Will the coronavirus pandemic constitute force majeure in commercial contracts?
Please note: The information contained in this article is correct as of 06/08/2020. Due to the ongoing nature of the coronavirus situation, guidance is therefore subject to change and it is always advisable to speak with a solicitor for specific advice.
Following on from my blog on 27 April 2020 detailing whether commercial contracts can be enforced during the current COVID-19 pandemic, questions still arise as to whether the circumstances surrounding the COVID-19 pandemic will essentially constitute a force majeure event in commercial contracts and therefore either grant relief or cause frustration to those who are party to the contract.
The reality is that interpreting commercial contracts will never lead to a straightforward ‘yes’ or ‘no’ answer. The answer will mostly be dependant on particular circumstances and how the relevant contractual provisions have been drafted. It is useful however, to have some insight on how such clauses within those contracts could be interpreted and applied to fit current circumstances with the help of existing case law.
What is a ‘Force Majeure’ clause?
A force majeure clause is a contractual clause which (if triggered) will alter the parties’ obligations and/or liabilities under the contract when an extraordinary event or circumstance outside of their control prevents them from fulfilling those obligations under the contract.
Contrary to popular belief, there is no statutory or common law definition of force majeure events in English Law, and therefore the parties to a contract have the freedom to agree what will amount to a force majeure event for the purpose of their contract and what the consequences will be if such an event were to happen. It is mainly for this reason why it is crucial to observe the specific terms set out in your contract as terms may vary from contract to contract and there will be no generic answers to questions about how force majeure will apply to your contract.
Is the COVID-19 pandemic a force majeure event?
It is important to check how the force majeure clause in your contract has been drafted. For example, has it been drafted to include specific events such as earthquakes, terrorism, plagues or epidemics? Note that where the term ‘epidemic’ or ‘pandemic’ has been used, this will most certainly cover the COVID-19 pandemic.
In many cases the restrictions that the Government have advised to limit the spread of the virus will fall within the contractual definition of force majeure, for instance some contracts will be drafted to set out broad criteria and may refer to events or circumstances ‘beyond either parties’ control’. However, the contractual wording together with the impact of the circumstances on the parties to the contract (including the effect of most recent government policies and directions) will need to be studied carefully to determine whether the clause applies.
Alternatively, many contracts specify the level of disruption that the event that constitutes force majeure must have on the parties’ in order to trigger the clause into effect. For example, some contracts will state that the event must ‘prevent’ the party from being able to perform its duties under the contract whilst other contracts may state that this event must merely ‘hinder’ performance.
What’s important though, is that in either case, the standard is set high.
If the clause specifies that performance must be ‘prevented’ this means that performance must have been legally or physically impossible to carry out (such as a high street clothing store being legally forced to close during lockdown) and it will not be sufficient to show that performance was made more difficult or that it is not economically worthwhile.
If, on the other hand, the clause specifies that performance must be ‘hindered’ then this will be interpreted to mean that performance would put the party in such a position that it would endanger the business or prevent them from performing their duties under contracts with other parties.
All will depend on interpretation of the specific wording used in such a clause. The general wording within this type of clause will normally be interpreted broadly rather than being limited to certain events (similar to those mentioned above) and so the clause may therefore still be triggered even if a health event has not been specifically listed.
What about costs already incurred and payments made under the contract?
Many force majeure clauses tend to fall silent when it comes to costs and payments made under the contract. In which case, the starting point here is under common law and the stance on this typically is that “costs fall where they lie”. Meaning that any payments made under the contract or any costs incurred by either party for performance of the contract will not be recoverable, which ultimately could leave one party in a better position. You can mitigate these risks in two ways, one of which is to ensure you have adequate insurance in place such as business interruption or cancellation cover to reimburse you for any losses incurred. The other is to consider the law of frustration.
The Doctrine of Frustration
The doctrine of frustration will apply where an event was unforeseen by the parties and which doesn’t arise as a result of breach of contract by either of them but makes performing the contract impossible.
Whilst frustration appears similar to force majeure, frustration requires more than an event to take place to make performing under the contract more difficult or not economically worthwhile. The party affected by the event must also be able to demonstrate that they took reasonable steps to mitigate the impact of the event on their performance under the contract.
The procedure for relying on a Force Majeure clause
Parties seeking to rely on a force majeure clause must ensure that it complies with any procedural requirements under the contract, for example, a requirement to give notice to the other party of their intention to rely on the clause within a particular timescale, including any specified formalities such as service of notices. Some clauses may also specify the requirement for updates to be provided and/or express obligations to mitigate.
The effects of relying on a Force Majeure clause
If a force majeure clause is revoked then the usual remedy is that the one or more of the parties’ are excused from their obligations under the contract and they will no longer be held liable or made accountable for paying damages. Force majeure clauses can also allow for time extensions, suspensions or even termination in the event that there appears to be continuous delay or non-performance by an affected party.
If the contract does not have a Force Majeure clause
Since force majeure stems more from contractual obligations rather than being a rule of law, the absence of a force majeure clause will essentially mean that parties seeking relief will need to have a look at the other provisions within the contract to seek a way out. If the other provisions provide no such remedy then it may (in certain situations) be possible to rely on the doctrine of frustration (as mentioned above).
Practical steps for parties looking to rely on a Force Majeure clause
Scrutinise the wording of the contract as a whole and more specifically the force majeure clause (if any). Trying to determine whether performance by a party is excused under a force majeure clause is difficult and highly fact-sensitive so it is important that legal advice is sought at the outset;
Explore different means of being able to perform, reducing delay or minimising loss to the other party. This could include things such as finding alternative suppliers or alternative ways to deliver goods;
Ensure to serve any notices as specified within the contract as soon as possible and in accordance with the terms of the contract, taking into consideration the event or circumstances in which the parties allege constitutes the force majeure event – having particular consideration to the wording of the clause
Do not intend to rely on a surge of costs to excuse inability to perform obligations under the contract as this will not be sufficient
Ensure to keep a record of things such as why performance is impossible, hindered or delayed (as the case may be), the steps taken by the affected party to mitigate loss and find alternatives, and any services of notices
If no such clause exists within your contract:
– Consider the doctrine of frustration of contract but take caution of the high standard set for the affected party having to establish whether the contract has in fact been frustrated
– Consider other routes and remedies whether they be through the contract itself or agreeing to variations to the contract with the other party.
For further legal advice on commercial contracts and contract disputes, please get in touch with Farleys commercial solicitors on 0845 287 0939 or contact us by email.