Companies in the utilities sector and its supply chain are facing “uncertainty and confusion” over the application of force majeure clauses and whether they can be invoked to free parties from contractual obligations during the coronavirus lockdown.
Law firm Addleshaw Goddard said it has received a “flood of requests” concerning force majeure clauses, which allow parties to suspend obligations or terminate contracts when faced with an “act of god”.
It said the impact of the crisis on utilities has been limited when compared to other sectors such as retail, which have seen a huge drop-off in revenues, but problems could escalate quickly if there are unexpected requirements for urgent maintenance or the replacement of assets.
“Different contracts have different clauses,” explained Rob Thompson, legal director for infrastructure projects and energy at Addleshaw Goddard.
“There isn’t a completely standard clause. Sometimes it will be an exhaustive list – and it might me earthquakes, lighting and tsunamis et cetera– and often what we see is those exhaustive lists don’t actually cover epidemics or pandemics.”
Thompson said other contracts give a more general description of any event that “wasn’t reasonably foreseeable or is beyond the party’s control.”
But either way, companies wishing to invoke a force majeure clause have “quite a few hoops to jump through”. They need to demonstrate “exactly what it is you can’t do and why and show what kind of mitigating steps you’re taking to get around the issue and still be able to provide the service”.
Thompson told Utility Week some of Addleshaw Goddard’s clients have “struggled to describe exactly how the problem is manifesting itself,” but said this is partly due to difficulties in gathering the necessary evidence in the circumstances which are changing fast.
Discussions between parties have largely remained civil so far but some are taking an “aggressive approach” – seeking to suspend a wide range of contracts without substantiation by serving near identical notices. He said difficult trading conditions do not necessarily constitute a force majeure event and warned that failure to consider the matter on a case-by-case basis could have serious consequences
Thompson urged companies to protect themselves by confirming any agreements to vary their service in writing “so in six months’ time when all this is hopefully over, there won’t be a dispute about what happened.”
He also called for clearer guidance from government on what work should be considered essential during the lockdown, noting that the current guidelines have been interpreted in different ways by different companies, even if they are doing the same thing.