corona virus and force majeure in commercial contracts and licenses

The Corona virus (COVID-19) is undoubtedly a circumstance that suppliers and customers have not been able to influence. But does Corona justify invoking ‘force majeure’?

A few examples

There are, of course, many different situations imaginable in which one of the contracting partners gets into trouble with the fulfilment of its contractual obligations.

For example, a machine manufacturer may have insufficient staff to meet the agreed delivery date or a grower cannot harvest fruit or cut flowers on time due to a shortage of workers. A customer may also find himself in a situation where he is unable to meet his obligations. For example, a customer who has to purchase a certain volume, may noy be able to meet its obligations due to decreased demand.

Force majeure

When a successful appeal is made to force majeure, it generally results in that:

  • no performance can be claimed; and
  • there is no liability for non-performance.

Force majeure is defined by law as a shortcoming due to a circumstance that is not attributable to the fault of the person who has to comply, and is not for his account by virtue of law, legal act or generally accepted practice. When assessing an appeal to force majeure, all circumstances of the case are relevant, as well as any force majeure clause in the agreement.

The question of whether (preventing the spread of) the Corona virus justifies invoking force majeure cannot be answered in general terms.

In a Dutch court case concerning bird flu, there was a legal order to cease operations. This was declared by the court in 2005 to constitute force majeure (in this case it was considered to be a case of force majeure for creditors not regulated by law). In the case of the Corona virus in the Netherlands, such a general lock-down order is not effective (yet) but the increasingly restrictive measures are actually having (almost) the same effect.

Force majeure clauses

The parties may deviate from the law and make their own arrangements regarding situations that allow the invocation of force majeure. Force majeure situations can be broadened in relation to the law, but can also be limited. For example, an extension will take place when force majeure of a supplier, according to the contract, also constitutes force majeure for the supplier. Normally such a situation (according to general perceptions) falls under the normal business risk and the supplier can therefore not invoke force majeure.

If the failure is caused by the outbreak of a disruptive epidemic or pandemic, it seems defensible to us that the failure is not for the supplier’s account if the supplier has no other options than (temporary) failure to perform.

It is therefore in any case important to check whether your contract contains a provision for situations of force majeure, what this means and what the consequences are.

A force majeure clause often stipulates that the other party may terminate the contract (without being liable to pay damages) if the situation has lasted longer than a certain period of time. Or that the other party may suspend its payment obligations. Perhaps your contractual partner is willing to adjust this provision in these extreme circumstances or to find a middle of the road solution with you, taking into account the interests of both parties. Your contracting partner may be in the same situation with regard to the fulfilment of its own obligations.

Dissolution of the contract?

In principle, force majeure does not play a role in the right to dissolve an agreement.

According to the law, any failure in the performance of the contract justifies dissolution of the contract, if the non-performance is of sufficient weight. It is therefore irrelevant for dissolution whether the failure can be attributed to the party invoking force majeure.

Deviating arrangements may have been made for this as well, such as the contractual provision that in the event of ‘any attributable failure’ the agreement can be dissolved. In that case, the invocation of force majeure will again come into play.

Further points of attention

Your agreement may include reporting obligations and contractual penalty arrangements. For this reason too, it is important to assess these in good time, or have them assessed, and to enter into discussions with your contract partner. This way you can jointly examine how the negative consequences of the current situation can be contained as much as possible while taking the interests of both parties into account.

Incidentally, the regulation of force majeure varies considerably from country to country, especially in Great Britain and other Anglo-Saxon countries. It is therefore relevant to determine the applicable law. Particularly where this has not been expressly agreed, it is often not easy to determine the applicable law.

Other bases?

The current situation may give rise to unforeseen circumstances within the meaning of the law. In other words, future circumstances that could not (or could not have) been foreseen at the time the agreement was concluded and that are so drastic that the other party may not require unaltered maintenance according to standards of reasonableness and fairness. Here too, it will depend on the circumstances of the case whether the consequences of or the measures taken in connection with the Corona virus will result in such unforeseen circumstances.

Furthermore, Dutch law stipulates that provisions whose application is unacceptable according to standards of reasonableness and fairness shall not be applied. A court may therefore rule that, for example, a contractual penalty or termination clause remains inapplicable. This assessment, too, always takes place in the light of all circumstances of the case and is therefore focused on the specific situation. The measures and circumstances will also play a role in this and weighing of interests will also take place here.

Concrete actions

  • Check your contracts
  • Communicate with your contract partners
  • If necessary, make good further agreements, including on whether (the consequences of) the Corona virus constitute force majeure