Partner Jeremy Laws discusses Business Contracts in the Aftermath of COVID-19.
For many businesses, the major concern at the outbreak of the COVID-19 pandemic was simply how they would survive. Now, as the lockdown slowly begins to lift, the focus is shifting. Attention is turning to how contracts already entered into will be performed and, if they cannot be, what options there are.
What is a force majeure clause?
At its most basic, a force majeure clause details the way in which parties to a contract will be released, and to what extent, from carrying out their obligations in certain circumstances. They are intended to protect parties by preventing them from being in breach of contract when events outside of their control happen.
An entitlement to rely on a force majeure clause can:
- permit a party to the contract to fail to fulfil their obligations, either completely or in part;
- allow a party to delay performance of their obligations;
- allow a party to request more time to perform their obligations; and
- give a party the ability to terminate the contract.
What do you need to consider and do to rely on a force majeure clause?
- The first step is to review the contract, to see if it includes a force majeure clause.
- If it does, then the party who is seeking to rely on the clause must show that a specified event has occurred and that it falls within the defined terms in the clause. A clause may include specific reference to events that will trigger the force majeure clause. For instance, specific reference could be made to a ‘pandemic or epidemic’, ‘disease’ or an ‘act of government’ which may all apply to COVID-19. A clause may also set out general criteria. An example would be an inclusion of the term ‘events or circumstances beyond the parties’ control’. The party seeking to rely on the clause will need to show that the event (e.g. COVID-19) was beyond its control and that there was no action it could have taken to prevent or mitigate the event.
- If a party maintains that they have been prevented from performing their obligations, then they must show that it was either physically or legally impossible to fulfil them. This is a high threshold test. It will not be enough for a party to argue or demonstrate that (to fulfil the requirements of the contract) it was more difficult, more expensive or less profitable. This may be particularly relevant to business contracts within supply chains as it may be that parties would be expected to take reasonable steps to mitigate issues within the chain, or to obtain alternative supplies, rather than to rely on the force majeure clause.
- A party must also show that the force majeure event that they are seeking to rely on was the sole cause of the non-performance of their contractual obligations, rather than it just being a contributing factor. This is likely to be a significantly disputed element in any claim to rely on a force majeure clause.
- Not only will a party need to show that their inability to perform was due to circumstances out of their control, but they will also need to show that their non-performance was unavoidable. Essentially, a party must show that there was no alternative action that they could have taken to avoid or minimise their inability to perform the contract. The courts will apply a test of reasonableness as to the alternative steps or measures that a party could have taken.
- Parties should also check the contract to see whether notice provisions within the force majeure clause have been complied with. For instance, have timing requirements been adhered to and has the correct method of service been followed?
What if a contract does not contain a force majeure clause?
If a contract does not contain a force majeure clause, it is very unlikely that one will be implied. Therefore, parties may need to consider and rely upon the common law doctrine of frustration.
To rely on the doctrine of frustration to get out of contractual obligations, an event will need to have made the performance of the contract impossible or to have changed what is required of the parties to something fundamentally different than was intended. Furthermore, it must be shown that making the parties continue with the performance of the contract would be unjust and/or unfair.
The effect of a contract being frustrated is the ending of the parties’ obligations. If a contract has been frustrated it absolves the parties from any future performance of the contract. No ongoing relationship between the parties is maintained.
Historically, it has been very difficult for a party to establish that a contract has been frustrated. Examples of instances which have historically led to contracts being frustrated include changes in laws, the cancellation of an event, and the delay or commandeering of goods and/or services (provided for by the contract) by the Government.
Non-performance by a party must have become impossible and it will not be enough for a party to argue that their obligations under the contract have simply become more challenging. The length of the contract will also be relevant and therefore the duration of an ‘intervening event’ will be relevant. Whilst the impact of COVID-19 is likely to be severe, in application to a 10 year contract it may be seen to be temporary in nature as restrictions and lockdowns will pass in time.
There is no uniform way to advise how a force majeure clause will work in practice. The assessment and advice that follows will turn on the wording of the force majeure clause, the event that has occurred and its consequences.
It remains to be seen how the courts will construe force majeure clauses in light of COVID-19. What is certain is that businesses should be reviewing their commercial contracts and be aware of the content of any force majeure clauses, their scope and their limitations.