The recent outbreak of coronavirus (COVID-19) has closed schools, cancelled major sporting events, suspended the Premier League, and forced many institutions to close or recommend employees stay at home. Share prices around the world continue to fall sharply. The Bank of England has lowered interest rates to stem the downward economic trend. Public gatherings may soon be banned in the UK. The World Health Organisation has declared coronavirus a worldwide pandemic.
But how will coronavirus affect the effective enforcement of contractual terms? It will likely cause problems for manufacturing activity, to businesses, supply chains and the availability of staff. Defaulting parties will likely seek to invoke force majeure provisions in contracts in order to excuse non-performance or delay. The key takeaway point is that any contract that contains a force majeure claim may be subject to a claim and may lead to litigation.
The invocation of force majeure clauses in litigation (to our knowledge) has not yet been the subject of a claim issued at the High Court. However, it is likely a claim will be forthcoming, given the number of contractual non-performances that have been and will likely continue whilst coronavirus impacts the global supply chain and the domestic routine.
What is a force majeure?
Force majeure is the happening of events outside the control of the parties, for example natural disasters. It is a clause that is included in contracts to remove liability for unavoidable catastrophes that interrupt the expected course of events. Ordinarily it is for parties to provide in a contract that events outside the control of the parties will not make the defaulting party if they preclude it from performing its contractual obligations.
However, if a contract does not contain a force majeure clause then a defaulting party cannot rely on coronavirus to get out a bad bargain and will be in breach of the agreement if it fails to perform its obligations.
What is a force majeure clause?
A force majeure clause is a contractual terms by which one or all parties are (upon an event happening beyond their control) can:
- either wholly or in part be excused from performance of the contract;
- suspend performance of the contract;
- claim an extension of time for performance of its contractual obligations.
Force majeure clauses typically operate by excusing non-perfomance when a particular defined force majeure event occurs.
Which types of contracts have force majeure clauses?
- Consumer contracts;
- Construction contracts;
- Supply contracts;
- Contracts for commodities; or
- Contracts with a long term ongoing supply
Examples of template force majeure clauses in commercial contracts
If you as a party to a commercial contract are either considering defaulting on your contract or you as a party seek to enforce the other party’s contractual obligations, then you must check your contract for boilerplate force majeure clauses such as the following:
Notwithstanding anything to the contrary contained herein, neither party shall be liable for any delays or failures in performance resulting from acts beyond its reasonable control including, without limitation, acts of God, acts of war or terrorism, shortage of supply, breakdowns or malfunctions, interruptions or malfunction of computer facilities, or loss of data due to power failures or mechanical difficulties with information storage or retrieval systems, labor difficulties or civil unrest. Notwithstanding the foregoing, in the event of such an occurrence, each party agrees to make a good faith effort to perform its obligations hereunder.
Neither party shall be held liable or responsible to the other party nor be deemed to have defaulted under or breached this Agreement for failure or delay in fulfilling or performing any obligation under this Agreement when such failure or delay is caused by or results from causes beyond the reasonable control of the affected party, including but not limited to fire, floods, embargoes, war, acts of war (whether war is declared or not), insurrections, riots, civil commotions, strikes, lockouts or other labor disturbances, acts of God or acts, omissions or delays in acting by any governmental authority; provided, however, that the party so affected shall use reasonable commercial efforts to avoid or remove such causes of nonperformance, and shall continue performance hereunder with reasonable dispatch whenever such causes are removed. Either party shall provide the other party with prompt written notice of any delay or failure to perform that occurs by reason of force majeure. The parties shall mutually seek a resolution of the delay or the failure to perform as noted above.
Is the outbreak of coronavirus pandemic a force majeure event?
To ascertain whether COVID-19 is a force majeure event is the key question. Some contracts will specifically list defined force majeure events. Generally it will of course be a lot easier for a party to invoke a force majeur clause if an epidemic is listed. Epidemics are not wholly uncommon, for example, foot and mouth disease, SARS, ebola, swine flu, therefore contracts may contain the outbreak of disease as a force majeure event.
Also the opposite may be true, in that certain contracts may specifically define events which are precluded from evoking the force majeure clause. Savvy parties will often utilise such techniques to allocate risk to the other side but these risks ordinarily do not include global epidemics and instead are related to such events as economic downturns and other financial issues.
This also raises another interesting question, there could arise a situation where there is a tension between a defined force majeure event and an excluded event. For example, what if one party seeks to rely on a global pandemic to excuse non-performance and the other party relies on the specifically eluded event of an economic downturn (which we are currently in the midst of).
Can a party claim that coronavirus is covered by a general force majeure clause?
A party must first examine the contract and consider whether the force majeure clause includes a speciifc trigger under which a party may invoke rights of termination and/or suspension. Check the contract for specific wording such as quarantines, pandemics, epidemic, widespread disease and/or government intervention as a result.
It is likely, perhaps even certain, that contracts will not include the specific word “coronavirus” given that it as a novel strain of flu. It is likely that the triggering event for a claim would not be the virus itself, but the resulting action that would be taken such as closing of posts, substantial impact to infrastructure, quarantines and government intervention.
Therefore a party should be able to rely on force majeure for non-performance if the force majeure clause includes reference to “quarantines, epidemics or diseases”.
Can the coronavirus pandemic be defined as an “act of god”?
Most force majeure clauses will include wording such as an “act of god” or a catch all phrase such as an “”irresistible act of nature”. Such a provision may include the coronavirus pandemic, however, it is difficult to advise without understanding the nature of the particular contract, the specific wording of the force majeure clause and the general terms of the contract (alongside the governing law clause).
NB: Parties to a contract should NOT assume that standard force majeur catch all clauses will be sufficient to permit a party to no longer perform its contractual obligations. Please seek legal advice immediately to check the provisions of your force majeure clause carefully.
What remedies are there for a party when the other party terminates the contract as a result of coronavirus?
If one party invokes either a specific force majeure clause or the general act of god catch all clause, the “defaulting” party must not be able to determine another way of performing the contract, otherwise said party will be in breach of contract. For example, if a buyer of goods refuses to make contractual payments for goods, said party would need a contractual provision which allows it to withhold payment otherwise it will be in breach of contract.
However, if the force majeure clause is invoked and a court later rules that the clause does not cover the coronavirus pandemic, then substantial damages may be awarded against the defaulting party who has breached the contract.
Claims for breach of contract as a result of force majeure clauses
The key question is, in a specific contract, whether the coronavirus pandemic and the resultant consequences consitutes a force majeure event.
- In order to successfully invoke the force majeure clause without breaching the contract, if the clause states that the event must prevent performance, the “defaulting” party must successfully show that performance of its contractual obligations has become impossible and not merely hindered.
- On the other hand, should the force majeure clause state that the event “hinders” contractual performance, then the threshold is obviously lower and it will be easier for the “defaulting” party to show that even though it can technically still perform, such performance has been hindered.
Force majeure claims in English law
To summarise, in order to rely on a force majeure clause, UK case law demonstrates that a claimant should follow the 4 steps below.
1.Burden of Proof
The burden of proof is on the party seeking to rely on the force majeure clause. A claimant must demonstrate that the event (such as the coronavirus pandemic) falls within the clause and that non-performance was due to said frustrating event.
2.Interpretation of the specific contractual clause
In Coastal (Bermuda) Petroleum Ltd v VTT Vulcan Petroleum SA (No 2) (The Marine Star)  2 Lloyd’s Rep 383, the Court of Appeal held that a court should interpret a force majeure clause by reference to the words the parties had used, not their general intention.
Tennants (Lancashire) Ltd v G.S. Wilson & Co. Ltd  AC 495 is authority for the principle that if the triggering event “prevents” perfomance, a claimant must prove that the performance is either physically or legally impossible. As stated above, words such as “delay” or “hinder” have a far broader scope. However, say for example a manufacturer is unwilling to supply goods given that the majority of its workforce are self-isolating and as such the costs of manufacturing have increase, the increased cost in performing the contract is unlikely to be enough to trigger the clause.
3.The force majeure event must be the only effective cause of default
In Classic Maritime Inc v Limbungan Makmur SDN BHD  EWCA Civ 1102, the Court of Appeal held that a charterer could not rely on the exceptions clause (which in effect was a force majeure clause) in the affreightment contract as it would not have been ready and willing to provide cargoes for shipment even if the exceptions event had not occurred.
Therefore, a force majeure event must be the only cause of deault. A party will not be excused performance of its obligations under the contract because of an exceptional event if it was not able and willing to perform its obligations in the absence of any supervening event preventing performance.
4.A defaulting party must show that it took reasonable steps to mitigate the effects of the event
In Channel Island Ferries Ltd v Sealink UK Ltd  1 Lloyd’s Rep 323, the court held that a clause which referred to events “beyond the control of the relevant party” can only be relied upon had that party taken all reasonable steps to avoid its operation or mitigate its results.
If coronavirus allows a party to invoke a force majeure clause what is the effect on the contract?
- Suspension: most force majeure clauses are suspensory. The affected obligations are suspended while the force majeure event continues, unless come to an alternative agreement. When the global/nationwide conditions return to normality, the contract is re-activated.
- Termination: certain force majeure clauses allow either or both parties to serve notice terminating the agreement after a specified period so that they can make alternative arrangements.
- Non-liability: the non-performing party’s liability for non-performance or delay in performance is removed ordinarily for as long as the force majeure event continues.
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