With COVID-19 dominating the news, having an unprecedented effect on the economy, trading and key commercial sectors as well as tragic worldwide consequences; is the global pandemic enough to protect your business from a breach of contract claim if you are unable to perform your contractual obligations?
Force Majeure?
A party to a contract will only be able to rely on force majeure to excuse non-performance if there is a force majeure clause in the contract.
A force majeure clause, in English law, has the effect of relieving a party from its contractual obligations on the occurrence of specified events that are beyond the parties’ control. For instance, a flood, natural disaster or war are common features of a force majeure clause. These clauses cannot be implied and arise solely from the existence of an express clause in the contract. The starting point is to check your contract or agreement to see whether it contains a force majeure provision.
Can you rely on a Force Majeure clause?
Even if the contract contains a Force Majeure clause, it is not guaranteed that a party will be able to rely on it for protection against claims for breach of contract.
English Courts traditionally take a stringent approach to interpreting these clauses, and typically a party will need to show:
A force majeure event has occurred beyond the reasonable control of the affected party;
It has prevented, hindered or delayed the performance of its obligations under the contract; and
It has taken all reasonable steps to avoid or mitigate the event or its consequences.
Is COVID-19 a force majeure event?
Whether the disruption caused by COVID-19 is a force majeure event, will depend on the particular wording of the clause (rather than the parties’ intentions). Force Majeure clauses vary from contract to contract, and generally deals with political and/or natural events. If the clause makes no specific reference to epidemic, pandemic or quarantine (as it most likely will not), COVID-19 may be caught up by catch-all wording such as ‘Act of God’, or ‘other circumstances beyond the parties’ reasonable control’.
It is, of course, easier to bring a force majeure claim for COVID-19 if the clause expressly refers to a pandemic, though it is clear that COVID-19 would also qualify as a circumstance beyond the parties’ reasonable control.
Has COVID-19 prevented, hindered or delayed the performance of the contract?
There must be a causal link between COVID-19 and the affected party’s inability to perform its contractual duties. You will need to show that COVID-19 directly or indirectly caused non-performance of the contract.
The wording of the clause is significant here- a force majeure clause only requiring a party to be ‘hindered’ in their performance will be easier to enforce than one requiring a party to be ‘prevented’ from performing, by the event. Commonly, the latter wording is used.
If your entire office is self-isolating, for instance, and as such is unable to perform its duties under the contract, this could qualify as a force majeure event and therefore likely could be relied upon.
Difficulties may arise say, if performance involving another supplier remains possible, and you are seeking to rely on a force majeure clause. Though each case is different, and the main issue is the effect of COVID-19 on performance by the parties to the contract.
It is worth noting that despite potential economic increases, any disruption leading to increased costs to perform the obligations will are unlikely to be sufficient (even, as with COVID-19, the economy has taken a downturn as a result). A contract which has become more expensive or uneconomic to perform cannot constitute force majeure, despite the impact of COVID-19 on the economy.
Have you taken all reasonable steps to seek to avoid or mitigate the consequences?
The key here is that there cannot be an alternative solution to performing the obligations. Each contract will turn on its head and it is important to consider each contract individually to determine what would be ‘reasonable’ in the circumstances.
Whilst the measures coming into place with COVID-19 may make it difficult to mitigate its effects, it is still important to demonstrate you have considered all reasonable steps that may be taken (whilst still adhering to due processes and guidance from the Government to avoid the spread of the virus). We would advise keeping a thorough record of decisions made in this respect, which can be used as evidence further down the line.
Have you served notice?
Force majeure clauses generally require notice to be served and evidence supporting the inability to perform to be sent to the other party.
It is important to note that many contracts contain a time-bar specifying when notice must be served by in reference to when the affected party first became aware of force majeure circumstances.
The Courts have been known to reject force majeure clauses for a failure to comply with notice provisions. If you are in any doubt, please feel free to contact us and we can assist you.
Given the evolving nature of the COVID-19 outbreak, one solution may be to issue a rolling notice, which may enable you to resume performance of your obligations should it become possible.
Consequences?
If a force majeure claim is successful, the consequences for the parties will depend on the nature of the obligations affected as well as potentially involving the payment of compensation (if the contract allows for the same).
Remedies may include an extension of time, suspension of performance for the duration of the event, or termination of the contract should the event last longer than a specified time.
The clause itself, generally sets out next steps.
How to protect yourself?
Check whether you are insured and whether your policy covers any losses as a result of COVID-19
Check the scope of any force majeure provisions in your contract. If you do not have a force majeure provision, you may be able to rely on the common law doctrine of frustration.
Consider whether the force majeure contract contains specified events which may cover COVID-19, or if not, whether catch-all buzzwords have been included.
If you have obligations which can no longer be performed, consider whether these are directly as a result of COVID-19 (i.e. self-isolation, quarantine).
Consider what steps have been taken to minimise the impact of COVID-19 on your ability to perform your contract and ensure you can evidence the same – there is a high threshold to meet.
Review any notice requirements and ensure you are compliant with the same.
Consider any potential consequences of COVID-19, such as cancellation rights and related issues, i.e. quarantine costs and who must bear these.
What to do if you receive notice of force majeure?
Carefully consider the claim, whether notice has been served and the above requirements are met.
How can we help?
Disputes affecting the declaration or reliance of force majeure clause are inevitable as a result of COVID-19. If you are affected by this, or any other issue arising from a contract dispute, please contact our experienced team who are on-hand to provide pragmatic advice and assist you, as the affected or unaffected party to the contract.