Global Chair of Energy and Infrastructure, Interlaw, Belgium
CORONAVIRUS: A CASE OF FORCE MAJEURE IN ENERGY CONTRACTS?
The answer seems at first evident, obvious and yet...
According to a commonly accepted definition, force majeure is an unforeseeable and irresistible event, at the time of the conclusion of the contract, which prevents the performance of an essential obligation of the contract, for example, the supply of electricity, gas, oil or the transport or distribution of energy.
Energy contracts almost always contain a definition or explicit reference to force majeure. Some add a list, more or less extensive, of exceptional circumstances - beyond the control of the parties and unmanageable - "assimilated" to force majeure.
For the lucky ones, their contract lists the circumstances of "epidemic, famine, quarantine or plague." But these cases are rare. The only "viruses" included in the contracts are "computer viruses" - which is not very helpful.
For the less fortunate, it will be necessary to check whether, due to factual, geographical, political or epidemiological circumstances, the party invoking the coronavirus is confronted with an epidemic or pandemic, which totally prevents it from performing the contract (unlike hardship or contingency clauses, which only make performance more onerous).
The laws and regulations applicable to the energy sector are generally silent on this subject.
Hence the attitude of certain countries which, in order to protect their nationals, issue "certificates of force majeure" or present a decree acting as force majeure. The interest lies in the fact that this measure can be assimilated to the "fait du Prince" (mandatary act of government). However, the burden of proof remains with the person invoking it.
A further restriction related to force majeure, stems from the fact that the person who invokes force majeure must not be in default of performance of its contractual obligations, as in such cases the contracts preclude the use of force majeure.
Finally, unpredictability is assessed "at the time of the conclusion of the contract." The utmost caution is therefore required for the contracts being currently concluded and where a serious or proven risk of epidemic is known: in this case, the parties could be considered as having concluded the contract with full knowledge of the facts and therefore of the risks.
The main consequence is the suspension of obligations (to deliver, to transport, etc). But a careful reading of the contract is necessary as even in case of force majeure, certain obligations, often linked to the payment of a fixed term, remain in force.
Another consequence is the obligation for the party invoking the force majeure clause to "report" this situation to the other party promptly under the terms of the contract. In addition, the party claiming the force majeure will have to take all the measures at its disposal to minimize the negative consequences for the other party.
Finally, contracts frequently provide that at the end of a 30-day, two or three months period of force majeure, the parties may unilaterally terminate the contract, often without compensation. This period is short, too short for an epidemic or pandemic such as the one caused by COVID-19.
It is highly likely that "post-coronavirus" force majeure clauses will now include epidemics, pandemics and provide for longer periods before energy contracts can be unilaterally terminated without compensation.