In the last year alone, fire, flood, plague and war have touched almost every continent, providing plenty of cause for parties to claim that contracts are unfulfillable for exceptional reasons. The COVID-19 pandemic made many contractual obligations out of reach, particularly for smaller businesses contending with increased competition for talent. These issues have led to an unprecedented rise in force majeure claims as businesses struggle to meet demand.
In brief, force majeure is the universally acknowledged shorthand across jurisdictions for a get-out clause that allows a contracting party to escape the consequences of an agreement which is no longer fulfillable for reasons out of its control and will.
When we speak of force majeure, we are really talking about pestilence, war, and bad luck, which may include natural disasters or events of global significance like COVID-19. Historically, many legal systems have tended to regard force majeure as the opposite of an easy way out; however, the pandemic and the war in Ukraine have raised the profile of this contract clause, which can often either become forgotten about or buried.
That said, when it comes to force majeure there are still unclear consequences for business relationships across borders with some events considered monumental to some, and minor to others. How do we determine then when it is appropriate to dissolve an agreement due to force majeure?
Before considering the legal aspects and implications for auditing, reporting practices, and businesses, it is worth considering some of the key drivers of late:
- The COVID-19 pandemic: China’s Council for the Promotion of International Trade, a near-state body, announced nearly $40 billion1 of legal exemption papers which effectively absolved a wide range of manufacturing and resource organisations from their contracts to (mainly overseas) clients, citing COVID-19 as the reason.
The ‘COVID effect’, though, has not been restricted to China, with Poland now challenging the EU on its contracts for Pfizer vaccines, claiming that the immigration of three million Ukrainians means its purchase commitments are void. The EU argues that, if anything, the influx of unvaccinated refugees actually constitutes a demand for further supplies, re-enforcing the Pfizer agreement2 in their view. Some see the dispute as mainly political in character, and part of Poland’s wider issues with the EU, including the primacy of European Union law over national law.
- The Ukraine war: The invasion of Ukraine by Russia has resulted in the exclusion of Russia from half the world´s population as a trading block, in what former Secretary of State, Henry Kissinger, defines as a ´totally new era´3. The approach to contract breach and who is responsible may be subjective, and even politically influenced in many jurisdictions.
Specifically, Russia has announced its intention of waging ´lawfare´ (war by legal means) on its, mainly Western, counterparties in a variety of key sectors. Such sectors range from aviation (where many Russian nationally-owned planes have been effectively seized abroad, as well as the obvious oligarch assets such as yachts and properties) through to the insurance sector in relation to other assets, such as finance and leasehold agreements.
The traffic is by no means one-way in terms of potential litigation. ExxonMobil is claiming force majeure in relation to oil asset write-offs, with many more players in that sector to follow, in relation to its $4bn Sakhalin- fields4. BP is to write off over $20bn in Russian assets with consequent breaches of contract claims potentially against it, or claims by itself in the long-term against the Russian counterparties. Russia has refused to recognise its invasion of Ukraine as more than a special military operation, so may argue in time no force majeure applies.
At the time of publication, one well-known global oil and gas production company has said that its sanctions will involve no breach of current contracts, intending to honour them all. It is unclear if in so doing the major risks breaching the requirements of other governments in which it operates.
Furthermore, if the European Council adopted Regulations (n. 330/2022 but see also n. 269/2014) and UK enforces edicts that Law and PR firms may simply not advise Russian businesses, we may see claims arising from their clients, and issues over notice period payments, for instance, where again the character of the contract breach may be disputed.
- Simple bad luck: For all good intentions and endless risk mitigation planning, there is a lot that can go wrong in normal business life that is simply out of the company’s control. Major incidents include -
- Storms, lightening and floods - (in June this year many lost their lives and millions were left stranded in India as storms washed away homes and businesses)
- Bush fires - (the current shortage of goods such as timber and a lack of labour has meant many businesses are struggling to rebuild after record-breaking bush fires of 2019 devasted many communities in Australia)
- Industrial accidents (there are many that occur each year and are unique in nature but can have a significant impact on a business being able to continue to operate as the relevant investigations take place)
From a corporate point of view, RSM´s approach to the above is defined essentially around the question of a duty to report liability, and efforts at mitigation in both board reports, and in annual accounts. The duty to mitigate the losses from any force majeure claim is a high focus of US, European and Commonwealth courts as recent court cases confirm.
With our strong focus on growth companies, RSM Legal advisers are particularly alert to the needs of businesses at the unexpected termination of contracts, which may well be in real estate, aviation leasing, distribution, supply chain, banking and insurance. The general principle is to take careful advice prior to declaring a force majeure event, as nowhere are courts especially sympathetic, and many contacts contain several break clauses but are silent on compensation and/or mitigation of its impact on either contracting party.
The essence of protection of the integrity of our clients’ businesses is prompt analysing with specialised international lawyers, reporting and acting a conservative treatment of liabilities potentially arising. Together with the liability of the decision makers, this places the demand on boards and advisers, particularly where key counterparties are parastatal and may simply refuse to acknowledge jurisdiction internationally.
All of that said, the complexities of the new era of geopolitics as described recently as ‘a new era´ must also be top of mind in terms of draft internal procedures in case a force majeure should happen. This may include setting up a Risk Committee with its own rule book, regulate force majeure in all contracts the (including so called “force majeure clauses”) or ensure that all force majeure clauses in contracts are enforceable”, seek the guidance of lawyers and business advisers with an international and multidisciplinary approach.
Author: Marco Carlizzi, Partner at RSM Italy and a member of RSM’s global legal group
1 Financial Times 28.02.20
2 Reuters et al 2.05.22
3 Henry Kissinger, Financial Times, 07.07.22
4 CNBC, April 28 2022