Five reasons an upsurge in force majeure claims has yet to materialize

Litigation may be a bridge too far

One possible explanation for the current state of force majeure litigation may be C-suite hesitation to engage in time-consuming and costly proceedings during an ongoing economic crisis brought on by a continuing public health threat. While many organizations and their legal counsel have no doubt contemplated an array of force majeure claims, the practical reality is that leadership may not have supported it, quite likely because they are preoccupied with developing strategies related to the pursuit of government incentives or state aid, and navigating workforce reorganization and other areas that promote revenue protection and organizational resiliency amid unprecedented disruption. This is compounded all the more by the potential for litigation to negatively impact key supplier relationships at a time when they are more vital than ever.

From business as usual to business as unusual

The dearth of force majeure litigation during the COVID -19 pandemic can also be attributed to significant pressure on organizations to continue what has been aptly called “business as unusual”. Adapting to remote working and other logistical challenges, understanding constantly changing guidelines from national health authorities, managing employee headcounts with a revenue-minded focus and providing business-critical legal insights have now consumed most of legal departments’ time for over a year, and few have had an opportunity to meaningfully consider viable force majeure strategies for the COVID -19 era.

A murky outlook for commercial risk and reward

Several multinational organizations have taken a deep-dive inventory of their contracts and confirmed that, in many cases, there were multiple versions of contracts in operation, with an array of conflicting force majeure clauses. While several of these enterprises have considered utilizing legal technology approaches to drive more efficient analysis of their contractual positions, the reality is that these solutions are largely cost-prohibitive for most companies at this precarious time. As with any commercial litigation, claims relying on force majeure must justify the time, expense and likelihood of success before they can be pursued. Organizations likely have also considered the risks that litigation poses to key supplier relationships and an already vulnerable supply chain in deciding not to pursue this option. While force majeure claims may have been a feasible option before the COVID -19 pandemic, the risks and rewards today – when the vast majority of the world’s organizations are affected by the same ongoing disruptive event – are quite understandably much less clear.

Legal departments and courts impacted by pandemic-related backlogs

Another key factor in the lack of COVID -19 related force majeure claims is, quite simply, the fact that general counsel’s offices and legal departments are operating at reduced capacity, with few practical opportunities to navigate similarly overwhelmed court systems that have also had to cope with a radical shift in operations. Many courts around the world have been closed for long periods, while others are only accepting cases in certain areas of law. Further, governments in some jurisdictions have enacted legislation specifically intended to prevent an onslaught of cases arising from the COVID -19 pandemic. One example of this is Singapore, which has suspended claimants from lodging bankruptcy or insolvency petitions. In the United Kingdom, the Financial Conduct Authority (FCA) has continued to intervene to help claimants ensure their business interruption insurance claims would be resolved without the need for extensive litigation.

One result of the aforementioned court system slowdown has been that parties to a range of disputes have opted for alternative dispute resolution measures, such as conciliation or mediation. However, even if force majeure was the basis for these types of disputes, the settlements reached would not be widely known as they are typically confidential.

Research has also shown that there was little to no enforcement cases resulting from arbitrations (which are themselves confidential) related to force majeure disputes in key jurisdictions.

Legal department evolution amid significant pressure

Legal departments have not been left unscathed by the workforce reorganization measures implemented during the first wave of the COVID -19 pandemic in 2020 by organizations across several industries, including the implementation of large-scale furloughs or reduced work hours. This has resulted in much leaner legal departments that have been inundated with requests for assistance on urgent, tactical matters, ultimately compromising their ability to devote comprehensive, long-term focus to any single matter.

Many organizations have also fast-tracked digitalization and other innovation incentives – with enterprises in many sectors moving these projects to business-critical status – and legal departments have certainly been no stranger to this phenomenon. Where legal teams have returned to, or remained at, full strength, they are under pressure to reduce costs and transform their operating models. This may be one fundamental reason why organizations have not yet committed to pursuing robust force majeure litigation.

2021:  More of the same or something different?

Anecdotal feedback from organizations across several business sectors indicates that some entities may be running out of alternative means to pursuing force majeure claims. We are also seeing key changes to regulatory agendas in several jurisdictions. For example, as of February 2021, the UK’s FCA has begun to revisit its moratorium on some categories of repossession, which may serve as a starting point for an increasing number of claims or class actions in the near term based on force majeure. For these reasons, and despite the absence of substantive evolution of force majeure jurisprudence in 2020, this situation may change in 2021, particularly given the continued strain on the global economy due to the COVID -19 pandemic.

A version of this article was first published on the Commercial Dispute Resolution website.

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