Examining the Force Majeure Clause in the ISDA® in the Context of COVID-19: Could it Trigger?
When considering whether the force majeure clause could be triggered as a result of the COVID-19 crisis, one needs to break down the clause into its various elements:
1. The clause only applies to the office where payments or deliveries are made, and the force majeure event prevents that office from (i) performing its obligations to pay or receive payments, or (Iii) complying with any other material provision of the ISDA®. The force majeure event must prevent or make it impossible or impracticable for the performance of payment, receipt of payment or performance of obligations. Impracticable is generally seen to mean that performing the obligation would be so difficult that it can’t be reasonably expected.
2. The clause also applies to the Credit Support Provider of the party if such party is prevented from performing payment or delivery obligations under a Credit Support Document.
3. The event causing the obligation breach must be a force majeure event or an act of state. Neither of these terms are clearly defined, so there is no legal clarity of what these terms actually mean.
4. The event must be beyond the control of the office through which the party is acting, and the party or Credit Support Provider must be seen to be making all reasonable efforts to overcome the prevention, impossibility or impracticability of the performance of their obligations. This is further clarified by stating that the reasonable efforts required should not result in the incurring of a loss apart from immaterial or incidental expenses. But again, these terms are not defined.
In short, the clause contains various different (and poorly defined) elements, which must be met before one can rely on the clause. This makes it a difficult clause to rely on in that it is unclear whether you can satisfy all the required components. It is likely that courts will apply this cause in a specific and restricted way.
It is possible to argue that the COVID-19 crisis is indeed a force majeure event (it is a natural disaster which is beyond the control of the parties, and the extent of the crisis could not have been anticipated by the parties). The ’act of state’ could be argued to constitute the directive from government to lockdown the country and only allow essential services to be performed. But what is difficult to prove is that this is causing the relevant office of the parties to fail to perform their payment, delivery or other obligations under theISDA®.
At the present moment, whilst the COVID-19 crisis is certainly causing unprecedented difficulties and restrictions in people’s day-to-day lives; remote working arrangements, access to technology and electronic payment and delivery systems mean that it is questionable whether a party could confidently motivate that their ability to perform their obligations is being compromised as a result of a lockdown.