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These are turbulent times. Covid-19 has swept through not just the country but the world on scale not seen since the Spanish Flu. Rates of infection at the time of writing have exceeded 700,000 and deaths have topped 38,000 with a large proportion of the world’s population in lockdown.

 

Quite apart from the human tragedy, this pandemic has all the hallmarks of an impending commercial disaster. Businesses have seen their orders dry up and their employees and customers remaining home for the foreseeable future with no indication as to when the crisis may end.

For many businesses this new status quo will prove to be too much resulting in bankruptcy and closure. However, it is not just the direct business impact of Covid-19 that is likely to cause problems. Counterparties may seek to renegotiate terms on the back of Covid-19 or seek to avoid obligations all together citing the inability to move or conduct business as usual as the reason.

For businesses facing this situation the terms of their contracts are going to play a crucial role in ensuring their survival. For many of these businesses their force majeure clauses are going to move front and centre in future litigation.

 

What is force majeure and how does it work?

Force majeure are contractual clauses which alter a parties obligations under a contract in the event of extraordinary intervening circumstances.  Typically, force majeure clauses will list events such as the outbreak of war or an ‘act of God’ which will excuse a party from performing its obligations due to the event being outside of their reasonable control.

English law does not have an overriding doctrine of force majeure so it will depend on the construction of the clause as to how it operates in a given circumstance.

Occasionally a force majeure clause will include epidemics or pandemics expressly. Where this is the case Covid-19 will clearly fall within the definition of a force majeure event. However, where epidemic or pandemic is not expressly referred to it may create more difficulty for the parties.

The wording of the clause will need to be looked at to determine whether the parties intended an event such as Covid-19 to be included within the definition. Often, force majeure clauses will be drafted very broadly to encompass ‘events’ or ‘circumstances’ which are beyond a party’s reasonable control. Determining whether this would cover an outbreak of Covid-19 is fact specific and dependant on all the circumstances.

It is likely that, given the almost unprecedented reaction of governments around the world to Covid-19 and the restrictions on citizens and businesses that have followed, Courts will likely be inclined to find Covid-19 a force majeure event.  

This is not where the story ends however. Most force majeure clauses will go on to specify the level of difficulty a party will need to experience before the clause can be triggered. Words such as ‘delayed’, ‘prevented’ or ‘hindered’ are amongst the most common and may be used to help clarify the extent to which a party must be struggling to comply with the contract before the clause is triggered.

Where a party is prevented, either legally or physically from performing a contract then this will almost certainly be a force majeure event. Even in instances where the term ‘prevented’ has not been expressly used a court will require this high threshold to be met in order to find a force majeure clause effective. This means that a party finding themselves merely hindered, whether by cost or interference, will struggle to show a force majeure event.   

Where a party is delayed, the question is a more complicated one and again will depend on the wording of the contract. One might imagine a scenario where a contract deems time of the essence in the performance of the contract. Where this is the case, delayed performance may be no better than non-performance. In these circumstances the force majeure clause may be activated.

It is important to remember that force majeure clauses are contractual clauses, they are not creatures of statute. As a result, where a contract does not contain a force majeure clause, a party will need to look for other remedies to their situation such as frustration.

Frustration

The doctrine of frustration dates back to the mid-19th century and works to set aside contracts where unforeseen events render contractual obligations impossible to perform or radically changes the party’s purpose for entering into the contract.

It is important to note however that despite the doctrine expanding in the last 150 years it is still applied narrowly. The primary heads which may give rise to frustration are (1) the destruction of the subject matter, (2) supervening illegality, (3) incapacity or death, and (4) Delay. Where most of these heads are self-explanatory it is worth considering some specific circumstances in relation to illegality and delay. Where an amendment to the law deems the underlying purpose of the contract illegal, then it is said to be frustrated. One might imagine a scenario where the government imposes restrictions on the movement of certain goods during a pandemic. Where this occurs, a contract may be said to be frustrated where it involves the movement of those goods.

It is important to note in delay cases however that frustration will not apply to instances where a foreseeable delay has occurred. It cannot be relied upon by a party who is simply enduring hardship and finds it difficult to perform to the contract in the time they said they would. In the case of Bank Line Ltd v Arthur Capel and Co [1919] AC 435 it was held that delay caused by the requisition of the Defendant’s ship to assist in the war effort, where that ship was the subject of a charter agreement, was sufficient to frustrate that agreement. What Lord Sumner made abundantly clear is that frustration arises without blame or fault on either side; self-induced frustration will not stand.

The future

Businesses are increasingly looking to address pandemics specifically in their contracts in light of Covid-19. It will undoubtedly change the legal landscape in the years to come. The drafting of such clauses and agreements needs to be carefully considered in all the circumstances of the business and the arena in which it operates. Clear and practical drafting to provide both parties certainty will prove crucial. Where it is too late to adopt new clauses or contracts going forward, clear and cogent advice about a companies options should be obtained before litigation is contemplated.

Author: Kyle Lecuona

Kyle is a London based Barrister who specialises in commercial law. If you have questions relating to this article please contact us through the Contact Us portal on this website.