Drafting contracts requires anticipating the future. Your legal team need to be thinking about the events which can cost you. If you are not properly protected, Coronavirus has the potential to cause you a serious financial headache. We experienced this recently when our Commercial Litigation team supported a valued client in navigating the Coronavirus affecting all of their Chinese manufacturers. Chris Potts and Cherrene Balasanthiran stepped in to interpret what turned out to be a well drafted clause that offered real protection in these circumstances.
The recent Coronavirus has meant that suppliers reliant on factories in affected areas to supply goods could find themselves, through no fault of their own, in breach of contract. In these circumstances you need a robustly worded Force Majeure clause to protect you from a claim.
English common law does not have a clearly defined concept of Force Majeure. The best protection is including a properly drafted Force Majeure clause in your contract. This can act to excuse a party from performing its obligations, or encourage the parties to look for ways around its effects.
A good Force Majeure clause needs to answer three questions
- Firstly, what events should it include? If you are a supplier relying on overseas factories you will want a broadly defined Force Majeure clause but you are likely to be met with resistance on this from your counterparty. One option is to define Force Majeure broadly as an event beyond the control of the parties but also to provide specific examples. We have found that the effects of the Coronavirus have been captured by including an example of a Force Majeure event as factory closure due to government order. If the response to Coronavirus is anything to go by, closure of public spaces and self-isolation appears to be the standard government response, therefore such a clause should be future proof.
- Secondly, a Force Majeure clause needs to state the parties’ obligations if there is a Force Majeure event. Do the parties simply walk away or should they try and work together to find a solution. It is likely that both parties will be invested in the successful completion of the contract. The supplier is likely to have incurred significant outlay trying to deliver the goods and the buyer is likely to require the goods for onward sale. If this is the case you need a clause which obliges the parties to sit down and work out a solution. This probably means the supplier looking for alternative factories and the buyer extending delivery dates to meet the new arrangements. Only a properly drafted clause taking into account your particular circumstances will make this happen. If not, as a supplier you could be looking at loss of your outlay to date, and as a buyer, a loss of profit.
- Finally, the clause needs to consider the worst case scenario that no alternative solution can be found. In this instance the clause needs to ensure that the losses you face as a supplier or a buyer are limited.
Our commercial team led by Penny Rinta-Suksi has considerable experience in drafting robust contractual provisions to protect businesses. This proved helpful in protecting our client from the catastrophic Coronavirus situation wiping out its supply chain.
If you require any legal advice concerning a Force Majeure clause or any contract drafting, please contact us.
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