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.
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.
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.
It may not be sufficient to make a claim simply because the contract is more expensive, difficult or creates reputational risks to perform.
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.
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.
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.
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.
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?
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.
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.
If you need support or advice during this time please visit our Coronavirus Guidance page or contact me directly.