Can Covid-19 trigger force majeure clauses in offshore and industry contracts?
The Covid-19 virus is affecting a large number of sectors and it is clear that the pandemic will have a significant impact on the industrials and offshore sectors.
The current situation gives rise to a number of new challenges. Challenges that neither suppliers nor customers could have accounted for when their existing contracts were entered into. Simultaneously, new issues arise. How should the ongoing situation be dealt with and various other issues that needs to be considered when new contracts are entered into or existing contracts renegotiated.
A large number of suppliers and customers have supply contracts or contracts for sub-supply, to and from countries and regions severely affected by the Covid-19 virus. Some may experience restrictions imposed by the official authorities. A large number of companies also experience employment related issues, as employees are quarantined, fall ill or are suspected to be contaminated by the virus.
Both suppliers and customers question what rights they have towards their counterparties in the existing contracts, considering the current situation and how potential claims should be handled. Or what rights they may have due to lack of performance of their own obligations.
The key issue to consider will be how the force majeure risk is allocated in the contract.
The scope and requirements of force majeure (and similar legal defenses) vary from contract to contract. A careful legal analysis of your specific situation is therefore indispensable. The scope and requirement will depend on the exact nature of the supply problems, and the specific terms of your contract. If you find yourself facing a force majeure defense by your supplier and, as a result, cannot supply your own customers, you need to assess the risk allocation under each contract separately, in order to develop the best risk management strategy.
Most contracts on the Norwegian market covers force majeure clauses, with the purpose of exempting each party from its performance obligations due to extraordinary events outside of the parties’ control. Force majeure is also generally accepted as an integrated part of Norwegian contract law, and may have an impact on contracts not dealing specifically with the issue.
The clauses can vary from contract to contract, and must be analysed to understand if, and to what extent, hindrances related to Covid-19 will be accepted as a force majeure situation. Some contracts may have an exhaustive listing of force majeure events, whilst others typically operate with an indication of event and not in the form of an exhaustive listing.
The main rule is that the force majeure clause regulates the schedule risk, while each party has to cover its own cost related to the event. However, this is only a starting point. Some commonly used contracts have a slightly different approach.
In NTK 15 and NF 15, which are standard contracts widely in use within the Norwegian offshore industry, and recently also in the railroad sector, the supplier will have a limited entitlement to compensation if the client declares force majeure. A similar model is found in NIB 16, the standard contract for subsupplies, where the main contract is based on NTK/NF 15. This model is conditional upon an identical regulation of force majeure, as in the main contract.
The same type of approach is found in NL 17. NL 17 is the contract model used within the sector for the supply of machinery, mechanical and electronic equipment, and related products. Even in NL 17 the entitlement to compensation is conditional upon the customer declaring force majeure.
In addition, the offshore contracts contain some tailor-made clauses for situations where the force majeure events impact subcontracts for marine operations, including heavy lifting, hook-up and installation. This is based on the approach that these are very costly operations and should, in the (unlikely) event, be the client’s risk.
As indicated above, the main purpose of the clauses is to allocate the schedule risk appropriately. One important premise is that there is a specific hindrance, which cannot be avoided. In other words, a general concern regarding the progress and ability to supply, or that performance has become more costly or challenging, do not count as force majeure. The parties should, as far as possible, keep a focus on the evidentiary position when force majeure is declared.
In regards to new or renegotiated contract obligations, it should be noted that a force majeure event is conditional upon the event being an unforeseen circumstance at the time of entering into the agreement. New contracts may therefore be assessed differently than previous ones. The same principles will apply to variations and other amendments. As the current force majeure situation may last for a duration of time, note that changes or amendments in order to deal with a current situation may necessitate changes elsewhere in the contract to avoid revisiting the issue within a short period of time.
To have entitlement to schedule adjustment, force majeure needs to be declared by the affected party. Failure to declare force majeure could potentially expose the party in default to pay compensation to the other party for cost that could have been avoided if the notification has been given in due time. Further processing and agreement on the specific entitlements will thereafter be handled in accordance with the contract variation mechanism, if these exist. It is also currently recommended to make reservations as to the specific schedule impacts, due to the fact the duration of the Covid-19 impacts are still uncertain.
- Identify the exact nature of the supply problems and document them
- Analyze the risk allocation within your contract
- Provide the necessary information – but beware of the pitfalls
- Always make reasonable efforts to overcome the supply problems
- Beware of how you allocate existing supplies (if you are able to maintain some activity)
- Manage contract disputes proactively to resolve them efficiently