Vol 17 (2020) - Issue 4

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Using Force Majeure Clauses in Relation to Inability to Pay: A Forlorn Hope?

Synopsis
The impact of coronavirus on businesses has been dramatic. Markets have vanished overnight, supply chains have been disrupted or suspended, and many financing arrangements entered into in a different, pre-COVID19, world have become unmanageable. Worse still, many of the fixed payment obligations of the business under other long term contracts, such as equipment leases or agency or franchise arrangements remain in place and require to be met, even though turnover may have collapsed and payment has either become very difficult or impossible rendering the non-paying party vulnerable to being served with a statutory demand and being wound up on a cash flow insolvency basis.

Faced with an inability to perform, many parties turn to their contracts and look for a way out, clutching at the words 'Force Majeure'. For the reasons explained below, that is likely to be an exercise in clutching at straws.