Force Majeure clauses & the life sciences sector during Covid-19
SummaryCovid-19 has created many unanticipated challenges, including difficulties in meeting contractual obligations. As some readers may have unfortunately found in recent weeks, life science companies have suffered from supply chain disruptions - making it difficult, or even impossible, to manufacture a particular drug.
- Author Company: Stevens & Bolton LLP
- Author Name: Catherine Penny, Partner and Elizabeth Butler
Covid-19 has created many unanticipated challenges, including difficulties in meeting contractual obligations. As some readers may have unfortunately found in recent weeks, life science companies have suffered from supply chain disruptions - making it difficult,or even impossible, to manufacture a particular drug.
As such, since the outbreak of Covid-19, Force Majeure has been somewhat of a buzzword in the legal industry. However, the extent to which life sciences companies can actually rely upon such clauses to relieve them of their contractual obligations in these unprecedented times deserves much more consideration.
What is “Force Majeure”?
Contrary to popular belief, while “Force Majeure” is a recognised concept in English law, it does not have a precise legal definition. “Force Majeure” clauses typically feature in commercial contracts, including R&D, manufacturing and supply chain contracts (contracts with which life science companies will be well acquainted). Their purpose is to protect the parties from a breach of contract claim if they are unable to perform their contractual obligations due to an event that is outside of the parties’ control.
Is Covid-19 a Force Majeure event?
Ultimately, whether the current Covid-19 outbreak and its effects amount to a Force Majeure under a contract will depend upon the specific wording of the clause. Although these clauses are often superficially quite similar, the scope and effect of a Force Majeure clause can be extremely varied depending upon its construction and drafting. Before placing any reliance on a Force Majeure clause, it is crucial that the parties consider the precise wording of their own contracts to establish how Force Majeure will work, if at all, in the relevant factual circumstances.
Typically, Force Majeure clauses list particular events such as “acts of God, extreme weather events, riot, war or invasion, any action taken by a government of public authority…”. It is slightly less common to see clauses that expressly contemplate a global health emergency, pandemic or epidemic as a Force Majeure event. For suppliers, a wide definition of Force Majeure will be most helpful, and they should consider a definition that lists particular events – for example, “pandemic, any action taken by a government or public authority…”.
Will a Force Majeure event trigger termination?
It is usually not enough for a Force Majeure event (for example, a pandemic) to simply exist; the Force Majeure event must actually have caused the contractual failure (for example, a failure to supply). Some clauses require the party affected to be “prevented” from performance. This is a high threshold and will require parties to demonstrate that performance is legally or physically impossible, not just more difficult or unprofitable. Using broader contractual wording such as “hinder” or “delay” performance will likely assist those seeking to rely on a Force Majeure clause, as such clauses are more likely to apply where performance has been made significantly more difficult to perform rather than impossible by the Force Majeure event.
Often, if a Force Majeure clause can be invoked by one or other of the parties, certain procedural requirements will need to be satisfied before the clause can be relied upon. For example, parties will typically be required to send prompt notice in writing to the other party, specifying (i) the relevant Force Majeure event and (ii) the effects it will have on them. Accordingly, it is vital that parties check the notice provisions within the contract and ensure that they comply with the relevant procedural requirements to avoid losing the benefit of the clause (this remains the case even where parties are in discussions to try to agree a commercial way forward without relying on Force Majeure).
Reliance on Force Majeure
During the pandemic, there has been talk of Force Majeure clauses being a “get out of jail free card” by contracting parties. Life sciences companies do, however, need to proceed with care when seeking to rely upon such clauses.
Often, Force Majeure clauses are framed as being mutually beneficial to both the supplier and purchaser under a supply contract. In practice however, purchasers may find it hard to rely on “conventional” Force Majeure clauses. This is because it may be difficult for a purchaser of unwanted goods or services to be able to establish that its performance of the contract has been prevented, hindered or delayed by the Force Majeure circumstances where the position is that the purchaser simply does not need the supplies anymore.
In light of the above, parties should exercise caution before declaring the recent coronavirus outbreak a Force Majeure event and ceasing performance of their obligations. This is particularly important as incorrectly declaring a Force Majeure event may result in a contracting party repudiating the contract, which may provide the other party with a right to damages. It is a highly complex area and parties should seek legal advice promptly.
That said, if used correctly, Force Majeure clauses can be a real lifeline for life sciences companies who have been greatly affected by the current pandemic. By invoking a Force Majeure clause, parties may be able temporarily to suspend their contractual obligations for the duration of the Force Majeure event. In some cases, they may even be able to legitimately avoid their contractual obligations altogether.
Although they can be very useful when correctly invoked, there are risks associated with incorrectly seeking to rely upon a Force Majeure clause, which could ultimately result in a damages award being made against that party. To mitigate these risks, parties may choose to explore whether there is a way forward that will remove the need to rely on a Force Majeure clause – for example, by varying the quantity of products the supplier is obliged to supply. When doing so, parties should remember that any variation to the contract should comply with the formalities set out in the original contract.
Although they have been regularly discussed during the pandemic, Force Majeure clauses can be either a blessing or a curse – they must be approached with due care and attention to ensure parties fully understand the complex nuances surrounding them.