With the destructive and disruptive effects of COVID-19 being felt by us all, we are dealing with urgent enquiries about force majeure (which literally translates from French as “superior force”) every day.
You might quickly come to the view that if force majeure is concerned with extraordinary events – and there are few more extraordinary events one can think of as those that we are currently experiencing – force majeure must apply to many of your contracts.
However, that may not be so: there is no overriding concept of force majeure in English Law that comes to the rescue and can be implied into every contract. The simple point is this – if it’s not in the contract, you can’t rely on it. Everything depends on what each individual contract says.
So, let’s remind ourselves of the basics.
Generally speaking, in order to rely on a force majeure clause, a party must demonstrate the following:
- that the event in question has occurred (the FM Event);
- that the FM Event is the cause of its being unable to perform its obligations;
- that it has taken all reasonable steps to avoid or mitigate the FM Event or its consequences.
Has the FM Event occurred?
Force majeure clauses will often be drafted to include a number of specified, usually industry-specific FM Events, and then follow with a general ‘catch-all’ provision such as “any event outside the reasonable control of the party/ies”.
It is very unlikely that COVID-19 will be specifically identified save in contracts being written in the last few weeks and months. However, some clauses will include reference to ‘pandemics’, ‘epidemics’ or ‘global health emergencies’ which obviously makes it easier to demonstrate that COVID-19 is covered by the force majeure clause. Equally, there might be a reference to “government action” which again would likely capture the current circumstances.
Even if there is no specific reference to COVID-19 and its effects, all is not lost. There is no requirement in law to identify the FM Event specifically. COVID-19 and the action that has been taken by governments in response will likely be captured by the catch-all provision of “any event outside the reasonable control of the party/ies”
Has the FM Event caused the party to be unable to perform its obligations?
Again, this depends on the specific wording of the contract. The clause might say that the FM Event must have “prevented” performance or alternatively merely that it has “hindered” or “impeded” performance.
The difference is important: the requirement for a party to prove that an event has “prevented” performance sets a high bar. It’s not enough to show that performance was more difficult or expensive. But, as the global response to COVID-19 has dramatically intensified so as to close down many businesses and impose lockdowns on populations, it becomes easier to argue that performance has indeed been “prevented”.
Has the party relying on the force majeure clause taken all reasonable steps to avoid or mitigate the FM Event or its consequences?
Relying on a force majeure clause is a drastic step: it relieves a party from contractual obligations the non-performance of which would otherwise be a breach of contract. So, before a party can rely on this clause, it must demonstrate that it had taken reasonable steps to mitigate the effects of the FM Event.
Again, in the context of COVID-19, it is becoming increasingly difficult to imagine how one can mitigate against it and its effects. One example of mitigation might be ensuring that a workforce is adequately equipped for working from home such that the company can continue to perform its contractual obligations.
Notice obligations and consequences
It is very important to check the notice requirements before relying on a force majeure clause and make sure that you comply with them.
Ordinarily a force majeure clause will have the effect of suspending the obligations of the parties, rather than automatically terminating them. Sometimes termination rights can accrue to one or both parties after a period of suspension.
If the effects of a force majeure clause are particularly onerous (i.e. by allowing immediate termination) there is a risk that it could be caught by the Unfair Contract Terms Act 1977 (UCTA), which requires that such clauses be “reasonable”.
Practical points to consider
- If you want to rely on a force majeure clause in a current contract, check the wording carefully: make sure that COVID-19 could be caught by the clause; check whether the FM Event must prevent, impede, or hinder performance; and ensure you have taken reasonable steps to mitigate (it would be a good idea to keep records of these steps).
- Do not rush to invoke the force majeure clause. It is likely that no one has escaped the effect of COVID-19, including your contractual partner. As a matter of good commercial sense, approach them and see if you can discuss ways to manage the current circumstances, perhaps by signing a short-term bridging arrangement.
- If you are on the receiving end of a notice of force majeure, make sure the notice provisions have been complied with and, if UCTA applies, that the provisions within the force majeure clause, particularly in relation to suspension/termination are reasonable.
- If you are currently drafting contracts, consider if you want to list COVID-19 as an FM Event. The position in English law appears to be that an FM Event can include things that are reasonably foreseeable to either of the parties or in existence at the time of signing the contract. But, were you to list COVID-19 and then later rely on it, there is a risk that the other side would argue that your obligations to mitigate are particularly onerous, given what you knew at the time of signing the contract.
- Think carefully before you start re-writing all your boilerplate agreements to ensure that the force majeure provisions include epidemics or pandemics. These are hopefully rare occurrences and you risk making life more difficult for yourself: do you include epidemics or pandemics? Or both? And by reference to what – does it need to be officially designated/declared by a body? If so, which one? In the current circumstances, it took some time before COVID-19 was officially declared a pandemic by the WHO, during which there was already considerable disruption to industry. So a clause that included ‘pandemic’ would likely mean you would have to wait for such a designation before triggering it.
We realise that the next few months are going to be extremely challenging for our clients and we will endeavour to update you on any important developments as and when further guidance is issued, or new regulations are introduced. In the meantime, please rest assured that we are here for you at this time and will be pleased to assist you with any queries you may have as quickly as we possibly can.