In light of the COVID-19 outbreak, there are issues relating to force majeure and frustration you may want to take into account when handling commercial contracts.
As a result of a pandemic or other crisis, businesses may either be unable to fulfil their contractual obligations or suffer losses because suppliers cannot fulfil theirs. Under normal circumstances, a claim for damages for breach of contract would be a possible remedy. However, if it is clear that the contractual failure was principally caused by an outbreak of disease (for example, the outbreak of COVID-19), a claim for breach may not be viable for the following reasons:
- There is an applicable force majeure clause in the relevant contract.
- The doctrine of frustration applies.
Force majeure clauses
A force majeure clause typically excuses one (or both) parties from performance of the contract in some way following the occurrence of certain events. This may result in the affected party’s obligations under the contract being suspended, until the force majeure event has passed, or may allow the affected party to terminate the contract. It is important to recognise that the scope of a force majeure clause (in English Law) will vary from agreement to agreement depending on how it has been negotiated. When determining whether a force majeure clause covers the outbreak of COVID-19, key factors to consider include:
- Whether the COVID-19 pandemic is specifically covered as a force majeure event in the contract.
A clause or definition may specifically refer to a ‘pandemic’ or ‘epidemic’ as a ‘Force Majeure Event’.
- If the COVID-19 pandemic is not specifically covered as a force majeure event, whether it may fall under the general wording of the force majeure clause.
A clause may be drafted more broadly with ‘catch all’ language, to include events such as acts of God, actions of government or diseases. Whether COVID-19 is covered by a force majeure clause will depend on the drafting and the intentions of the parties at the time the contract was entered into. Even if it is covered, other requirements may still need to be satisfied to constitute force majeure.
- Whether there has been a government decision or administrative action preventing performance.
Political interference language is commonly included in definitions of force majeure and it may be the case that government measures taken against COVID-19, such as forced closures or restrictions on movement, will allow an affected party to rely on this wording. The fact that the government action is genuinely outside the control of the affected party, as opposed to being the result of a request by the affected party, will be a key consideration here.
- Whether the contract excludes events that could have reasonably been provided against, avoided or overcome.
Some commentators have suggested that this could require comparison with actions taken after the SARS coronavirus outbreak in 2003. The word ‘reasonably’ will need to be considered objectively in this regard.
- Whether the affected party must show that the force majeure event has directly prevented or hindered performance of the contract.
The party that is seeking to rely on force majeure must usually establish that the force majeure event has prevented or hindered it from performance of the contract. This is mostly a factual question but will also turn on the exact wording of the clause. For example, some force majeure provisions require performance to have been rendered impossible, so the burden on, e.g. a contractor to show that it could not have sourced staff, equipment or materials from elsewhere will be high. Generally, force majeure clauses are not so generous as to offer relief where services or goods will simply be more expensive to perform or obtain.
- What duties there are on the affected party to limit the effects of the force majeure event.
The party that is claiming force majeure relief may be under a duty to show that it has taken reasonable steps to reduce the effects of the force majeure event, depending on the wording of the clause.
- What notice requirements apply.
Parties may wish to ascertain what the contractual requirements for notifying each other are and whether notification is a requirement for the affected party to benefit from the relief a force majeure clause provides. This will depend on the wording of the clause. In practice, it may be beneficial for parties to start a conversation regarding any problems they may encounter, for example, in supply chains, as early as possible.
- What the consequences of establishing force majeure are.
In most contracts, establishing force majeure will lead to relief from performance (suspension of the contract), thereby avoiding the risk of a serious breach of contract, and an extension of time for performance. Commonly, parties bear their own costs arising from any force majeure delay but there are exceptions where compensation may be payable after a certain duration or certain costs are payable from one party to another. Extended periods of force majeure can lead to a right for one or more parties to terminate the contract. If the parties do not wish this to happen, it is important to engage in discussions sooner rather than close to the deadline. It may be preferable for these to be held on a without prejudice basis.
- The impact on the contract of any change in law.
In some contracts, decisions or actions taken by governments and public authorities in response to the pandemic may trigger change in law relief and compensation, although often this relief is restricted to changes in law in the project or host country.
Non-performance clauses
Contracts may also contain punitive non-performance clauses such as liquidated damages which businesses will need to be aware of, and potentially plan for. Whether or not the business will be required to pay liquidated damages as a result of non-performance of contract or a force majeure event will depend on the drafting of the contract.
Frustration of contracts
In the absence of a force majeure clause, parties might have recourse to the common law doctrine of frustration. This provides that a party is discharged from its contractual obligations if a change in circumstances makes it physically or commercially impossible to perform the contract or would render performance radically different. Frustration is not a temporary solution and if this doctrine is invoked, the contract will be terminated.
A contract will not be frustrated simply because it becomes more difficult or more expensive to perform, or because a business has been let down by another supplier. This sets a high bar and the courts have confirmed that the circumstances where it can be invoked are narrow.
The bar will be reached in some situations arising from COVID-19, e.g. where the contract requires performance in a region that is subject to a state-imposed lockdown but, in many other instances, parties will need to refer to contractual force majeure clauses. If frustration applies, the consequences are set out in the Law Reform (Frustrated Contracts) Act 1943 which allows recovery of monies paid under the contract before it was discharged (subject to an allowance) at the court’s discretion, for expenses incurred by the other party.
Consumer contracts
In a consumer contract made on or after 1 October 2015, the Consumer Rights Act 2015 (CRA) will apply. A supplier’s force majeure clause in a consumer contract will need to satisfy the CRA's concepts of fairness and transparency. In a consumer contract, the Competition and Markets Authority (CMA) considers it permissible to exclude liability for delay or non-performance only where this is due to an event outside a trader's control. As the term force majeure may not be understood by consumers, it is advisable to use wording such as ‘events outside our control’.
Consumers also have additional rights beyond those granted to businesses in B2B contracts by virtue of consumer protection laws. For example, consumers may have the right under common law to a refund in respect of any services not performed by the trader.
Future contracts
When drafting a force majeure clause for a new contract, businesses should consider adding pandemics, epidemics and other crisis situations to the list of force majeure events. Businesses should also consider amending their standard terms of business to make sure that their force majeure clauses cover pandemic situations and crises.
