Growing Concern: The Effects of Force Majeure in Commercial Contracts

Introducing a new downloadable study on the effects of force majeure in commercial contracts by Kira Systems

The current coronavirus (COVID-19) pandemic has inflicted major damage on global supply chains and commodities markets.

In fact, as of March 11, 2020, 75% of companies reported experiencing supply chain disruptions in connection with the pandemic, with more than 60% of businesses subjected to delays in their orders from China as businesses struggle with fulfilling their contractual obligations. The impact this has had on supply chains is so significant that companies are beginning to warn their investors of the risks. 

The China Council for the Promotion of International Trade has now issued more than 5,600 force majeure certificates that cover a total contract value of 503.5 billion Chinese yuan (US$72.47 billion) – nearly five times the contract value covered in early February.

The certificates, which acknowledge the pandemic as a force majeure event, seek to absolve the recipient businesses from liability for non-performance or partial performance under relevant contracts. With the pandemic’s spread now reaching worldwide, parts shortages that have not yet been resolved, and new travel restrictions being implemented daily, the impact has expanded well beyond China.

Download the study.

The importance of force majeure

Force majeure provisions in contracts establish the circumstances under which a party’s obligations under the contract may be suspended, or otherwise altered, due to events deemed to be out of the affected party’s control. Examples include natural disasters, acts of terrorism or war, acts of God, labor disruptions, or even pandemics. Force majeure provisions are important because the occurrence of a force majeure event can result in any number of effects on the contract, such as: 

  • Exemption from performing its contractual obligations (important to the non-affected party)
  • Discussions and/or modifications to the contract
  • Potential notification requirements (important to the affected party)
  • Potential termination of the contract altogether (important to all parties)

For our latest study, “The Effects of Force Majeure in Contracts,” we used Kira to review all of the commercial contracts filed on EDGAR between February 2018 and February 2020 that involved at least one Chinese entity and contained force majeure provisions to identify, categorize, and analyze those consequences.

This study includes the prevalence of force majeure clauses within those contracts, and other clauses such as:

  • Suspension of performance;
  • The need for consultation/discussion, and;
  • Termination of contracts altogether.

Just some of our findings

  • Out of the 130 contracts we reviewed, 72% of them included force majeure provisions; 
  • Over half of the contracts that addressed the effects of force majeure included language providing for temporary suspension or postponement of the affected parties’ obligations, with the requirement to resume performance after the force majeure condition is eliminated;
  • A significant portion of the force majeure provisions with consequences stated that if a force majeure event occurs, the parties will consult with each other to determine what course of action to take.

As the pandemic grows, so does the volume of contracts that must be reviewed

With the severity and prevalence of COVID-19 escalating so quickly, and more businesses and industries affected each day, the volume of contracts that may warrant review for force majeure provisions is growing as well. 

If you’d like to learn more about the potential impacts COVID-19 could have on you or your clients’ organization(s) and how leveraging AI provides invaluable (and critical) visibility into your contracts, download our study today!

[ Artificial Lawyer is proud to bring you this sponsored thought leadership article by Kira Systems. ]