The reality of the Covid-19 outbreak is forcing businesses to adapt to a changing economic environment. In some cases, businesses are struggling to meet their contractual obligations and may seek to rely on a contractual provision called a ‘Force Majeure’ clause to excuse them from performing their obligations.
The underlying principle behind a Force Majeure clause is that a contracting party may be excused from their performance for all, or part, of its obligations under a contract (and any subsequent liability), upon the occurrence of events which are outside of the party’s control.
It is important to note that Force Majeure is not a legal doctrine, it is a contractual remedy that is set out in a contract. So if there is no express Force Majeure clause in the contract then the journey stops there and Force Majeure is not available to either party. [Note the legal doctrine of frustration of contract may assist, for which see our later article].
Under English law, the scope of a Force Majeure clause will depend entirely on how it was worded in a specific contractual agreement. In understanding whether a Force Majeure clause will allow you or a contracting party to be excused from performing a contractual obligation, you should pay specific attention to what events are referred to in the provision. Force Majeure is not a “term of art”, which means that the Court will not imply events into it, only events that the parties agreed to constitute a Force Majeure event are covered.
Guidance from the Courts suggests that Force Majeure clauses should be drafted to include a broad range of events.
Clauses could include references to “natural disasters” or “acts of God” generally, whilst specific reference to “pandemics” would also be valid. A failure to refer to either category of event may lead to contractual parties running the risk of incorporating clauses which could be deemed too vague to have contractual effect, (British Electrical and Associated Industries (Cardiff) Ltd v Patley Pressings Ltd  1 WLR. 280).
In addition, Force Majeure clauses may only be relied upon if an event is the sole effective cause of a party’s default on their contractual obligations (Intertradex v Lesieur  2 Lloyd’s Reports 509).
The effect of a Force Majeure clause is dependent on its drafting, however, common effects usually include:
- A right to terminate the agreement if the Force Majeure event makes it impossible for parties to perform their obligations under the contract at a later date, and does not merely hinder the parties from doing so (Tennants (Lancashire), Limited Appellants; v C. S. Wilson and Company, Limited Respondents  A.C. 495) (the Force Majeure clause itself may include a specified notice period for the termination);
- Requiring the party seeking to rely on the Force Majeure clause to have taken all reasonable steps to avoid the event’s consequences before invoking the clause (Channel Island Ferries Ltd v Sealink UK Ltd  1 Lloyd’s Rep 323);
- The party invoking the Force Majeure clause will not suffer any liability for their lack of performance under the contract; and
- Any obligations under the contractual agreement are suspended for the duration of the Force Majeure event (unless the parties agree otherwise) and reactivate when the event comes to a conclusion.
Central to the present Covid-19 crisis has been the issue of contractual performance with businesses in the construction, travel and hospitality sectors struggling with sharp declines in consumer demand. This raises concerns on how they may fulfil their contractual obligations which can often form part of a larger supply chain.
The outbreak of a pandemic may inevitably render contractual performance difficult or impossible for some businesses. A contractual party may seek to rely on a Force Majeure clause or the common law concept of ‘frustration’ to excuse their performance. The party invoking the Force Majeure clause carries the burden of proving the current circumstances (ie Covid-19) fall within the circumstances outlined in the clause.
While Spring Law advises seeking legal advice if you are considering relying on a Force Majeure clause or a contractual party has invoked it, it is important to keep in mind both parties may also be affected by changes to the law through emergency legislation related to Covid-19. [Note in this regard, for example, The Coronavirus Act 2020 which has stopped Landlords from forfeiting commercial and residential leases until June and September 2020 for non-payment of rent].
Where possible, contractual parties are encouraged to maintain open and proactive dialogue with each other on their respective difficulties with contractual performance, in order to reach a commercially viable compromise as early as possible.
Covid-19 is having a strong impact on stakeholders in every industry, from employees to large businesses. In these unprecedented times, reliance on Force Majeure clauses will be met with increased scrutiny. The precise wording must offer sufficient protection to a party seeking to excuse itself before they take steps to cease performance under a contract; which could otherwise expose them to claims of breach of contact. As well as reviewing Force Majeure clauses, contractual parties should also consider their contract provisions on termination more broadly.
We acknowledge that in addition to an increased consideration of the use of Force Majeure clauses, the Covid-19 crisis also raises issues relating to employers’ obligations of health and safety, in particular their decisions to suspend staff or implement remote working policies. Any risk mitigation or disputes arising out of these circumstances are also areas that Spring Law can provide guidance on.
Please contact Tim Perry at email@example.com to discuss any queries.