The on-going spread of Covid-19, the so-called coronavirus, is affecting a growing number of people and businesses, and society at large. Uncertainties surrounding the proliferation of the virus and the measures being taken by various governments to contain it are creating shockwaves through trade and industry generally, as well as for individual businesses. One challenge in particular is that some contractual parties are finding it increasingly difficult, sometimes even impossible, to hold up their end of the bargain.
Force majeure and unforeseen circumstances
Under Swedish law, agreements are generally enforceable in accordance with their terms. However, it is not uncommon for commercial contracts to be subject to express (or implied) exceptions or limitations, which might regulate certain unforeseen events. A so-called force majeure clause usually provides that, in the event of certain extraordinary circumstances, one party or the other (or both) may be released (either permanently or temporarily) from full performance of the exact terms of the agreement. Such circumstances must normally be outside of the control of the party relying upon the clause and not have been reasonably foreseeable when entering into the contract. Typical circumstances include war, revolution, natural disasters and similar phenomena. Industrial action, such as strikes and lock-outs, and trade restrictions instituted by nation states are also commonly included. To constitute force majeure, the circumstances (and/or their consequences for contractual performance) must generally be unavoidable, notwithstanding all reasonable efforts taken by the relevant party.
The exact scope of a force majeure clause varies considerably between agreements. Each must be considered on its own terms, against the background of what the parties intended on signing. It should also be noted that where one of the parties is a governmental body, such as a municipality, which is obligated by law to take necessary actions in a crisis situation, such agreements often include particular limitations on what circumstances can constitute force majeure.
Force majeure clauses often apply only for a restricted period of time, normally only so long as the relevant circumstance pertains. This amounts to a right to postpone contractual performance. In such case, it’s not uncommon that the other party has a right to terminate the agreement if the force majeure event endures. The party who cannot perform may also be entitled to terminate in some cases.
It should be apparent that both the relevant circumstances that trigger a force majeure clause and the implications thereof can vary considerably between contracts. Moreover, notice provisions concerning force majeure claims are often quite strict, and rights can be lost if not exercised exactly in accordance with the agreement.
Can the coronavirus outbreak constitute force majeure?
The question on many of our clients’ minds right now is whether the ongoing spread of the coronavirus and the effects on society at large (or their agreements in particular) can constitute force majeure. As mentioned, this depends on the circumstances in each individual contractual relationship and there is unfortunately no easy or straightforward answer.
Some circumstances commonly included in a force majeure clause may increase the likelihood of it being triggered. If a clause refers to “epidemics,” “quarantines” or other similar circumstances, this suggests that parties intended that the current situation regarding the coronavirus should constitute a force majeure for the purposes of the agreement. Whether the clause is actually triggered will depend also on how the coronavirus actually affects a party’s ability to perform in accordance with the contract. Typically, the force majeure circumstance must be the sole or predominant obstacle to performance.
Some indirect effects of the coronavirus, such as making contractual performance more expensive and more difficult, might not necessarily constitute force majeure. In addition, voluntary measures instituted by a party, such as cancelling or modifying performance in some specific way for the protection of its employees, will likely not give grounds to invoke a force majeure clause. On the other hand, a government decision that makes contractual performance impossible might constitute force majeure, assuming it was unforeseeable at the point of entry into the agreement.
If there is no force majeure clause in an agreement, or if such clause is deemed not to be applicable in a given situation, a party at risk of breach may be able to rely on Swedish statute which may imply certain terms. For example, the Swedish Sale of Goods Act (e.g. §27, 1990:931) may limit sellers’ liability for delays in delivery that are due to unforeseen events outside of their control (which provision may also apply by analogy to contracts involving delivery of services).
Additionally, it is a general principle of the Swedish Contracts Act (§36, 1915:218) that any party may apply to court for a contractual provision that proves to be unjust in the circumstances to be moderated or adjusted. The “unjustness” relied upon may include a circumstance arising after the entry into the agreement that prevents due performance.
Moreover, it is always possible for the parties to an agreement to renegotiate its terms and conditions to modify the agreement as they see fit. This option may be especially apt to settle issues in long-term commercial relationships.
Obligations when force majeure events arise
In the case of force majeure, both the innocent party and the party potentially in breach are generally obligated to take measures to mitigate losses, for example by purchasing goods through another distributor or adapting to the situation in some other way. If the coronavirus outbreak causes difficulties for a party to perform an agreement it should at first explore what, if anything, the parties can do together, or separately, to minimize losses, both individually and collectively.
You should consult your lawyers as soon as possible. Some agreements stipulate formal notification requirements that must be satisfied in order to rely upon a force majeure clause. The other party should also be mindful to take legal advice as necessary, and clearly state any objections to such claims.
The parties should also check their respective insurance policies to determine whether any compensation for contingent loss might be available in this situation and whether any notification requirements apply. It is also wise to archive all potential evidence for or against the notification of circumstances that constitute force majeure, for example correspondence with distributors, government agencies, customers and relevant news articles etc. in the event of a future dispute. This includes documenting all evidence of correspondence with the other party and any measures taken in mitigation.
Where a party cannot perform all of its obligations under an agreement, it should do so to the extent possible, despite the circumstances that constitute force majeure (although a buyer/payer should think carefully before making any payment for goods/services at risk). The progress of events should be followed closely enough that the fulfillment of obligations under the agreement can resume as soon as possible; consult the agreement to see whether there are any formal requirements necessary for this to happen. Also observe any relevant timeframe within which the other party may terminate the agreement due to continued reliance on the force majeure clause.
Legal consequences of force majeure/unforeseen circumstances
Finally, it is important to remember that contractual obligations do not generally cease unilaterally due to force majeure. If the supplier cannot deliver (or would be justified in not doing so), the customer’s payment obligation will also fall away. Force majeure must be seen, rather, as a form of cancellation or termination right, without liability for damages for the party who is able to rely upon it.
We would always advise our clients to take specific advice on any extraordinary circumstances that might prevent contractual performance, and now particularly those relating to the coronavirus, before seeking to rely upon a force majeure clause, or otherwise seeking to avoid or vary obligations to perform under general legal principles. The same applies for customers whose suppliers seek to avoid their obligations in this way.
The current situation
We stand in the midst a social crisis, and it is natural to worry, both for your own well-being as well as that of others, and for the economy and society at large.
At Törngren Magnell, we feel a great sense of responsibility for the services and the legal advice we provide, especially in times of crisis. We remain available through all of our regular channels of communication and our office is open for business, even as our associates and counsel are working remotely (in accordance with the recommendations of the Swedish Public Health Agency, in order to help minimize the spread of the coronavirus).
If you are in the process of negotiating agreements containing force majeure-clauses, you should pay particular attention to the fact that the parties’ knowledge of the current situation is likely to affect the applicability of the clause. This is especially important when using boilerplate-clauses. For this reason, we would recommend developing a customized clause stipulating specific risk allocation in relation to coronavirus implications.
Törngren Magnell can respond quickly and sensitively to provide legal advice on the implications and enforceability of any existing commercial agreements in the face of the unprecedented legal and commercial situation in Sweden. We can help you renegotiate current agreements or draft new ones and help manage disputes as they may arise.
Kristoffer Stråth, Managing Partner
For the avoidance of doubt, please note that this overview concerns contracts governed under Swedish law. Any views and opinions provided are of a general nature and cannot be taken as legal advice in relation to any particular circumstances. Relevant contractual clauses, factual circumstances and governing judicial principles are given by way of example only, and explicit grounds would be required for them to be applicable in each case.Back to news