COVID-19: Commercial contracts and “force majeure”

4th August 2020 4:10 pm Comments Off on COVID-19: Commercial contracts and “force majeure”

Even as lockdown measures continue to ease across England and the rest of the UK, many businesses have found that since March they have been unable to perform contractual obligations. Lots of examples spring to mind; private nurseries that had to shut down for a period of time and re-open on a reduced capacity basis, building contractors who were suddenly unable to work because they could not practice safe working and social distancing and all sorts of other businesses supplying goods and services to other businesses and/or the public. Businesses and their customers alike have made enquiries about “force majeure” and what the impact of Covid-19 is on these unperformed contracts.

What is “force majeure”?

The first point to make clear is that in English law “force majeure” is not a stand-alone legal concept. In this jurisdiction this term relates to a set of provisions in a contract that typically define what type of event is considered to be a force majeure event and then goes on to state what the consequences of that event are on the performance of the outstanding contractual obligations of one or both of the parties to the contract. Usually these events will be outside of the control of the affected party and have the effect of preventing or delaying performance of obligations.

It is important to note, therefore, that if you believe that Covid-19 has made performance of your obligations under a contract impossible, or significantly hindered or delayed such performance, the first thing you need to do is check your terms and conditions. If there is no force majeure clause, you will have to look at other ways of escaping liability, which we shall deal with in more detail below.

So, you have checked your contract and the good news is there is a force majeure clause – what now? If a force majeure clause is present, you need to seek legal advice immediately as a force majeure clause will operate according to the interpretation of the specific wording of that clause.

Firstly, what events trigger the application of the clause? Is this event included in the list either specifically or does it fall within a general description of a type of event? For example, the contract may define a “force majeure” event as including an “epidemic” or “pandemic” (likely to include Covid-19) or it may refer more generally to an “act of god”, “act of nature” or even “any event outside of the party’s control”. There is no accepted definition of such general phrases and the wording will need to be considered carefully in the context of the rest of the clause. For example, an “act of nature” could be interpreted to include an event like Covid-19, but if the wording of the contract is “an act of nature such as flooding, tempest, blizzard…” etc. then arguably this is less likely to include Covid-19 as it appears to be intended to take account of extreme weather events. Also consider, is the wording of the definition of the events covered intended to be exhaustive or not? If the event in question is not covered by the wording of the contract at all then it is not a force majeure event.

Secondly, what is the effect of the event in question? It is not enough that the force majeure event simply occurred, the occurrence of the specified event must have made the party’s performance of the contract impossible, or substantially hindered or delayed such performance. Again, careful consideration needs to be given to this point. Has performance really been prevented? Or is it just much more difficult or expensive? If you are asserting that performance is impossible, you will have to show that it really is so and not just considerably more difficult or expensive to perform the contract. If you assert that your ability to perform has been hindered, then you will need to show this. For example, if you supply stock which you obtain from a wholesaler and that stock becomes a little more expensive for you to buy, therefore eroding any profit you might have made, has your performance been hindered? By comparison, if the wholesaler increases the price by a factor of 10, therefore meaning that your performance of the contract actually costs you money rather than making you profit, has your performance been hindered?

Force majeure: do I still have a duty to mitigate my losses?

Yes and no. Generally, one must show that he has mitigated his losses arising from a breach of contract by the other party to claim damages in respect of that breach. To some extent, one must still try to mitigate any losses suffered as a result of a force majeure event to the extent that such mitigation is possible. Having said that, if an event is truly outside of your control, how can you mitigate the losses arising from it? If there is a reasonably practicable way around the problem, then it may well not be a force majeure event in the first place because arguably the event has not caused performance of the contract to become impossible.

What does all this mean and what happens to a contract in these circumstances?

The wording of the force majeure clause is going to be crucial, as is complying with any requirements in the clause to give notice to the other party etc. before you can rely on the clause. The clause will usually also provide for what should happen to the contract in certain circumstances. For example, it may state that where performance of the contract is delayed, the party that is unable to perform has more time to comply with his obligations. Alternatively, if he can show that performance of the contract is now impossible, the force majeure clause may operate to bring the whole contract to an end. Careful consideration should be given to the drafting of a force majeure clause when parties are negotiating terms. If the force majeure clause brings the contract to an end, what happens in terms of payment obligations? What if payment has been made in advance? Does the force majeure clause provide for repayment in part, or in full?

Frustration: what happens if there is no force majeure clause in the contract?

The English common-law principle of frustration of a contract comes into play in circumstances where an unforeseen event has taken place that makes performance of outstanding contractual obligations impossible, illegal or so radically different to what was originally intended that it would be unfair to require the party to the contract to perform the contractual obligations. This sounds potentially promising from a Covid-19 perspective, but the reality of the situation is that frustration will apply in a fairly narrow set of circumstances and it is difficult to successfully argue that a contract has truly been frustrated. If the contract can be performed by means other than those which were originally intended, it is not frustrated even if those other means are more difficult or more expensive. Where does delay sit within the concept of frustration? If performance of a contract is delayed, is the contract frustrated or not? The answer, regrettably, is “it depends” because it depends on whether time for performance is of the essence or not. It also depends on the context of the delay. Assuming the delay is caused because performance is temporarily impossible – for how long does that need to be the case before the contract is frustrated?

If a contract is frustrated it comes to an end automatically. If you have been paid “up front” for goods and/or services and a contract is subsequently frustrated, you should expect to have to repay some or all of the monies you have received.

Conclusion:

In the absence of a well drafted force majeure clause, the doctrine of frustration may assist you in bringing your contractual obligations to an end if you cannot perform them. It is essential, however, that you take advice early from a solicitor who specialises in commercial contracts and disputes arising from them. These are, quite literally, unprecedented times and it follows, therefore, that there are no legal case law precedents that tell us how a Judge is likely to approach these questions, so it is important that you have an expert on your side, helping you navigate the potential minefield of early termination of contracts.

To find out more about the impact of Covid-19 on commercial contracts, or for advice on a specific issue, contact Kate Williams on 01628 631051 or by email to kate.williams@colemans.co.uk.


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This post was written by Colemans Solicitors LLP

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