DATED: 5 MAY 2020
Many enquiries from clients focus on whether COVID-19 is a 'force majeure' event and on whether a contract has been 'frustrated'. Dispute Resolution expert, David Mallilnson looks the impact of the COVID-19 outbreak on contracts and the implications for customers and commercial partners if they can longer perform their contractual obligations.
Many businesses will have entered in to contracts which pre-date the onset of the COVID-19 pandemic and inevitably a vast majority will now be finding it either increasingly difficult or impossible to perform their contractual obligations.
Some of those businesses are now hoping to utilise force majeure clauses—often referred to colloquially as Act of God clauses—in contracts to escape liability for failure to perform a contractual obligation. However, force majeure clauses are generally difficult to rely on and, if disputed by the other party, can lead to a protracted legal battle.
What is a force majeure clause?
Force majeure clauses are reasonably common in commercial contracts and typically act to excuse, vary or suspend (usually for a specific period of time) the performance of contractual obligations (in whole or in part) in defined circumstances which are considered to be outside the reasonable control of the affected party.
A well-drafted force majeure clause will specifically define situations which constitute a force majeure event. A poorly drafted force majeure clause that simply refers to events beyond the control of the parties is more difficult to rely on. The Courts have routinely taken a restrictive interpretive approach to force majeure clauses and are unlikely to consider an event not contemplated by the contracting parties as being covered.
The aim of a force majeure clause is to allow performance under the contract to be suspended until the ‘event’ is over and both parties can continue to perform their contractual obligations as they had originally intended. It is usual, however, that if the event in question continues for a prolonged period of time, the contract will permit either party to terminate the contract. In this situation, it is essential that the contract is read carefully. Terminating the contract on the basis of a force majeure event which is not permitted under the contract places the terminating party in repudiatory breach, entitling the other party either to insist on performance under the contract or terminate and seek monetary compensation in the form of damages.
Is COVID-19 a Force Majeure Event?
The level of unforeseen disruption and impact to businesses (and lives in general) as a result of COVID-19 is exactly the type of circumstance that parties to a contract would envisage a force majeure clause being designed to cover. However, as mentioned above, whether COVID-19 is considered to be a force majeure event will ultimately rest on the wording of the contract and whether the parties considered that type of event.
Where the contract mentions terms such as ‘epidemic’ or ‘pandemic’ or ‘acts of government’ the affected party may be able to rely on COVID-19 falling within one of these events. It is also, more often than not, that the usual exhaustive list of events specified in a force majeure clause will be rounded off with general ‘sweep up’ provisions with wording similar to “and such other acts or events that are beyond the control of the parties.”
This means that parties will have the flexibility to narrate what they consider constitutes a force majeure event. To the extent that such arguments seek to rely on the general ‘sweep up’ provisions, it should be noted that the English courts normally interpret these catch all provisions narrowly as they are unlikley to reflect the ‘true intentions’ of the parties at the time the contract was formed.
The affected party should, however, bear in mind that even if the parties have engaged in discussions to agree a suitable way forward without invoking the force majeure clause, its ability to rely on such a clause may be lost altogether if any procedural requirements specified in the contract are not followed in good time.
What will the affected party need to show?
In circumstances where a force majeure clause is being relied on, the affected party will be required to show a causal link between the event itself and its inability to perform its contractual obligations. The event must be the only cause of its inability to perform.
The affected party will also need to fulfil any procedural requirements (such as the giving of prompt notice to the other party to the contract) and show:
- The event being relied on is identified in the force majeure clause;
- It has been prevented from performing the contract by reason of that event;
- Its non-performance is due to circumstances that are outside of its control; and
- There are no reasonable steps that it can take to avoid or mitigate the event or its consequences.
It is important that where a party anticipates falling into difficulty with meeting its contractual obligations due the effects of COVID-19 that it explores all other suitable alternatives, such as sourcing alternative labour or materials, to avoid being in breach of contract.
When is a contract seen to be 'frustrated'
Uncertainty arises when the aforementioned terms have either not been adopted or when the contract does not contain any force majeure provisions whatsoever.
In circumstances where no such relevant event is mentioned to cover the COVID-19 pandemic, it will be for the parties to determine whether they had intended for such an event to be covered. As businesses try to navigate the unfamiliar territory COVID-19 brings, commercial factors such as the preservation of ongoing relationships will play a vital role in this determination.
If the contract does not contain any force majeure provisions and the affected party finds itself in a position where performance becomes impossible (as opposed to more difficult or economically less viable), and such impossibility is due to an unforeseen event (such as COVID-19) and not as a result of a breach of contract, then the contract itself will become void or ‘frustrated’. Similarly to force majeure, the affected party will need to demonstrate that it has taken reasonable steps to mitigate the impact of the event on its performance.
The most important distinction, compared with force majeure, is that if a contract is ‘frustrated’ this means that the parties are completely released from their contractual obligations and the contract effectively comes to an end and neither party is liable for damages for non-performance. For more information on the law of ‘frustration’ please speak to a member of the Dispute Resolution team.
What action should I take?
During this period of uncertainty you should make sure that a detailed and comprehensive force majeure escape clause is carefully drafted and included for any future contracts entered into.
If you have any uncertainty as to your position, please contact David Mallinson, Head of Dispute Resolution who will be happy to assist.
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