COVID-19: Force Majeure
The Corona virus (covid-19) is currently spreading rapidly and has resulted in curfews, assembly restrictions, quarantines, and entry and exit bans, etc., across the globe.
As a result, Danish companies are experiencing problems with non-deliveries, projects put on hold and other circumstances that make it difficult to comply with contractual obligations.
Therefore, the question is whether the outbreak of covid-19 and the effects hereof can be characterized as force majeure, which, under certain circumstances, may exempt a party from liability.
In this memo, we shall go over the concept of force majeure and the conditions for applying force majeure in the light of covid-19. At the end of this memo, we have also prepared a mini guidance on force majeure.
The Concept of "Force Majeure"
Under Danish law, force majeure usually means an external, extraordinary event which is beyond a contracting party's control, and which the party concerned could neither foresee, prevent or overcome, and which hinders the fulfilment of the parties' agreement.
The concept generally includes so-called 'Acts of God' (e.g. natural disasters), war, strikes and lockouts, import bans and blockades, etc. The situations listed above are examples, and other situations may, under certain circumstances, constitute force majeure. Many agreements contain a force majeure provision, of which the content is very important when determining the existence of force majeure in the specific situation.
In general, it takes a great deal for a circumstance to be characterized as force majeure – but this too depends on the content of the specific agreement and clause.
Force Majeure and covid-19
It is a fundamental principle of Danish law that the parties to an agreement must comply with the agreement, which the parties have entered into. If a party fails to fulfil its obligations in accordance with the agreement, the non-breaching party is generally entitled to claim damages for breach of contract. This applies, for example, to delay or non-fulfilment of an agreement.
An exception to the general principle on fulfilment is force majeure, but the question is whether covid-19 and the effects hereof may be characterized as force majeure. The answer depends largely on the specific contractual relationship.
If the agreement contains a force majeure provision, the answer will depend on a specific assessment of the wording of such provision. The access to invoke force majeure can, depending on the specific circumstances, be more lenient or more rigorous. For example, it may be stated that force majeure includes epidemics and/or pandemics or injunctions from public authorities.
If, on the other hand, the agreement does not contain a force majeure clause, the choice of law should - as a starting point, be investigated and identified.
Under Danish law, force majeure is a general legal standard therefore - as general rule - force majeure may be claimed, even if the agreement in question does not contain a provision on force majeure. However, this does not apply to all jurisdictions.
If the agreement does not contain a separate provision on force majeure, there are, in principle, three conditions that must be fulfilled for force majeure to apply:
- Firstly, it is a condition that fulfilment of the agreement is impossible. As a contracting party, you therefore have an obligation to seek all possible and available ways of fulfilling the agreement. The fact that the outbreak of covid-19 has made it more difficult or burdensome to comply with the agreement, or that the agreement may even have become unprofitable for the company, does not necessarily mean that it is impossible to comply with the agreement.
- Secondly, it is a condition that the company, at the time of entering into the agreement, could not foresee that the outbreak of covid-19 and its consequences would prevent compliance with the agreement. The timing of the agreement will thus be essential when assessing whether the outbreak of covid-19 and the effects hereof could be considered foreseeable.
If the agreement has been signed before the WHO's official declaration of covid-19 as an international health crisis and prior to the increasingly rigorous measures to stop the spread of infection, the condition is more likely to have been met. - Thirdly, it is a condition that the party has observed its duty of notification. In principle, it is a condition that the party who wishes to invoke force majeure loyally informs the other party/parties to the contract thereof, since the exemption from liability under Danish law is generally conditional upon this. Failure to comply with the duty of notification may cancel the right to invoke force majeure.
In this connection, it is important to examine the specific agreement's formal requirements and deadlines for such notification.
In any circumstances, it is important to be aware that, in each individual case, a thorough assessment of whether covid-19 specifically constitutes force majeure should be made, as reliance on force majeure is associated with a position risk.
International Contracts
While force majeure is a general legal standard in agreements governed by Danish law, this may not always be the case if the agreement is subject to another jurisdiction.
This i.a. applies to jurisdictions such as Great Britain and the US, where there is no general force majeure doctrine, and where force majeure can only be relied upon if the contract in question expressly regulates force majeure.
Therefore, it is always important to identify the governing law of the contract and to be aware of its implications.
Hardship and MAC Clauses
Unforeseen and atypical circumstances may also be governed by other types of provisions than force majeure clauses. This applies, for example, to so-called hardship or MAC clauses, which especially are found in international contracts and M&A transactions.
While force majeure provisions are characterized by impossibility, hardship clauses are typically applied to cases where the fulfilment of the agreement remains possible but where fulfilment has become unusually burdensome as a result of unforeseen events beyond the parties' control. Most often, hardship clauses impose a duty on the parties to renegotiate or allow a third party (i.a. an arbitrator) to decide on a modification of the agreement.
MAC clauses are typically applicable in agreements on mergers and acquisition etc., where they provide the buyer the right to withdraw from the agreement if material adverse changes (MAC) occur in the target company, the target company’s business base or the market conditions in general, depending on the wording of specific clause.
Therefore, it is important also to consider whether such clauses could possibly be applied as an alternative to invoking force majeure.
Mini guidance
Covid-19 currently raises several questions on how to deal with failed deliveries, projects put on hold and other matters that make it difficult to comply with contractual obligations. As highlighted above, the assessment of force majeure will always be an individual assessment.
Generally, in light of covid-19, we recommend that the following is considered:
- Consider whether the company has contractual obligations, etc., which may be affected by the outbreak of covid-19 and the effects hereof, and if such issue may be remedied/handled through proactive efforts;
- Check whether the agreement contains a force majeure clause, hardship clause or a similar provision. If so, examine the wording and content of the specific provision;
- If the agreement does not contain a force majeure provision, it should, particularly be investigated which jurisdiction the contract is subject to and which force majeure doctrine that applies in that specific jurisdiction;
- Consider whether the outbreak of covid-19 makes it impossible for the party to fulfil the terms of the agreement or whether the agreement can be fulfilled in an alternative way. In this context, do also consider the terms of the agreement in relation to deadlines and if any possibility of postponement/extension of deadlines may apply;
- Examine when the agreement was entered into and whether the parties could, at the time, foresee that the outbreak of covid-19 could prevent fulfilment of the agreement, including whether the agreement was concluded before or after the outbreak of covid-19;
- Consider whether the non-breaching parties of the agreement have been duly notified of the (anticipated) delay and/or non-performance which could be due to force majeure.
We also recommend considering whether to adapt standard agreements to future requirements, including whether force majeure management should be changed to include e.g. epidemics, lockdowns and international health crises. However, such changes require careful consideration, and at Mazanti, our specialists are of course ready to assist you.
For further information, please contact:
Niels Walther-Rasmussen, Partner and Attorney-at-law
Telephone +45 3319 3722
Mobile +45 4010 0151
E-mail: nwr@mazanti.dk
Jens Ahrendt, Partner and Attorney-at-law
Telephone +45 3319 3756
Mobile +45 4036 0536
E-mail: ja@mazanti.dk
Mette-Marie Uggerhøj, Attorney-at-law
Telephone +45 3319 3703
Mobile +45 5219 8095
E-mail: mmu@mazanti.dk
This newsletter does not constitute and cannot replace legal advice. Mazanti-Andersen Korsø Jensen does not assume any responsibility for any damage or loss that, directly or indirectly, can be assigned to the use of the newsletters.