By: Chiraag Kumar, Senior Counsel at MetLife Investment Management
The coronavirus outbreak has impacted the world in myriad ways. The most distressing, of course, is the health effects felt by the millions of people who have been inflicted. The adverse impacts on business have been far less concerning, but substantial. One example: project finance investors have received more notices of force majeure (“FM”) in the past few months than in recent years.
The influx of FM notices has caused investors to take a deeper look at how FM provisions are drafted and what changes can be made to provide better safeguards in the future. The below takeaways are just a few of the considerations investors are now taking into account when analyzing if an FM provision is adequate.
Definition of Force Majeure
The logical place that investors have first looked to enhance their protections is in the definition of FM itself. Three particular questions to ask are:
- Does the definition include “epidemic”, “pandemic” and “quarantine”?: The typical FM definition will have a long list of events that will allow a party to claim FM and therefor be excused from its performance obligations under the applicable contract. Typical events that are included are things like natural disasters, war, acts of terrorism and government actions. “Epidemic” and “pandemic” are also commonly included, but it will be important to consider whether “quarantine” should be added as the past few months have shown that business operations were severely impacted not just by the coronavirus, but also the resulting quarantines.
- Must the event directly disrupt a party’s ability to perform its obligations?: FM definitions will sometimes allow a party to be excused from performance only if the relevant event directly disrupts that party’s ability to perform. As noted above, though, businesses were disrupted by the subsequent quarantines just as much as (if not more than) they were the coronavirus itself. Whether a business not otherwise affected by coronavirus but is closed due to a quarantine can claim that the pandemic has “directly” prevented their performance is a question ripe for argument, and one investors may want more clearly set out, especially where the contract involves a key supplier or service provider to a project company.
- Must the event make a party’s ability to perform its obligations impossible, or is severe frustration sufficient?: FM definitions will also vary on the extent the FM event must affect the claiming party. Some contracts will only permit a party to claim FM if the event makes performance impossible. Other contracts are less onerous, and will allow a party to claim FM if the event would severely delay performance or otherwise make performance impracticable. The concern for investors here will be twofold, similar to the point above: first, a “frustration” standard would create more ambiguity than an “impossibility” standard; and second, a “frustration” standard would be easier to claim. When concerning a key project supply or service contract, investors should always be wary of uncertainty related to a contractor’s ability to avoid timely performance.
A common question that arises when a company issues an FM notice is whether any of the company’s insurance policies cover the associated losses. This has been no different in recent months as investors have received coronavirus-related FM notices. The answer, though, has been less satisfactory than usual. Insurance policies covering pandemic-related losses do exist, but these are typically highly-specific additional policies that are taken out by companies in conjunction with their overall insurance package. For example, there is precedent of companies making claims under such types of policies during the SARS outbreak in the early 2000s. The magnitude of coronavirus’ spread and effects, and how unanticipated both were, will now have investors considering to what extent they will require their counterparties to take out insurance policies (pandemic-related or otherwise) to protect against risks that previously would have seem far-fetched.
This article has been prepared by the author solely for informational purposes and does not constitute a recommendation regarding any investments or the provision of any investment advice. The views expressed herein are solely those of the author and do not necessarily reflect, nor are they necessarily consistent with, the views held by, MetLife, Inc. or any of its affiliates.