Force Majeure Clauses in Contracts and Covid-19

Tuesday, April 28th, 2020

As Covid-19 continues to grip the world, forcing vast populations into their homes to stifle the spread of the virus, businesses the world over are feeling the impact. Contracts for services and contracts for goods are under serious strain with individuals unable to run their businesses in the usual way and in some cases, at all. For many businesses this has put a significant financial burden on their trade, with many unable to fulfil contracts, rental agreements and supply contracts. However- with almost all standard contracts containing a clause for force majeure – is this a way for parties to excuse each other from performing their obligations under the contract or from doing so on time without financial penalty?

The answer lies in the circumstances and the drafting of the relevant contractual provisions. Whilst there is no blanket answer, outlined below is some guidance that aims to ‘unravel’ the complicated business of interpreting force majeure clauses in the context of Covid-19.

 

What is Force Majeure?

Force majeure is a common clause in contracts that essentially frees both parties from liability or obligation when an ‘extraordinary event’ or ‘circumstance beyond the control of the parties’, prevents one or both parties from fulfilling their obligations under the contract.

Whether or not this clause will apply will rely on the wording of the provision and what it seeks to define as an ‘extraordinary event’ or a ‘circumstance beyond the control of the parties’.

The “test” for force majeure usually requires the satisfaction of three distinct criteria:

1 the event must be beyond the reasonable control of the affected party;

2. the affected party’s ability to perform its obligations under the contract must have been prevented, impeded or hindered by the event; and

3. the affected party must have taken all reasonable steps to seek to avoid or mitigate the event or its consequences.

N.B Any party who has entered a contract in full knowledge of the frustrating event will not be able to rely on force majeure to avoid its obligations. For contracts entered before early 2020, COVID-19 is clearly an unforeseeable event that may engage force majeure obligations.

 

1.The event must be beyond the reasonable control of the effected party

Naturally, each contract and agreement has its own way of defining what would constitute a ‘force majeure event’ and clauses are seldom ‘boilerplate’ and are often the product of intense negotiation.

Whilst in some cases, the contract will seek to very clearly define what is and what is not to be classified as a ‘triggering event’ for the purposes of force majeure, others take a more general approach.

By way of example, many contracts will list events such as ‘tempest’, ‘hurricanes’, ‘terrorism’ ‘acts of government or regulatory bodies’, ‘disease’ and ‘pandemics’ as actions that will have the effect of triggering the clause. Where the term ‘disease’ or ‘pandemic’ is used, this can be used to cover Covid-19 as these fit well within the definition.  An act of government could also have occurred if for example a business is unable to operate as a result of imposed travel restrictions or trade cessation affecting supply of goods. However, the position is less clear where the government makes recommendations. This was clearly evidenced during the early days of the pandemic where recommendations not to attend theatres were made by the government (although not expressly banned) – meaning many parties were not able to rely on force majeure clauses as a way of bypassing their obligations to perform the contract.

However, do not fear if your contract does not list an event which specifically places Covid-19 within its remit!

Many contracts merely rely on broader ‘catch all’ provisions such as an “act of God”, or simply an ‘event beyond the parties’ control’ (as defined by Transco plc v. Stockport Metropolitan Borough Council).  In the current climate, it can clearly be said that the Covid-19 pandemic is very much an event beyond the control of the parties – especially as it is ever changing and evolving.

Consequently, a party could seek reliance on this broad definition to cover non-performance as a result of an ‘act of God’.  However, any party wishing to do so would need to be able to demonstrate that their inability to fulfil the contract (or breaches of the contract if time is of the essence) was occasioned by the ‘act of god’ and that they would not have been able to mitigate the damage or prevented it.

Courts are alive to the effect the virus is having on businesses and individuals alike and are minded to view the open interpretation of these clauses favourably, within reason.

 

2.The affected party’s ability to perform its obligations under the contract must have been prevented, impeded or hindered by the event

The next stage is to review the wording of the clause and consider does the provision require a party to be “prevented” by the force majeure event from performing its obligations or simply hindered or delayed?

Naturally, it will be more difficult if a clause requires a strict prevention of obligations rather than one which only requires the party to be “impeded” or “hindered” in the performance of its responsibilities.

Has Covid-19 had the effect of ceasing all trading? An importer of goods from an area where trade has been banned as a result of the virus is prevented from fulfilling the contract. However, can the same be said for an importer who has simply found himself with additional overheads and further measures required to adhere to government guidance?

Being unable to perform a contract because of government rules on self-isolation is clearly a prevention of performance under a contract where personal attendance is necessary.

An attempt to use clauses to avoid performance for economic reasons will not be successful. Case law clearly demonstrates that just because a contract has become more expensive – or even uneconomic – to perform, that will not constitute force majeure.

 

3.The affected party must have taken all reasonable steps to seek to avoid or mitigate the event or its consequences

Finally, if a party feels satisfied that it is within (1) and (2) they will usually have to show that it has taken reasonable steps to avoid or mitigate the event and its consequence, and that there are no alternate means for performing under the contract.

Reasonable mitigation will turn on the facts of a specific case and will be dependent on the alternate methods available to that party and the comparative cost of the same.

It is likely that what is deemed reasonable during the Covid-19 pandemic will change and evolve as restrictions are tightened and relaxed. For example, it may be reasonable to ask for a company to work from home to fulfil its contracts but unreasonable for any time scale outlined in the contract to be strictly adhered to.

 

Remedies for Force Majeure

Usually the remedy for force majeure will be explicitly set out in the provision itself and can typically include an extension of time to perform the obligations enshrined in the contract or a moratorium on performance under the same. In some cases, there may even be scope to terminate the contract altogether.

This will turn on the specific facts of the matter at hand and will need to be viewed on a case by case basis.

 

Conclusion

The above is not an exhaustive list of factors that will be taken into consideration when a Court decides whether a force majeure provision should stand at Court. It is a complex area of law which is largely down to interpretation and strict requirements of service and we strongly suggest you obtain legal advice if you are contemplating release from your obligations under force majeure.

 

Please do not hesitate to contact a member of the Property Litigation & Dispute Resolution Team on 020 228 0017 who will be happy to assist you during this uncertain time.

 

Force Majeure and Covid-19 - Hanne & Co's Kate Kenneally looks whether force majeure clauses in contracts can be invoked due to coronovirus

Kate Kenneally is a Solicitor in Hanne & Co’s Property Litigation & Dispute Resolution Team