Can companies rely on a force majeure clause in their commercial contracts to justify an inability to perform because of the coronavirus?
The rapid spread of the coronavirus, Covid-19, has impacted the global economy on a scale not seen since the Second World War. The retail, service, financial services, travel and airline industries appear to have borne the initial brunt of the impact, as the public has become worried at the prospect of being near one another in fear of contracting the virus.
Investors are equally uneasy with the emergency circuit breakers being tripped for the Dow for the third time in a week and all the major indexes globally posting losses including the London FTSE.
Many companies are concerned that they may be unable to perform their contractual obligations in this current climate, or that they will be let down by their clients or suppliers.
What is Force Majeure?
Force majeure is a clause found in many commercial contracts. It provides that on the occurrence of certain intervening events, such as war, the parties to a contract no longer have to comply with some or all of their contractual obligations. Although commonly used, the term force majeure is not specifically defined in english law. Other jurisdictions, like Germany, have taken the route of defining what force majeure means within legislation – the advantage of that it allows the government to control what events do and do not constitute force majeure. As matters currently stand, in contracts governed by English law, it remains necessary to carefully review the force majeure clause to see what it covers.
The first thing is to identify the force majeure clause. Not every contract will have one. Usually, this clause will be accompanied by a list of events the parties agree will constitute a force majeure event, and an explanation of what will happen in such event. It will be necessary to look carefully at the wording used in drafting the clause and which events will trigger it.
Will the coronavirus trigger a force majeure clause?
Check the list of force majeure events within the clause to see whether it contains the words epidemic, or pandemic, or crisis.
If these words are not found, it is worth looking for a sweeper clause within the clause, such as “events, circumstances or causes beyond a party’s reasonable control”. That wording may be sufficient to cover the coronavirus; although because it does not specify exactly what events are beyond reasonable control, the courts would be expected to look carefully at the intentions of the parties, their relative positions and the circumstances of the contract if a dispute did arise about whether or not the coronavirus is caught in this wording.
What happens if the coronavirus does trigger the force majeure clause?
Within English law the effect of triggering a force majeure clause is left to the parties to decide within the contract.
Common provisions include: an obligation to renegotiate terms, the right to terminate the contract, the right to extend the deadline to perform, or a temporary suspension of contractual obligations.
There may also be an obligation on the party who seeks to rely on the force majeure clause to notify the other parties to the contract that they are invoking the force majeure clause and explaining why; usually they will need to show that they were ready and willing to perform their obligations prior to the force majeure event happening. In many cases parties can only escape their obligations if the force majeure event makes compliance with them impossible (and not simply unprofitable).
Because force majeure clauses can differ so widely, there is no substitute for carefully reading the clause and seeking legal advice if you are unsure on its meaning or effect.
What if I entered the contract recently – can I still rely on force majeure?
It is hard to imagine that anyone could have foreseen the scale and global impact that the coronavirus would have on industries and global markets.
However, if the contract was entered into in (for example) the last week, the parties would at the point of entering into the contract have been aware of the rapid spread and effect of the coronavirus on the global marketplace and still decided to become contractually bound.
If one party later failed to perform and sought to rely on the coronavirus as a force majeure event; it would be necessary to find out whether the force majeure clause is qualified by foreseeability. What this means is that if the potential force majeure event, the coronavirus, was something that the parties could or would have known about when entering into the contract it will have been foreseeable.
The party relying on the force majeure clause may be deemed to have foreseen the further spread of the virus and may not be able to rely on force majeure, if the clause is qualified by foreseeability.
Other factors such as the purpose of the contract, the practical effect of termination, mitigation and the event itself will also be important in a court’s decision making.
I can’t find a force majeure clause in the contract?
In this situation you may be able to rely on the legal doctrine of frustration of contract. This is in short where due to a completely unforeseen event (which is not the fault of the party seeking to rely on it), the performance of the contract becomes impossible, or so fundamentally different that it cannot be performed by the party. A contract will not be frustrated simply because it becomes more expensive or more difficult to comply with the contract, and it is generally quite difficult to prove frustration of contract.
If a frustrating event occurs then the contract will be at an end; monies paid under the contract can be recovered subject to an allowance for expenses incurred by the other party.
If you are concerned about the effects of the coronavirus on your business or on any of your contracts with clients or suppliers, our commercial department is standing by to assist. Contact firstname.lastname@example.org or 0207 613 7146 if you wish to discuss further.