil for employees and work. Organizations must prepare for a potential pandemic because of likely resource shortages if one should strike.
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