Can my force majeure clause protect me against the economic impact of coronavirus (COVID-19)?

Can my force majeure clause protect me against the economic impact of coronavirus (COVID-19)?

Is there a force majeure event?

In English law, the expression ‘force majeure’ does not refer to a legal doctrine. Instead, the expression ‘force majeure clause’ is used to describe a contractual term which provides that, on the happening of a specified event or event beyond the parties’ control, one (or both) of the parties:

• is entitled to cancel the contract (or it may be cancelled automatically)

• is excused from performance of the contract, in whole or in part

• is entitled to suspend performance or to claim an extension of time for performance

Whether or not a force majeure clause will assist in suspending performance obligations under a contract or give rise to a right to terminate a contract will be subject to the particular drafting of the clause and the general principles of contractual interpretation should be applied. See Practice Notes: Contract interpretation—the guiding principles and Contract interpretation—rules of contract interpretation.

It will be necessary to check to see if the definition of force majeure is wide enough to cover coronavirus (COVID–19) or the impact of coronavirus (such as supply chain disruption). If pandemic is not specifically referred to, does it fall within one of the itemised ‘Force Majeure Events’? For example, ‘Act of God’ is often used in force majeure clauses but would it cover the specific circumstances? For further commentary and examples of how the courts have interpreted this phrase, see: What constitutes an act of God: Halsbury's Laws of England [269].

Definitions used may also include epidemics, acts of government, restrictions on import and export, failure in supply chain. These clauses are interpreted strictly and it will be for the party seeking to rely on the clause to show that the impact of coronavirus falls within the definition. For more information, see Practice Note: Contract interpretation—rules of contract interpretation—Contra proferentem principle.

Where expansive wording such as ‘any event or sequence of events beyond a party’s reasonable control’ are included, its effect may be limited by any list of events to which it is attached. The ejusdem generis principle, provides that where a contractual term contains a list of specific words with some common characteristic and these words are followed by a general word (such as ‘other’), the meaning of the general word will be confined to cover the same type of subject matter as that covered by the specific words. For more information, see Q&A: Where a force majeure event is defined as something beyond a party's reasonable control 'including but not limited to' a list of specified events, would a court consider that list as indicative of the type of event that would constitute a force majeure event?

For further information, see:

• Practice Note: Discharge by force majeure

• Checklist: Drafting and negotiating a force majeure clause—checklist

• Precedents: Force majeure clause and Force majeure event definition and associated Drafting Notes

Has performance been prevented?

Where coronavirus is found to be a force majeure event within the definition used, it is important to check what the trigger is to the clause coming into effect. Is it that performance has to be prevented, hindered or delayed? This will depend on the drafting of the clause and be subject to the usual rules of contractual interpretation. For example, a party seeking to rely on the clause when performance has been prevented will not be able to benefit from the clause where performance is more difficult or unprofitable (Thames Valley Power v Total Gas & Power).

Did the force majeure cause the non-performance?

The decision in Seadrill Ghana v Tullow Ghana illustrates that it will be rare for a force majeure clause not to require that the force majeure event must have an impact on the performance of the contract. The decision demonstrates the need for the alleged force majeure event to be the sole operative cause impacting performance of the contract, rather than being a concurrent cause, unless the clause itself specifically provides otherwise.

There has been some consideration of whether or not you need to overcome a ‘but for’ test of causation when seeking to rely on a force majeure clause, ie that the party seeking to rely on the clause must establish that ‘but for’ the force majeure event they would have performed under the contract. The first instance decision in Classic Maritime v Limbungan did not change the established rule that effective reliance on a force majeure clause does not import such a ‘but for’ causation requirement, it did however indicate that there can be cases where an apparent force majeure provision, depending on its precise wording, could import such a test (see News Analysis of the first instance decision: Force majeure—is it necessary to prove causation? and the Court of Appeal decision: Contractual exception clauses, force majeure, causation and damages (Classic Maritime v Limbungan Makmur)). However, Classic Maritime was very much a case on its own facts and, as the Court of Appeal considered (upholding the first instance decision on this point), the critical issue was the construction of the words used in the particular clause.

Do I have to mitigate the effect of the force majeure?

Some force majeure clauses require the party that is affected by the force majeure to mitigate its impact. Any requirements that are stipulated in the contract should be followed. These may be qualified by reasonable or best endeavours which will impose different levels of obligations on the affected party. For further information, see Practice Note: Reasonable and best endeavours.

Seadrill Ghana v Tullow Ghana also considered the obligation to use ‘reasonable endeavours’ and found this required Tullow Ghana to consider Seadrill’s commercial interests under the contract as well as its own. See News Analysis: Force majeure and reasonable endeavours (Seadrill Ghana v Tullow Ghana). Although this obligation was not present in Classic Maritime, and there was no express wording to mitigate the effects of the force majeure event, the court decided that in the essence of express wording to the contrary, Limbungan had to show it has taken reasonable steps to mitigate such effects.

Can I cancel the contact?

Since force majeure is a contractually defined right, the options available in the event of a force majeure event will be specified in the contract. This can include suspension of the obligation to perform for a given period (usually the period that the force majeure subsists). Some provisions include a right to terminate if the force majeure event continues beyond a specified period. Sometimes this right is given to both parties or just to one party.

Check the drafting provisions to assess your options.

Will I still be paid?

Payment will depend on the provisions of the contract. This will be of particular concern where payment obligations are suspended during the period of force majeure and payment terms are in arrears and/or based on milestones. This could impact significantly on the cash flow of the business.

Maintaining operations at a level to be able to recommence performance as soon as the force majeure ceases to affect performance of obligations under the contract can result in additional costs without the right to receive payment. This can erode the profit in a contract or push the contract into a loss. If a supplier has a right to terminate a contract this could provide an opportunity to bring the customer to the table to negotiate continued but different performance and the associated costs.

Can the customer challenge the validity of the force majeure clause?

It may be possible to challenge the validity of a force majeure clause under section 3 of the Unfair Contract Terms Act 1977 which applies to contracts where one of parties deals on the other party's written standard terms of business; in which case the court is required to determine whether the clause is reasonable.

What happens if I trigger the clause, suspend performance and I get it wrong?

If a party ceases to perform a contract by incorrectly claiming force majeure, that party may be in repudiatory breach of the contract. For further information, see Practice Note: Repudiation.

For more information on breach of contract, including information regarding acceptance of, or affirming the breach, see Practice Notes: Termination for breach of contract and Consequences of termination boilerplate clauses together with : Contract termination—checklist and the following Precedents: Deed of termination of contract and Termination clause.

What other contract management options should I consider?

Consider contacting the other contracting party to see if it is possible to resolve any contractual issues through sensible dialogue. Challenging times may encourage co-operation and both parties may be open to agreeing a mutually beneficial variation to the terms of the original contract to bridge the issue. See Practice Note: Contract variation and Contract variation—checklist. See also, Precedents: Deed of variation and Variation agreement.

For further risk management considerations, see: Contract risk management clauses—checklist. See also Practice Notes: Managing a trading relationship with a business in financial difficulty and Reviewing commercial contracts to minimise financial difficulties.

Finally, check the availability of insurance cover.

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