Force Majeure clauses in light of the COVID-19 outbreak
The recent COVID-19 outbreak has faced businesses with an unprecedented challenge in looking after their staff and customers, whilst doing their best to continue trading as best as possible. With such an unexpected and devastating event causing such a global disturbance, many businesses are likely to find that they are simply unable to honour existing contracts. In the event the parties are unable to fulfil their obligations, who is liable for cancellations of such contracts and ultimately what options are available to such businesses? A crucial tool in deciding the difference between a claim for serious breach of contract, or whether the contract is terminated is the force Majeure clause.
Force Majeure – what is it?
A Force Majeure clause (French for superior force) is a contractual provision that allows for the release of the contracted parties of their contractual obligations in the event of certain circumstances arising beyond their control that make the performance of their obligations inadvisable, impractical, illegal or impossible.
Unlike other jurisdictions, under UK common law a Force Majeure clause is not accepted as an implied term of a contract. This meaning that for force-majeure to be considered, it must be expressly written into a contract, with the specific circumstances being stated.
Due to the severity of the impact force-majeure will have on the parties’ rights on obligations, English courts show a narrow interpretation of force-majeure clause. Therefore, when considering whether the COVID-19 outbreak constitutes a force-majeure event, the wording of the contractual clause will be pivotal.
Should “disease” or “pandemic” or other similar descriptions of the event not be listed expressly into the clause, the Court may accept certain umbrella terms such as “acts of God” and “irresistible force of nature” in relation to natural disasters. In light of the Court’s strict interpretation, the wording of the clause should be considered very carefully.
Consideration must be given as to how the contracted performance has been affected, i.e. how, if at all, has COVID-19 delayed, obstructed or prevented the parties’ performance? It has been readily documented that English courts are unwilling to accept force-majeure on the basis that the obligations have become uneconomically viable to perform. It is therefore important to consider what the clause covers, and whether alternative performance involving third parties (I.e. alternative suppliers) remains viable, as if so, this may subvert reliance on any force-majeure provision.
Force-Majeure clauses do not necessarily give rise to an instant termination of the contract, with some clauses providing a suspension of obligations for a set period of time. However, should all relevant circumstances satisfy what is required for an incident of force-majeure, the clause normally sets out what is to happen next. It should also be noted that upon notice of force-majeure being given, the recipient may ultimately acquire an entitlement to terminate, therefore requiring due consideration before seeking to pursue this remedy.
Where international contracts are subject to UK law, they will be subject to the same difficulty relying on a force-majeure clause to circumvent contractual liability under UK law.
What if there is no force-majeure clause available?
Where there is no force-majeure available, parties to a contract may seek alternative remedies via the common law doctrine of “frustration.”
In essence, a frustration of contract arises an unforeseen event causes the impossibility of performance.
Much like force-majeure, frustration of contract allows for the parties to be relieved of their legal obligations and can prove equally onerous to successfully pursue. In a frustration of contract claim, due consideration must be given to interrupting events by comparing the surrounding circumstances of the parties at the date of entering the contract, the circumstances that have arisen and whether they are radically different as a result of the change in circumstance following the supervening act. Supervening events that give rise to frustration of contracts include, but are not limited to, banning attendances at event venues following a virus outbreak, such as that we are currently experiencing in the UK with the COVID-19 outbreak.
The aftermath of the COVID-19 outbreak will undoubtedly give rise to many contractual disputes.
Our litigation team is here to advise you on this complex area of the law, which is requiring all parties to monitor the law and any new authorities (of which there will be plenty) very carefully in order to advise clients.