Force Majeure amid COVID-19

Force majeure clauses or sometimes known informally as “Act of God” clauses appear in a number of contracts – but by no means all of them. It should be noted that there is no common law equivalent of this so it must be expressly covered by the contract.

The purpose of such a clause is to provide a defaulting party under a contract with a legal remedy to prevent them from being sued in the event that circumstances outside of their control prevent them from being able to perform their contractual obligations.

Whether the force majeure clause can be invoked is a matter of interpretation and the defaulting party must be able to prove:-

1. One of the events included in the force majeure clause has occurred;
2. The defaulting party has been prevented, delayed or hindered from performing the contract due to this event;
3. Their non-performance was due to circumstances outside of their control; and
4. There were no reasonable steps that could have been taken to avoid or mitigate against the event.

For a force majeure clause to engage, performance must become “physically or legally impossible, not merely more difficult or unprofitable.” Similarly, a downturn in economic conditions (even if caused by an event like COVID-19) will generally not constitute force majeure.

Frustration

In the event that your contract does not include a force majeure clause or that it is not effective then it may be possible to consider the rules relating to frustration.

For a contract to be frustrated:-

1. The event must be unexpected;
2. Beyond the control of the parties; and
3. Makes performance impossible or radically different from what the parties had contemplated when they entered into the contract.

For frustration to occur the event must “significantly change the nature of the outstanding contractual rights or obligations”.

Can you use it?

You will need to check the force majeure clause in your contract to see if it includes “pandemic”, “epidemic”, “outbreak”, “Government action”, “crisis” or similar wording. Alternatively, a general catch-all phrase such as “outside the reasonable control of the parties” might be sufficient.

You will then need to consider if COVID-19 has actually made performance of the contract impossible or radically different. If it has simply made completion of your contractual obligations less convenient or more expensive then this is unlikely to be sufficient for the clause to be invoked.

For example:-

1. If the contract provides for delivery of goods or completion of a building by a specific date but a Government lockdown prevents this from happening then force majeure is likely to be in point;
2. If, however, the contract delays supply of certain goods by a few months due to the supply chain being interrupted in a multi-year deal then this is unlikely to be sufficient. The bar for proving force majeure to a Court is usually set very high.

If a claim of force majeure cannot be supported, the next consideration is whether any of the following established grounds to founding a successful claim of frustration can apply:

• Temporary unavailability of either a person or asset that is essential to performance;
• Method of performance becomes impossible i.e. a ban on travelling etc.
• Failure of a specific source i.e. importation of goods from a specified country becomes impossible; or 
• Illegality i.e. a contract for airline services that are subject to a flight ban etc.

If successful, the effect of frustration is automatic termination of the contract. Parties can recover amounts paid under the contract before it was frustrated (less the other party’s expenses).

Parties should also consider other options. For example, if COVID-19 means that a business must temporarily halt production or miss a payment/delivery date, a moratorium could be requested. Force majeure and frustration are “nuclear” options to approach with caution, particularly given the current forecasts of how long COVID-19 will disrupt normal business.

It should be noted that the consequences of wrongfully asserting that frustration applies could be severe. This could amount to an anticipatory or repudiatory breach of contract thus allowing the other side to terminate and claim damages. 

You should, therefore, give careful consideration and take legal advice before asserting frustration.

What to do if the other side claims Force Majeure or Frustration?

The following steps should be followed:-

1. Does the contract contain a force majeure clause that could cover COVID-19?
2. Is there a link between the force majeure or frustrating event and the contract not being performed?
3. Write to the other side and ask for the following:-

• Evidence of the circumstances they are relying on;
• Full explanation of why the contract cannot be physically or legally performed;
• Evidence of steps being taken to mitigate the problem; and
• Regular updates on their efforts to resume performance of the contract.

If you are happy with their response then it might be sensible to enter into a deed of variation. If you are unhappy with this then consider escalating i.e. entering into dispute resolution etc.

Consequences of Force Majeure Applying

The contract will usually determine the consequences of the force majeure clause applying. Commonly this will provide for:-

• suspension of contractual obligations;
• non-liability;
• extensions of time to fulfil obligations;
• renegotiation of terms;
• obligation to mitigate losses; and
• the right to terminate the contract.

What if the event was foreseeable?

Whilst it might be impossible to predict the scale of the difficulties that will arise due to the COVID-19 outbreak or how long this will go on for – it would be difficult not to foresee COVID-19 being an issue in respect of new contracts and it would therefore be sensible to include a force majeure clause and specifically cite COVID-19 as one of the “Acts of God”.

Practical tips

• Review your contracts to see what – if any – force majeure clauses are included and pay particular attention to the non-exhaustive list of events and the consequences of invoking the clause;
• If there is a long list of non-exhaustive events then it would be prudent to include words such as “pandemic”, “epidemic”, “Government action” or “outbreak”;
• When negotiating new contracts take care with the word “unforeseeable”; and
• If you have any affected contracts then contact the other side to discuss possible renegotiations or postponements.

If you need legal help and advice, get in touch with our team at HW Business Law.

Should you have any other concerns please do not hesitate to contact me or your usual Haines Watts partner.