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Negotiating the crisis: force majeure termination rights in the supply chain


United Kingdom

There has rightly been a lot of commentary regarding force majeure clauses in light of the spread of covid-19 and associated lockdowns, including some excellent pragmatic and commercial advice from our very own Hugo Lidbetter. I expect that I am jumping the gun, but I am curious what the results of this unprecedented period will be on tech and outsourcing contracts. Will there be a rash of contracts being terminated on the basis of an express right to terminate for a persistent force majeure event?
If our clients are anything to go by, the initial focus for reviewing long term contractual relationships will be to look at what work is absolutely essential, what work can be carried out with some adjustments (such as working from home) and lastly the consequences of stopping all other work.
The consequences of work stoppages will naturally include financial matters, such as making sure the supplier has enough cash to continue its financial commitments arising under the contract and trying to mitigate its costs as far as possible, perhaps by furloughing staff and accessing government cash. However, this will be a careful balancing act, as businesses will also want to make sure that they can keep their teams together, so that the service is ready to resume in the best possible state when the lockdown conditions are alleviated. Many businesses will also want to do the right thing by their employees, in these difficult times. Sensible commercial parties will already be negotiating ways through these challenges together.
Looking further ahead, force majeure provisions often permit one or either party to terminate the agreement if the force majeure event prevents performance for a significant period (often 30, 60 or 90 days). What I am now beginning to wonder is, when this huge effort to triage and patch over contracts eventually abates, will there be opportunistic businesses out there seeking to terminate a contract on the basis of a force majeure provision, either because it was unprofitable for the supplier before the lockdown measures or had become too expensive for the customer? I suspect there will be some but not many who take this path.
However, I firmly expect that force majeure termination rights will be used as leverage to renegotiate terms when normal business practice resumes. Whilst government loans and wage cover (at least in those countries providing it such as the UK) may keep businesses going in the short term, supply chain partners will either need to recoup their sunk costs from the lockdown period or will inevitably face insolvency. Continuing to perform under existing agreements is unlikely to be sufficient to recoup sunk costs, and as a result there will no doubt be a second wave of contract renegotiations to distribute the financial consequences between the different tiers of each supply chain.
The outcomes for each contract from this second wave of renegotiations will depend on the respective bargaining power of the contractual parties, and will no doubt typically result in the little fish being forced to swallow a greater proportion of the financial impact. Force majeure clauses, particularly associated termination rights, will remain under scrutiny for a long time yet.

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