The outbreak of the Coronavirus (Covid 19) pandemic in China in December 2019 has caused significant disruption at an unprecedented scale to business worldwide and businesses should carefully review their contractual rights and obligations as part of the wider analysis they need to conduct to determine the effects of the pandemic on their operations and ability to mitigate losses. This note focuses specifically on force majeure clauses and the common law doctrine of frustration that businesses may rely on to seek relief from contractual commitments – the concepts could be very useful to avoid liability in the current climate.
Force Majeure
Broadly speaking, force majeure refers to an event outside the control of a party that prevents it from performing its obligations under the contract and such an event will legally excuse it from performing under the contract. This principle is carefully defined in many jurisdictions and may be implied into a contract governed by the law of such jurisdictions. The term force majeure has no specific meaning under English common law.
Under English law, where an event occurs that is outside the control of a contracting party and that prevents it from performing its obligations under contract, a party may seek relief from its contractual obligations (i) based on the doctrine of frustration (but as set out below it is very limited in scope and rarely applies), or (ii) if there is an express provision in the contract setting out the events that will trigger relief – these clauses are commonly labelled force majeure clauses but it is not always the case – it is important to carefully examine the substance of the contract.
Where a party can rely on a force majeure clause it will excuse it from performing its obligations under the contract and often a time extension for performance is afforded to the party. It is common for longer periods of force majeure to trigger a right to terminate the contract – if you wish to avoid termination in these circumstances, it is recommended that discussions on a “without prejudice basis” to avoid termination are commenced as soon as possible.
A force majeure clause will often list the events that will trigger relief, such as acts of God and natural disasters (flood, earthquake), war, terrorism, epidemics and pandemics, embargoes, changes to the legal environment and other events beyond the control of the parties. The precise wording of the force majeure clause should be considered in detail together with the contract as a whole and the circumstances that have arisen. Where there is no specific reference to a pandemic, the current Covid-19 virus may be classified as act of God.
The concept of foreseeability is often part of a force majeure provision so that an event will not constitute force majeure if it could reasonably be foreseen when the agreement was entered into – so if your contract has been entered into after the pandemic broke out it may be difficult to rely on force majeure clauses where foreseeability is a requirement for relief. If the contract is silent on whether the event needs to be unforeseen, a court will be reluctant to impose that qualification.
It is a commonly a requirement for relief that the event must be beyond the reasonable control of the relevant party (some contracts specifically exclude events which could have reasonably been avoided) – it appears that the COVID-19 pandemic would constitute force majeure under such a provision
A force majeure clause will typically not be triggered where the obligations under the contract become more expensive or burdensome to perform.
The burden of proof is on the party claiming relief under the force majeure provision and must show that the event falls within the scope of the clause and failure to perform its obligations under the contract was due to the event. Equally, a party claiming relief under the force majeure provision is usually under a duty to show it has taken reasonable steps to mitigate the effects of the force majeure event. Any notification requirements under the contract will need to be considered to determine if relief is available.
Frustration
Frustration applies where an event, beyond the control of the parties to a contract, occurs (after a contract has been formed) that was not in the parties’ contemplation at the time of entering into the contract and that makes it, physically impossible, illegal or radically changes the obligation, to perform the contract – when the doctrine applies, future contractual obligations will automatically cease and the contract will come to an end. The doctrine will not apply simply because a contract becomes more expensive or burdensome to perform.
It is important to note that the doctrine may be considered where there is no force majeure clause in the contract or if there is a force majeure clause only if it if it does not provides for the consequences of the supervening event on the rights and obligations of the parties. Often, force majeure clauses do not address pandemics and so it is worth considering the doctrine of frustration where you are seeking relief from your contractual obligations, although it is limited in scope and hard to prove. Where it is impossible to perform under a contract as a result of the pandemic (leading to of lack of materials, employees and ability to deliver under the contract) the doctrine of frustration may apply – the circumstances of each case should be considered carefully to determine the legal position.
Finally, supervening illegality, an event where it becomes illegal to perform the contract under English law, is one of a limited number of situations where the doctrine of frustration has successfully been held by the courts to apply and so if performance under a contract becomes illegal the contract would be discharged. Again, simply because a contract becomes more expensive or burdensome to perform (but not illegal!) will not trigger frustration and businesses may not rely on supervening illegality where performance has made it more difficult to perform under the contract (but not illegal) as a result of the lockdown introduced by governments across the world to limit the spread of the Pandemic.
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