A sign of things to come? Force majeure and material adverse change in the era of Covid-19

Court in France

By Deborah Ruff, Head of US & International Arbitration, Julia Kalinina Belcher, Counsel, and Charles H Golsong, Counsel, Pillsbury Winthrop Shaw Pittman LLP – On 22 May 2020, the Tribunal de Commerce of Paris ordered the insurance giant AXA France IARD SA to pay Maison Rostang, a Michelin-starred Parisian restaurant, EUR 45,000 for two months’ worth of revenue lost due to the Covid-19 pandemic. A simple case of Covid-19 losses? Not quite.

This was the first indication of a critical issue that courts worldwide will have to grapple with: whether the Covid-19 pandemic qualifies as an ‘Act of God’, or force majeure, event. Private equity firms in the UK should take note – although a French judgment, it signals an important milestone in the world of force majeure clauses and shines light on a similarly critical part of the M&A process: material adverse change (MAC) clauses. 

The verdict

In addition to ordering AXA to pay Maison Rostang for losses and legal fees, the Paris Court also held that the argument put forward by AXA as to the uninsurable nature of the pandemic risk, while an “interesting debate”, did not concern the court. 

It further found that, irrespective of the restaurant’s decision not to offer takeaway sales, the prohibition on allowing diners into the restaurant constituted a “total or partial administrative closure of the restaurant” and AXA’s arguments to the contrary were considered “not serious”. 

Does the French court’s decision set a precedent?

AXA certainly thinks so, judging by its decision to compensate a further 200 French businesses that had insurance containing similar business interruption guarantee clauses to Maison Rostang’s. With numerous private equity backed businesses in the UK facing insurance claims of their own, this is heartening news.

Since the outbreak of the pandemic, many companies have invoked force majeure provisions, which are found in most commercial contracts. Invoking this provision usually temporarily (ie for the duration of the force majeure event) relieves a party from having to perform its obligations under the contract, which would otherwise be a breach of the contract, whilst keeping the contract in force. The party seeking to invoke force majeure must show the link between the event and its inability to perform.

However, English law is very clear that a party cannot claim force majeure unless the contract in question contains such a clause and, even if it does, must show that it can bring itself within the clause on its particular wording. 

In addition, the force majeure event must be beyond the reasonable control of the affected party - for example, a private equity backed company - and prevent or hinder it from performing its obligations under the contract. A disruption that merely affects the profitability of a contract will not be sufficient for a force majeure claim unless the contract expressly provides for such a situation.

The actions taken by the affected party matter too – a business must have used reasonable endeavours to avoid or mitigate the event or its consequences and show that there are no alternate means for it to perform the contract. 

However, what constitutes ‘reasonable steps’ is subjective, and the widespread and continued effects of Covid-19 mean that there may be fewer mitigation measures available than in other instances where force majeure might be invoked. 

Nevertheless, we consider it likely that a party would still need to demonstrate that it took all reasonable steps to perform the contract eg by persuading workers to come in or switching to alternative manufacturing facilities. 

Is a wave of force majeure claims on the horizon? 

We are yet to see how the English courts will view force majeure in the ‘corona era’: disputes take time to reach judgment, even more so given the current climate. 

As ever in such cases, much will turn on the facts of each dispute, and the wording of each particular clause. While instructive, judgments of civil law jurisdictions such as France are of no persuasive effect in English litigation. It is, therefore, very much a case of ‘wait and see’, particularly as to how common law jurisdictions (such as Australia, Singapore, Hong Kong and Canada), judgments of which the English courts can take into consideration, will rule on such cases.

As with force majeure, whether the pandemic will trigger MAC clauses also remains to be seen – it will ultimately depend on the facts of each case, as well as the wording of each MAC clause. However, the leading case on the interpretation of MAC clauses suggests that, in order for a MAC clause to be triggered, the material adverse change “must not merely be temporary”. 

It is anybody’s guess as to how long the World Health Organisation will consider Covid-19 to be a pandemic, and nobody can say how long its effects will be felt.

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