The impact of the Coronavirus (also referred to as COVID-19) is challenging businesses’ ability to fulfil their contractual obligations. A Force Majeure clause in a commercial contract may operate to relieve one or both parties from their obligations under the contract, without incurring liability for non-performance.
What is a Force Majeure clause?
Most written English law commercial contracts will contain a Force Majeure clause. This clause can suspend or terminate performance obligations under a contract where an event outside of a party’s control arises, commonly referred to as ‘an act of God’, which prevents a party from performing their contractual obligations. If the clause is relied on successfully, the non-performing party seeking to rely on the Force Majeure clause will not be liable for its failure to perform the obligations under the contract. These clauses are usually located towards the end of a contract or a set of terms and conditions with the heading: ‘Force Majeure’.
Whether these clauses can be relied on to relieve the party concerned of their obligations under a contract in light of the Coronavirus pandemic, will depend on the wording of the clause, which will vary from agreement to agreement.
Is Coronavirus a trigger event?
The wording of key contracts should be checked to see if a Force Majeure clause is included. If this type of clause is included, check that ‘pandemic’, ‘disease’, ‘epidemic’, ‘crisis’, ‘government action’ or similar wording, is specifically included as amounting to a Force Majeure event. There is no standard definition of a Force Majeure event under English law.
If the contract does not include the specific wording but refers to ‘events beyond a party’s reasonable control’ this may be sufficient. Whether a party is able to successfully rely on it will depend on the precise wording, the circumstances, the parties’ intentions and how well these matters can be evidenced.
What does the clause say in relation to performance following the occurrence of a trigger event?
Does the wording in the Force Majeure clause say that the trigger event must strictly ‘prevent’ performance or, more simply, hinder performance? If the trigger event must prevent performance then the affected party must show that it is impossible, not just more expensive or generally more onerous, to perform the contract. An example of this would be the UK government banning movement of goods, and as a result a supplier under a contract is unable to deliver goods.
How to rely on a Force Majeure clause – obligations on the non-performing party.
Written Notice – It is likely that the non-performing party will have to give written notice to the other party of the trigger event and the reasons why the contract cannot be performed – this should be done despite the situation potentially being obvious to both parties. In some cases, if the requirements to notify are not followed accurately, the non-performing party may lose the right to rely on the Force Majeure clause. From a commercial perspective, early communication is sometimes key so that possible alternative ways of performing the contract can be discussed and agreed between the parties (see comments in respect of contract variation below).
Burden of Proof – The non-performing party will have to prove that the trigger event falls within the relevant clause and that the failure to perform the contract was a result of that event.
Mitigation – It is usual that the non-performing party will have to take all reasonable steps to try and perform the contract as well as it can and, very importantly, demonstrate its efforts to do so. The non-performing party should be able to explain why steps have not been taken to limit the contractual breaches, if this is the case.
Deciding whether a party is justifiably suspending/terminating obligations under a contract will depend on the wording in the contract, the trigger event(s) and the relevant circumstances. Each party should therefore keep an accurate written record of the efforts to mitigate breaches of contract, details of the trigger events(s) and any associated communications. Parties will sometimes argue about whether an event was within a non-performing party’s reasonable control and they could ultimately end up in court to decide whether the Force Majeure clause applied. In practice, it will make more commercial sense to negotiate a solution that both parties are satisfied with, where possible.
What is the effect of a Force Majeure clause?
Depending on the wording, obligations to perform the contract could be treated as suspended until the triggering event ceases. When the triggering event does cease, the contract will be re-activated. The wording could also provide for the contract to be terminated completely if, after a certain period of time, the trigger event is continuing.
While the trigger event continues, the non-performing party’s liability under the contract for not performing the contract or delay in performance will not apply.
Other clauses to check and follow strictly.
Notices – This clause will usually be towards the end of the contract and headed ‘Notices’. It will provide instructions as to how to communicate matters to the other party under the contract. Typically, these clauses require written communication and will sometimes exclude email correspondence.
Variation – If both parties agree to change the terms of the contract, there are often clauses towards the end of the contract headed ‘Variation’ which dictate how the contract can be changed. Usually agreed changes must be in writing and signed by both parties to be valid.
Pricing – Some contracts may have clauses which allow for price increases where a contract can still be performed but it is more expensive to do so due to unforeseen costs.
No Written Contract or no Force Majeure clause.
In certain restricted circumstances where performance has become impossible, the law may operate to terminate the contract completely, without an option to suspend performance.
This will only apply if there is a significant change of circumstances, due to an outside event which is not the fault of either party, which makes performing the contract radically different to the original obligations of the contract.