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Coronavirus – Force Majeure under an English law contract?
At a glance
Is the coronavirus pandemic a force majeure event under a contract governed by English law?
There is no yes/no answer to this question. The answer, as with so many legal questions, is “it depends” but in this briefing we review the relevant legal considerations, provide some practical pointers, and also briefly look at the related contract law doctrine of frustration.
Whilst the purpose of a force majeure clause is commonly understood – to excuse a party to a contract from the performance of their contractual obligations upon the occurrence of an event or circumstance which was not foreseen and is outside of its control – our starting point is that English law does not define “force majeure”, does not automatically imply a force majeure provision into a contract, and does not define the legal consequences of a force majeure event. This is an important point to bear in mind particularly for those parties to a contract who may be more familiar with those civil law jurisdictions which do have a statutory definition and which imply the doctrine of force majeure into contracts in defined circumstances.
Under English law, a party wishing to claim “force majeure” must first look at their own contract to see whether or not it includes a force majeure clause; then determine whether the event or circumstance which has arisen falls within the definition of force majeure in their own particular contract; next, check whether the relevant event or circumstance has had the impact upon them described in the relevant clause; and, finally, check whether there are any procedural or other requirements set out in the clause with which they need to comply in order to claim the benefit of the force majeure provision.
In terms of the definition of “force majeure” in a contract, approaches differ – frequently depending upon who “held the pen” in the drafting of the contract and whether that party considered that it, or the other party, was more likely to claim force majeure, for example in a customer/supplier relationship. In some cases “force majeure” is defined relatively narrowly, perhaps by reference to and limited to “acts of God”, other clauses may list certain events as included and others as excluded, whilst at the other end of the spectrum, “force majeure” may be defined as any event or circumstance outside of the control of the affected party followed by a ‘belt and braces’ list of events and circumstances described as “including without limitation” within the definition.
Whilst we have noted above that force majeure is commonly understood to excuse a party upon the occurrence of an unforeseen event or circumstance, the definition will not generally be expressed as limited to ‘unforeseen’ events, and unforeseen in this context is usually simply part of the assessment as to whether it is outside of a party’s control i.e. whether it could and should reasonably have been prevented by the affected party – perhaps ‘unexpected in its particular timing and manifestation’ would be a better description, and this may be relevant to a consideration of the coronavirus pandemic as a force majeure event depending upon the contract drafting.
In terms of whether the relevant event or circumstance has had the impact described in the force majeure clause, it is not simply a question of determining whether or not the event or circumstance which has occurred falls within the definition of force majeure, but whether that event or circumstance has in fact affected the performance by the affected party of the contractual obligation or obligations from which it seeks to be excused in the manner described in the contract. So, for example, does force majeure only apply if performance is ‘prevented’ or does it also apply if it is ‘hindered’ or ‘delayed’? It should also be noted that the same event or circumstance may have a different impact on different parties and, whilst in a sense it may seem unfair, the assessment is not what would be the expected impact upon a theoretical ‘reasonable party to the contract’ but what is the actual impact upon the particular party seeking to rely on the clause. The force majeure clause may also include an obligation on the affected party to mitigate the effects of the event, and what that entails in any particular case may well be contentious but can affect whether the party seeking to rely on the force majeure clause is ultimately granted that relief.
A nuance to this element of the assessment is the ‘but for’ test: would the affected party have been ‘ready, willing and able’ to perform the contract but for this event or circumstance? For example, in Classic Maritime –v- Limbungan Makmur (2019) a party whose performance was physically prevented by the flooding of a mine (which was a listed force majeure event) was not granted relief because they had not been performing under their loss-making contract anyway for a number of months prior to the flooding and so the Court was not satisfied that ‘but for’ the flooding they would have performed the contract. See our case briefing here.
The chain of ‘causation’ may also not be straightforward to establish. For example, the coronavirus pandemic might fall within a contract’s ‘force majeure’ definition as an epidemic (as it does in the ICC’s standard force majeure clause, for example) but the parties to the contract might be responsible for their own supply chains, so a shortage of supplies or a performance failure by a third party contractor is not classed as force majeure; so what happens in the scenario that if the coronavirus pandemic is the reason why the supply chain breaks down and causes one party to the contract to fail to perform – can the affected party claim force majeure? Please don’t spend too long mulling this question(!), although it may also be relevant where, for example, performance has been prevented or hindered or delayed by compliance with Government advice or a Government requirement; whilst both the advice and the requirement may have resulted from the coronavirus, it is easy to see a scenario where, under the terms of the relevant contract, compliance with the requirement is a form of force majeure and following the advice is not.
In terms of checking whether there are any procedural or other requirements to be met, it will certainly usually be the case that the party claiming force majeure must notify the other party, take steps to mitigate the impact and to resume the performance of the affected obligations, and keep the other party informed, but particular attention must be paid to any such procedural requirements which might act as a condition to relying, or continuing to rely, on the force majeure event, such as strict deadlines for notifications to the other party. If the other party is to receive notice and be kept informed, as is invariably the case, then check any separate notices clause as to how this is to be done.
If the party seeking to rely on the force majeure clause is able to tick all of the above boxes, then the contract terms will still be relevant in determining what relief is provided. Whilst we referred earlier to a force majeure clause as excusing a party from contractual obligations where performance has been prevented or hindered by the force majeure event, and certainly that is typical, the contract may or may not provide for any or all of the following:
- relief from liability for non-performance, or for a delay in performance, of the affected contractual obligations;
- the right for the affected party to suspend its performance of the contract;
- the right of the affected party to an extension to any stated deadlines or time periods for the performance of its contractual obligations (or perhaps for such deadlines or time periods to be automatically extended);
- the right for the affected party, or for the party not affected, or for either party, to terminate the contract if the force majeure event continues for a specified time period.
Check also whether the contract includes a ‘non-reliance’ clause (or has an ‘entire agreement’ clause which extends to include non-reliance), which excludes liability for any representations or statements made before the contract was signed, which may have been relevant to the decision to enter into the contract but which do not appear in the contract itself: for example, “Don’t worry, our supply chain is robust and nothing will stop us from delivering on that date”.
Whilst our advice, as set out above, is that generally “the contract is king”, there are certain statutory provisions which apply to the terms of B2B contracts, and more so to the terms of B2C contracts, which can affect the operation of a force majeure clause. For B2B contracts, section 3(2) of the Unfair Contract Terms Act 1977 may be relevant: it provides that a party contracting on its own standard terms cannot exclude or restrict its liability for breach of contract by reference to any contract terms except in so far as that contract term meets the ‘reasonableness’ test under that Act. For B2C contracts, the Consumer Rights Act 2015 and the Consumer Protection from Unfair Trading Regulations 2008 both contain a number of provisions which can affect the operation of a force majeure clause when a trader seeks to rely upon it in its dealings with a consumer.
If the contract does not contain a force majeure clause, it should still be reviewed for any other provisions which might afford the affected party some temporary or permanent relief from some of the consequences. For example:
- a ‘hardship’ provision which allows for renegotiation or even for unilateral amendment of the contract if one party suffers a substantial hardship, whether or not foreseeable at the time the contract was made;
- a ‘material adverse change’ provision which allows a party to terminate a contract if there is a material adverse change in the defined circumstances (which might be tightly defined and limited or might refer broadly to changes which have a material economic impact upon the party with the benefit of the provision);
- a termination provision which allows a party that is unable to continue to perform the contract to terminate the contract and thereby at least to staunch its losses even if it is liable for its performance failure up to that time (because the termination event is not a force majeure event under the contract).
The doctrine of frustration is of more limited application and therefore typically of more limited benefit to a party to a contract (which is why parties tend to include a force majeure clause in the first place) although, sadly, the greater the spread and impact of the coronavirus pandemic, the more likely that frustration will become relevant. If an event or circumstance occurs which is unforeseen and beyond the control of the parties and its effect is to make it impossible to perform the contract, or only to do so in a significantly different way from what was expected at the time the contract was made (and not simply at greater cost or effort), then the contract is said to be ‘frustrated’ and is thereby automatically terminated (and with a right for the parties to recover monies paid under the contract before that time).
What can you do to mitigate risk? These are uncertain and fast-moving times, but we recommend taking the following steps:
- Review your existing contracts to determine if they contain a force majeure clause and if so, begin to consider if your business, or the business on the other side of the contact, would seek to rely on the clause in the current circumstances.
- Review what steps you are taking as a business to avoid or reduce the effects of COVID-19 and your ability to continue to perform your contracts. Remember you should take all reasonable steps to mitigate both the effects on your own performance and the losses that you might suffer as a result of another party’s performance failure, which might include:
- Monitoring advice from Government (as well as from bodies like the World Health Organisation), and Government requirements, as these are likely to change rapidly over the coming weeks;
- Ensuring you are managing the impact on your workforce, this may mean implementing work from home measures, implementing policies reducing or prohibiting business travel and considering alternative communication options for meetings;
- Developing or implementing a continuity plan, this will involve liaising with HR, IT, legal and facilities to ensure a co-ordinated and ongoing response to COVID-19;
- Determine whether your insurance policies, such as business interruption insurance, may cover any of your losses.
Should you have any questions or concerns about the legal aspects of the coronavirus pandemic and how it will affect your business, please contact Jonathan Riley or Jenni Jenkins or your usual Memery Crystal contact.
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