COVID-19 The ‘Classic’ Force Majeure?
‘Force Majeure’ is a contractual term, usually tucked away at the end of the contract way after most people (except lawyers) have lost interest in reading any further.
The pandemic could be viewed as the ‘classic’ force majeure: a situation totally beyond the control of contractual parties. But what impact does the pandemic actually have on force majeure provisions in a contract?
What is Force Majeure?
The term, ‘force majeure’ is not defined in English law. Therefore, its meaning is dependent on how it is drafted in the contract. The concept is that an occurrence of unexpected events impacting performance may relieve parties of their contractual obligations.
How does the Force Majeure clause work?
A Force Majeure Event
The clause must specify the events which amount to force majeure. It may be drafted widely, to cover all events beyond a party’s control, or more narrowly and precisely, list specific events that would qualify.
At the drafting stage, parties may find it difficult to address all eventualities. COVID-19, specifically, would not have been imagined by the parties at the outset. However, some clauses do specify ‘pandemic’ or ‘epidemic’ as a force majeure event. Or, the pandemic may be implied from wording like ‘beyond control’ or ‘Act of God’.
When are Force Majeure clauses triggered?
It is important to identify the actual event that triggers the impact on performance. It is that trigger event that has to be beyond a party’s control. In the context of the current COVID-19 pandemic, for example, is it the pandemic itself, or a consequence of the pandemic, such as lack of staff due to illness, that impacts on performance?
The force majeure event also has to be the only trigger event. Existing financial difficulties making a party unable to perform its contractual obligations would mean that it cannot rely on the force majeure clause to absolve it from performance, even though that performance is now impossible as a result of the pandemic.
The impact of Force Majeure
The trigger must cause a detrimental impact on a party’s performance of the contract.
Sometimes the clause states that the party must be ‘prevented’ from performing its obligations. In this case, the obligation has to be physically or legally impossible to perform. Increased difficulty or delay or cost is not enough. If there are alternative ways of performing the contract (even if those ways would be extremely expensive) then the party is not ‘prevented’ from performing. In the example of lack of staff above, if it would be possible to recruit additional staff, albeit at a cost, then performance is not ‘prevented’, and the force majeure clause does not kick in. Whereas, if the staff are particularly skilled and there is now a shortage, then maybe the party would be ‘prevented’ from performing and can take advantage of the force majeure clause.
Sometimes the clause states that the party must be ‘delayed’ or ‘hindered’ from performing its obligations. In this case, performance does not have to be impossible, but there must be an impact that affects timing or makes the performance more difficult. Existence of alternative solutions may not prevent reliance on the clause in this instance. If it has become difficult, but not impossible, to replace staff off sick, this may be sufficient to amount to force majeure.
What is the effect of the Force Majeure clause?
The clause wording may allow an extension of time for performing obligations. Or there may be a pause or suspension of obligations until the event has subsided. This type of clause envisages the obligation being performed later on.
Other drafting may excuse non-performance, meaning a party never has to perform an obligation.
In these cases, only the obligations affected by the force majeure are suspended.
Some clauses permit the termination of a contract, perhaps after a specified period of force majeure.
A party relying on the force majeure clause usually has a duty to mitigate, or lessen, the impact on performance. This may have financial consequences for the party relying on the clause.
In all of these situations, there is the potential for a huge impact on both parties. Where a clause permits termination, it has to be considered whether invoking the clause is desirable, as termination of the whole contract may not be in either party’s interests. Always consider the effects of the clause and whether you want to start the clock on those effects, before invoking the clause.
Alternatives to Force Majeure
Other options may need to be considered. These may involve agreeing to a variation to the contract – whether short-term or permanent. It would be best to have any discussions about this on a without prejudice basis. Any agreed changes or short-term fixes should be documented.
Consider if the contract is automatically terminated by ‘frustration’ because of the unforeseen event.
To be frustrated, the contract must be impossible or illegal to perform, or performance of the contract would lead to something radically different from what the parties had originally envisaged – a difficult bar to clear.
Frustration won't apply if the parties might have considered the event at the start of the contract. The presence of a force majeure clause in the contract may in itself prevent a contract from being frustrated, especially if, in the case of COVID-19, it mentions 'epidemics' or 'pandemics’.
Again, frustration may not be in the parties' interests where termination is not the best outcome.
We can help you interpret your contract and advise on your options
As we keep hearing, these are ‘unprecedented times’ and we are in a situation that most contracts would not have envisaged at the outset. As is so often the case, the interpretation of force majeure clauses will depend on the precise drafting of the clause and a lot of external factors.
If the current circumstances are causing problems with any of your contracts, please contact Keith Kennedy (Head of our Corporate and Commercial Team) on 0161 684 6942 or at firstname.lastname@example.org. We can help you to interpret your contract and advise you on your options.
Amidst the uncertainty, one thing is clear: parties will be much keener to read the force majeure clauses in all future contracts.Subscribe to our newsletter
Please note that the information and opinions contained in this article are not intended to be comprehensive, nor to provide legal advice. No responsibility for its accuracy or correctness is assumed by Pearson Solicitors and Financial Advisers Ltd or any of its members or employees. Professional legal advice should be obtained before taking, or refraining from taking, any action as a result of this article.
This blog was posted some time ago and its contents may now be out of date. For the latest legal position relating to these issues, get in touch with the author - or make an enquiry now.