COVID-19

Contracts and force majeure: is COVID-19 a force majeure event?

Force majeure clauses are a standard provision in many business contracts. Yet there is no English or Scottish case-law which refers to force majeure in the context of epidemics or pandemics, despite previous outbreaks of SARS and Ebola.

Business contracts are under increased scrutiny due to the pressures in terms of performance, at almost every level in the supply chain. This might include agreements with customers, suppliers, property leases and other contracts including with lenders.

‘A lot of individual companies are under a lot of pressure, with a workforce which is working from home, some have been furloughed, others have perhaps been laid off or put in a position where they cannot perform in the same way,’ says Paul Corren, Partner at the city law firm Wedlake Bell

Suppliers are reviewing their current agreements to see if they can mitigate any performance obligations they may have under the current contracts, while companies who are contracting for good or services are looking to avoid suppliers evade or otherwise limit their obligations.

‘We’ve been approached daily about obligations and liabilities under those contracts,’ says Corren. ‘This has drawn a lot of attention onto an area of contracts that are often overlooked, because we do not use them very often.’

Force majeure

As business disruption and interruption brought about by COVID-19 has put a clear focus on contractual obligations, a typical question arising from clients is whether a ‘force majeure’ clause can excuse a party from performing their obligations either in whole or in part.

Force majeure clauses appear in a number of business contracts as a standard provision. They alter the obligations and/or liabilities under a contract when an extraordinary event or circumstances beyond control prevents one or all of them from fulfilling those obligations.

However, complications arise due to the fact that under English and Scottish Law, despite previous outbreaks of SARS and Ebola, there are no previous reported case-law directly on the operation of force majeure clauses in the contexts of epidemics or pandemics.

‘I suspect that will change post COVID-19,’ says Corren, whose firm has looked at the overall approach that the courts have taken to these clauses.

In English law, force is a question of contract law – not general common law – therefore the courts have no power in themselves to declare a particular event, like COVID-19, as a force majeure event.

This means that whether a particular clause releases a part of contractual liability will depend on the precise wording used in the clause. It is down to the party seeking to rely on the force majeure liability to ultimately convince a court that the contract excused their non-performance or late performance.

Force majeure clauses often define a ‘contract impacting event,’ such as war, terrorism, earthquakes, hurricanes, or acts of government. ‘If the words epidemic or pandemic are referred to in the clause, that would cover liabilities in relation to COVID-19,’ says Corren.

Where no event is specifically mentioned, it ill be a question of interpretation of the clause, or general wording such as ‘causes beyond our reasonable control.’

A high bar

If it is accepted that COVID-19 pandemic is an event covered by a force majeure clause, the next key question is the impact on the affected party’s ability to perform its contractual obligations.

The impact on performance that is required for the clause to be triggered is often specified as either ‘prevented,’ hindered’ or ‘delayed’ performance. Where prevented has been used, it means that it must be physically or legally impossible to perform the contractual obligations.

‘When you start thinking about this in today’s day and age of technology and the ability to find many alternative forms of performance, that is quite a high bar,’ says Corren.

‘Hindered’ is a lesser standard and may be triggered where performance has become substantially more difficult. ‘Delayed’ is also less onerous. ‘The key is being able to demonstrate that COVID-19 has delayed their performance – and a lot of companies should be able to demonstrate that in the last three weeks.’

As the criteria force majeure is often complicated to satisfy Corren always recommends seeking legal advice. ‘It’s not as straight forward as it should be,’ he says.

No clause?

What is there is no force majeure clause? In some very exceptional circumstances, where an unforeseen event has happened outside of the control of the parties has made the contract impossible to perform or radically different – to the point where it would be unfair to hold the parties to them – the courts may a agree that the contract is ‘frustrated’.

‘Frustration of a contract really brings a contract to an end,’ says Corren. ‘It’s a difficult area of law, and there is a debate around if COVID-19 was a foreseeable or unforeseeable event.’

‘The speed of the impact may have taken most of us by surprise, however some have been warning about this kind of epidemic,’ says Corren. ‘Bill Gates, for example, was lecturing in 2015 about a virus with these exact kinds of outcomes.’

 

Paul Corren, Partner at Wedlake Bell, spoke at the French Chamber’s webinar ‘Financial support and advice: limiting the impact of COVID-19 on your business’ on 6 April.

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