Force Majeure Summary
01-04-2020
The effect of the coronavirus pandemic has impacted businesses for several weeks now and is unlikely to subside in the short term. Contracts and transactions previously considered to be commercially advantageous may no longer be so. As such, many businesses are questioning whether they can escape from difficult obligations. One common query we are currently being asked is: will force majeure apply to a contract we can no longer perform?
A force majeure clause may entitle a contracting party to terminate a contract, avoid liability for breaching obligations under the contract or delay performance of contractual obligation on the occurrence of specified events which are beyond the control of the parties and where that party seeing to enforce the clause is not the cause of the specified event. Numerous factors need to be considered.
Has the coronavirus or regulatory steps taken to fight the virus delayed or prevented the performance of the contract? This is arguably very likely.
Is there a force majeure clause in the contract?
If yes, it’s crucial to check the exact language of the clause to determine whether there is a basis for construing the clause as including the coronavirus. The concept of force majeure will not be implied into a contract.
What is the wording of the force majeure clause?
In some contracts, the pandemic may trigger a force majeure clause (sometimes referred to as “acts of God”, “exceptions” or “unforeseen events”) which can excuse one or both parties from performing their contractual obligations if they are prevented from doing so by events outside of their control. The scope of each individual force majeure clause is different, depending on its wording and the specific list of events included (which may or may not include pandemics), so each contract would need to be reviewed and considered separately.
This is most easily satisfied with express wording to “pandemic”, “epidemic”, or something similar.
An event can also be caught more generally with provisions such as labour and supply shortages caused by the coronavirus pandemic.
Finally, there may even be a catch all provision referring to “any other event beyond the control of either party”.
Check that any of the express wording (e.g. pandemics) are not expressly excluded from an event which can constitute a force majeure otherwise force majeure will not be available.
Remember force majeure clauses in different contracts can give rise to different outcomes despite being based on the same set of circumstances.
Was the force majeure event the reason a party failed to fulfil its contractual obligations?
It may not be sufficient to make a claim simply because the contract is more expensive, difficult or creates reputational risks to perform.
Does the clause apply to the obligations of either parties, or only the party whose actions under the contract are impacted by the coronavirus?
For instance, if the clause refers to labour shortages experienced by the supplier, then the buyer would not be able to rely on this particular event to excuse itself from its contractual obligations.
Is there an obligation for either party to give notice if a force majeure event occurs?
Some force majeure provisions do not allow the party suspending their obligations to do so immediately, but instead require a period of notice. If the party does not undertake their duties under the contract without having fulfilled any notification requirements properly or before the notice period has expired, they may be in breach of the contract.
What are the consequences of the clause being invoked successfully?
Occasionally force majeure clauses allow for the complete termination of the contract. More typically, they provide for the suspension of the obligations, either for a set maximum period of time or more broadly until the event is no longer applicable.
Does the right to give notice to terminate or suspend the agreement only arise if the force majeure event continues for a certain period?
A clause may, for example, only allow for termination or suspension if supply shortages last for more than 30 days. Triggers and time periods are to be monitored.
Which party can the clause be used by?
It is important to consider which party is able to make use of the force majeure clause. Can the clause be invoked by: both parties based on the facts; the party that is no longer able to fulfil their obligations due to the force majeure event; or the party that is no longer receiving the benefit of its counterparty’s performance under the contract?
Has the party relying on the force majeure clause mitigated its loss?
The party relying on the force majeure clause usually has a duty to take reasonable steps to avoid the relevant event and mitigate its loss. This may involve looking at whether alternative performance if possible, rescheduling resources and minimising resulting delay.
Does the contract provide for certain payments to be made to you, or by you, if there is a breach of certain performance obligations?
Generally in English law, damages are limited to putting the innocent party into the position they would have otherwise been in had the breach not occurred. You should ensure any payments beyond this are not categorised as a penalty, as such payments are usually unenforceable under English Law.
In other cases where a force majeure clause is not applicable, the pandemic may ‘frustrate’ the contract. This is when a contract is discharged because an unforeseen event occurs after the contract is formed, which is outside the control of the parties and which effectively renders it impossible to perform the contract. This legal principle is, however, interpreted as narrowly as possible by the courts, and so is likely to depend heavily on the precise obligations set out in a contract as well as the specific reasons why the contract allegedly cannot now be performed. If there is a force majeure clause, it may be better to rely on this.
Useful resources:
- The latest official Government advice can be viewed here.
- A full range of business support measures have been made available to UK businesses and employees read more here.
- Guidance for small businesses and the self-employed can be viewed here.
- Guidance for employers and employees from Acas, the Advisory, Conciliation and Arbitration Service, an independent body funded by the Government, is available here.
- Health-related guidance from the National Health Service is available here.
If you need support or advice during this time please visit our Coronavirus Guidance page or contact me directly.
