May the Force Majeure Be With You…
As we all navigate the uncharted territory of the coronavirus, in the world of contracts the force majeure clause has come to the fore.
You’d be forgiven for assuming a global pandemic counts as a force majeure, but this isn’t necessarily the case: not a single reported case law or English law authority exists on the operation of force majeure clauses in the context of epidemics or pandemics. Not that a well-drafted force majeure clause can’t be relied upon, but the specific application in the UK of force majeure in the context of a pandemic is new and untested legal ground.
So, what exactly is a force majeure event? The starting point to determine this is the contract itself. If a force majeure clause is well drafted it will clearly spell what has been agreed between all parties that will constitute a ‘force majeure’. Typically, this will include ‘fire’, ‘flood’, ‘diseases’ and, notably, ‘pandemic’. Contracts also commonly use a form of catch all wording such as an ‘event beyond a party’s reasonable control’.
In the context of COVID-19, any references to ‘disease’ or ‘pandemic’ will be most likely to help if one party is seeking to rely on the force majeure clause. However, many clauses are far more limited in scope, for example, clauses that solely refer to an ‘Act of God’. Is COVID-19 an ‘Act of God’? Or is it an ‘event beyond a party’s reasonable control’?
Without a statutory or common-law definition of force majeure, it’s vital to interpret the contractual clause carefully to assess whether the current pandemic together with the rules and regulations surrounding it amount to a force majeure event. Scrutinised closely by the courts, force majeure clauses are generally understood to amount to events or circumstances beyond the reasonable control of a contracting party or both parties, rendering performance of the contract impossible.
For example, if a pandemic’s impact makes trading conditions more economically challenging as materials for supply and manufacture of goods are more expensive, this is unlikely to count as force majeure event. Commercial conditions are undoubtedly tougher, but this in itself doesn’t make performance impossible. The affected party may be paying more for materials, but their ability to perform the contract is not compromised. The ‘event’ in question must be the operative cause making it physically or legally impossible for one or more parties to fulfil their contractual obligations.
f an ‘event’ does make performance of the contract impossible, a contracting party can usually rely on the force majeure clause. If established, force majeure may allow for the suspension or cancellation of the affected party’s contractual obligations.
If an ‘event’ does make performance of the contract impossible, a contracting party can usually rely on the force majeure clause. If established, force majeure may allow for the suspension or cancellation of the affected party’s contractual obligations.
So, what do business owners do if their contract doesn’t contain a force majeure clause or the clause doesn’t apply in the particular facts of their case? Here, businesses could look to the ‘doctrine of frustration’.
Cases on frustration have not traditionally come before the English courts with any great regularity, but recent circumstances – such as Brexit and COVID-19 – could see it being used more often. Be warned, though: if a contract contains a force majeure clause you may not be able to rely on the ‘doctrine of frustration’, because you can’t automatically substitute one concept for another.
Frustration is a common law concept meaning that in order to rely on it, a party need not point to a specific term of the contract; it exists wholly outside the four corners of an agreement and can be relied on provided that the party seeking to do so can make up the key elements of the doctrine. If established, frustration automatically brings the contract to an end without any requirement to give notice or take any particular steps. However, this doesn’t mean the contract was invalid from the outset. A contract is held to be ‘frustrated’ when an unforeseen event occurs after the date of the contract that is outside the party’s control and, essentially, makes it impossible for a party to perform their contractual obligations, or means that performing the contract would be so radically different to what was originally agreed that it becomes unfair to hold the parties to their original agreement.
It’s unclear at this stage whether COVID-19 will be seen as an event of ‘frustration’, and there are no English authorities on whether a pandemic will give rise to ‘frustration’. There’s bound to be judicial sympathy for parties severely impacted by the pandemic, but that doesn’t mean the pandemic will necessarily give rise to an event of ‘frustration’ in the majority of cases.
‘Unprecedented’ is a word we often use, but pandemics are not as unusual as many would think: COVID-19 isn’t the first pandemic we’ve seen since the Millennium – as recently as 2000 the World Health Organisation declared the H1N1 virus a pandemic. The courts, no doubt wary of opening the floodgates, will probably continue their fairly restrictive approach to finding that cases have been frustrated by external events, and we must all watch carefully how they deal with these vital issues as events unfold.
John Warchus, Partner & Head of Commercial & Technology Group at law firm Moore Barlow