Using Force Majeure Clauses In Relation To Inability To Pay: A Forlorn Hope?

• Published date: 27 November 2020
• Subject Matter: Corporate/Commercial Law, Coronavirus (COVID-19), Corporate and Company Law, Contracts and Commercial Law, Litigation, Contracts and Force Majeure
• Law Firm: Quadrant Chambers
• Author: Mr Simon Rainey QC

Synopsis

The impact of coronavirus on businesses has been dramatic. Markets have vanished overnight, supply chains have been disrupted or suspended, and many financing arrangements entered into in a different, pre-COVID- 19, world have become unmanageable. Worse still, many of the fixed payment obligations of the business under other long term contracts, such as equipment leases or agency or franchise arrangements remain in place and require to be met, even though turnover may have collapsed and payment has either become very difficult or impossible rendering the non-paying party vulnerable to being served with a statutory demand and being wound up on a cash flow insolvency basis.

Faced with an inability to perform, many parties turn to their contracts and look for a way out, clutching at the words 'Force Majeure'. For the reasons explained below, that is likely to be an exercise in clutching at straws.

Force majeure and payment obligations

Almost all modern commercial contracts contain a force majeure provision in one form or another which work effectively when a party is prevented by circumstances outside its control from performing a contractual obligation. But these types of provision present special difficulties where the obligation in question is an obligation to pay money due under a contract.

This is because, most commonly, force majeure clauses have express provisions excluding their operation in the case of obligations to make payment of sums due under the contract. This can be total, e.g. 'all events beyond the control of the party ... which prevents or interrupts the performance of the obligations or any of them under this Agreement (except any obligation to make any payment hereunder)' or 'Force Majeure shall not include lack of available funds, financial insolvency or financial distress of the Party seeking to claim Force Majeure'. It can also be partial, 'Notwithstanding the foregoing, the following events shall not constitute Force Majeure [...] inability of a Party to pay any amounts when due where such inability is solely caused by lack of funds' or 'events caused by fluctuating economic conditions in local, national or global markets'.

Further, financing and loan agreements where the reciprocal obligations are purely financial rather than commercial agreements, where payment is the consideration for goods or services, typically do not contain any force majeure clause (as evidenced by their absence from the Loan Market Association precedents). While there may be more sophisticated provisions which can address the economic effect and increased costs of performance and alternative means of performance, such as 'material adverse change' (MAC) or 'material adverse effect' (MAE) clauses which allow termination of the contract, or suspension or adjustment of contract obligations, where external events impact upon the value of performance, even these commonly do not extend to pure market or...