A south Manchester law firm has received a number of enquiries from firms concerned about suppliers and customers using the spread of Covid-19 as a reason to invoke force majeure.
SAS Daniels, which has offices in Stockport, Macclesfield, Chester and Congleton, said the force majeure clause in a contract means, in certain circumstances, a supplier or customer can suspend its obligations.
Paul Tyrer, a partner in the firm's corporate team, said the firm has “noticed an uptick” in the number of enquiries related to the force majeure clause over the past week, in particular over the last couple of days.
He also said he expects it to become “more of an issue” in the next few weeks as “people try to suspend or postpone their operations”.
“We’re seeing it today with football matches and things like that, with events being cancelled, so I suspect more people are likely to say ‘hang on we’re cancelling this event, how do we get out of not having to pay for it?’ and this is the sort of clause you’ll be looking for in your contract,” he said.
Mr Tyrer explained a force majeure clause is “often buried away” in the standard terms and conditions.
“We would normally include a force majeure clause in a commercial contract and it states if either party is unable to perform their obligations, if it’s beyond their reasonable control, they can bring that in to play and that means they can suspend their obligations in relation to that contract.
“On a simple level, that could be their obligation to pay, that could be their obligation to supply the widgets they’re manufacturing and it can be something that is quite relevant, particularly if large numbers of staff are unable to turn up at work.”
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He said: “People are now starting to think ‘oh yeah I’ve got one of those clauses, what if my suppliers stop paying me, can I rely on this clause?’ and so they’re asking us to have a quick look and check what the position is.
“People are particularly worried in the context of cashflow.
“[They’re] asking ‘have we got this provision or can we withhold payment legitimately?’”
He said that, “being cynical about it”, there is potentially a category where “customers and suppliers that might use this as an opportunity to wriggle out of an unprofitable or an uncommercial contract”.
“They might be saying ‘we’ve stomached this contract because we knew that we were bound by the contractual terms, but you know what now...got this excuse we can rely on and it’s an opportunity for us to excuse ourselves of our obligations for this contract because we can invoke the force majeure clause legitimately’.”
Mr Tyrer says the clause is rarely invoked because the “scenarios are really quite severe”.
“There’s two types of the clause,” he said.
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“One that covers a fairly general wording...with events beyond their reasonable control, but most clauses go on to specify some examples, things like earthquakes, hurricane, flood, fire and terrorism, but quite often it says pandemic and epidemic.”
Mr Tyrer said clients are coming to them now as they are “quite reactive”.
“They don’t really plan too far in advance and they particularly don’t want to engage lawyers until there’s a need.
“Firms are beginning to look at things with a renewed focus and starting to make decisions and starting to look at how bad could this get and that’s where we are starting to see it.”
Advice to businesses
Mr Tyrer said the firm is telling clients to first “identify who your key suppliers and customers are”.
He said: “Pick your top five or your top 10 and look and see first if you have got written contracts because actually a lot of the time they haven’t [and] if they haven’t got a written contract, does it have one of these clauses in there.
“Identify what it does say, if it is fairly general wording or if it includes specifically pandemic and epidemic, if it does, ask whether it gives rise to the right to suspend your obligations and if so for how long, because it varies enormously.”
He also says businesses should also look at their own circumstances and resources and be “proactive” in engaging with customers and suppliers.
“If you have identified you might have a supply chain issue that you might be unable to fulfil your contracts or you might have a large number of people taken out by the virus, consider whether you need to invoke that clause and perhaps start engaging with your customers and your suppliers early on rather than flag up when it’s too late.”
He also suggests that businesses should look at their debtors.
“If there’s people that are a bit slow to pay, chase them down, get your books in order, try to stop people from running up big debts, keep your cashflow tidy.
“It’s unlikely to be covered by insurance as well, it’s not likely to be covered by business interruption...so you have to start planning and working out who’s likely to rely on this clause.”
He added: “It’s difficult because we don’t know how bad or quickly this is going to develop but really try and look ahead, try and mitigate the worst possible scenarios as much as you can.”