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This article was originally published in Law360 and can be accessed here.

Robert Maxwell Marsh, Solicitor

Daniel Powell, Senior Litigation Paralegal

 

Force majeure and COVID-19: does the pandemic justify non-performance of a contract?

The current unprecedented COVID-19 pandemic, and the government restrictions resulting from it across the globe, have affected international supply chains and the performance of commercial contracts.  If an event has occurred which is outside of its control and that has hindered, delayed or prevented a party’s performance of the contract, it may seek to rely on a force majeure clause within the contract. Reported effects of COVID-19 that could prevent parties performing their contractual obligations may include lack of workers, restrictions on international trade, and government-forced closure of third-party services or suppliers. But will the English courts consider these factors sufficient for parties successfully to rely on force majeure clauses?

In English common law, there is no general doctrine of force majeure and it must be explicitly stated in a contract. Although it depends on the precise terms of the contract, successful reliance on a force majeure clause normally leads to a suspension of obligations or a right to terminate the contract without being liable for damages.

This differs from the common law doctrine of frustration, where the parties will be fully discharged from their contractual obligations; but, only in the rare circumstances that an event occurs “which so significantly changes the nature (not merely the expense or onerousness) of the outstanding contractual rights and/or obligations from what the parties could reasonably have contemplated at the time of its execution that it would be unjust to hold them to [it] in the new circumstances…[1]. A common example is a contract which concerns a warehouse that has since burned down.

There is an inherent tension between the concepts of force majeure and frustration and the fundamental precept of English law that parties to a contract should be held to that promise, even where subsequent events make performance more difficult, expensive or onerous than they originally contemplated. Historically, the requirement to prove that performance of the contract has become impossible has made it difficult to avoid contracts on this basis. Both with frustration and force majeure, it is the party that invokes it who carries the burden of proof. 

Force Majeure Clause

Under English common law, a pandemic-related event will only be held to be a force majeure event if it is held to be provided for in the contract. Such events could range from shortage of staff caused by illness to government restrictions on trade. Often, contractual force majeure provisions can be quite general. For example, there may be references to government action; however, others may provide a lengthy enumeration of potential force majeure events, including specific mention of an epidemic or pandemic. This can often be an expression of different approaches and traditions to contract drafting; but where there is a list of potential force majeure events, it must be determined by looking at the terms of the particular clause and whether the list is exhaustive or inclusive, and to what extent it provides for the event that has arisen.

Often, the contract will also stipulate that the event must be unforeseeable and the effect on performance must be beyond the reasonable control of the parties. Even though there have been pandemics in previous years, it is unlikely that an English court would find the occurrence of a pandemic (particularly on the scale of the COVID-19 crisis) to have been a reasonably foreseeable obstacle at the time the parties signed the contract (unless, perhaps, the contract was signed after the People’s Republic of China (PRC) first announced the outbreak and spread of the virus in Wuhan). However, in order for a party to rely on a force majeure clause, it has to show that: the ‘event’ is within the contractual clause and that event prevented it from performing its obligations; its non-performance was due to circumstances beyond its control; and, finally, no reasonable steps could have been taken to mitigate the event or its consequences.  Whilst all aspects require consideration before seeking to invoke a force majeure clause, in the context of COVID-19, care should be taken to ensure that the pandemic is, in fact, the event.

Finally, it should be noted that unlike common law jurisdictions such as England, force majeure is part of the substantive law in some jurisdictions that follow the civil law tradition.   As such, and in the absence of a choice of law clause selecting some other governing law, it does not have to be explicitly stated in the contract so long as the event is unforeseen and outside of the parties’ control. France, effective 1 October 2016, introduced a further concept called ‘imprévision’, a hardship provision which can be implemented when there are dramatic and unpredictable changes of circumstance that radically alter the economic bargaining position of the parties. Conflict of law issues may therefore be relevant to the operation of force majeure in international commercial contracts.  Furthermore, some contract provisions prevalent in civil law contracts require a party invoking force majeure to procure a certificate from the relevant local chamber of commerce attesting to the occurrence of the event.  There are examples of such certificates having been issued upon the application of affected parties in some civil law jurisdictions, including the PRC, Italy, and the Russian Federation. These certificates can provide evidentiary support for the affected party’s force majeure notice, but other provisions of substantive law would need to be met according to the relevant law governing the contract. Where English law applies, then the specific terms of the force majeure clause will still need to be satisfied.

Causation

Even if the pandemic, or consequential government restrictions, can be shown to be an event within the meaning of the force majeure clause, the party invoking force majeure must also show that the event prevented, hindered or delayed performance of its obligations. The contract may state the particular threshold that must be met, i.e. whether the event can be said to prevent, hinder or just delay contractual performance. If the contract states that performance must be ‘prevented’, then force majeure should not be invoked where the event merely delays performance.

Where, on the other hand, the contract states that performance needs only to be ‘hindered or delayed’, there may be more opportunity to rely on force majeure. An example is a case in which the sellers’ primary source of supply was in Germany, but this supply was cut off due to the outbreak of WW1. Despite an alternative source of supply being available in England, the sellers successfully relied on the force majeure clause.[2] 

A final causation hurdle to be considered by a party invoking a force majeure clause has recently been clarified in Classic Maritime v Limbungan Makmur Sdn Bhd [2019] EWCA Civ 1102.  In short, if ‘but for’ the force majeure event, a party would not have been able to perform the contract in any event, that party is unlikely to be able to rely on the clause. Parties must therefore be cautious before invoking an event of force majeure, and consider the possibility that the counterparty will argue that the force majeure event is being used as pretext to excuse or avoid underlying and/or pre-existing issues.

Mitigation

Parties seeking to rely on a force majeure clause must also show that they took all reasonable steps to avoid the force majeure event and mitigate its effects. Global government restrictions and mass illness may narrow the range of options available to commercial parties. However, if a party took no alternative action, particularly if the contract requires that performance must be ‘prevented’, then that party will need to explain why (i.e., that there were no alternative suppliers in the market).

Frustration

The separate common law doctrine of frustration is applicable only in very limited circumstances. Nevertheless, the current pandemic is likely to give rise to attempts by parties to rely upon it to avoid their contractual obligations. In summary, a frustrating event is one, judged objectively, in which it:

-          makes performance of the contract impossible, illegal or ‘radically different’ from what the parties contemplated when forming the contract;

-          is not the fault of the parties to the contract, or due to an act of the party seeking to rely on the event; and

-          is not envisaged by the contract.

Whilst frustration may appear similar to force majeure, its consequences are significantly different. Of particular note are that if a contract is frustrated, the parties: (i) are released completely from their contractual obligations; and (ii) may be able to recover costs they have incurred prior to the event in performing the contract.  

A recent case, Canary Wharf (BP4) T1 Ltd v European Medicines Agency [2019] EWHC 335 (Ch), illustrates the English court’s reluctance to find that a contract has been frustrated: the EMA attempted to rely on Brexit as a frustrating event to end a 25-year lease with their landlords. Its main arguments were that Brexit would frustrate the lease since: (i) the common purpose of the parties was that EMA would use the premises in Canary Wharf, London as its headquarters; and ii) it would cause a supervening illegality. The court disagreed with the EMA on both arguments, for reasons including that there were provisions in the lease that allowed the EMA to sublet the premises. The EMA would not lose its legal capacity to maintain and gradually wind down the premises in London, and Brexit would not make it illegal for the EMA to continue to lease the premises.

Future Steps

Considering the global effect of this pandemic on many commercial contracts, affected parties should carefully consider what action to take. Before proceeding to litigation, parties may first consider negotiating extensions to performance deadlines, or other alternative variations to the contract. Indeed, some concern has been expressed about whether the current legal system is prepared for this kind of unforeseeable crisis. In a ‘concept note’ prepared for the British Institute of International and Comparative Law, two former Presidents of the Supreme Court, Lord Phillips and Lord Neuberger, looked favourably to measures being introduced in some jurisdictions to give a ‘breathing space’, and encouraged parties to negotiate rather than rush to litigation.

An affected party looking to invoke a force majeure clause or argue that a contract has been frustrated, should carefully consider what constitutes the relevant force majeure event and seek legal advice. The mere fact of the pandemic itself is unlikely to suffice. Instead, it is more likely to be the consequences of a supervening government regulation, or consequent disruption in supply chain or labour supply. The more direct and specific the description of the event and how it prevents, hinders, or delays (as the case may be) contractual performance, the more likely it is to be upheld as valid. In all cases, an affected party seeking to give notice of a force majeure event will need to look carefully at the relevant clause in the contract, scrupulously follow any terms relating to notice, and carefully record all steps it is taking to mitigate the impact of the pandemic, or related event, on its ability to perform its obligations under the contract.

Parties should also bear in mind that invoking force majeure could have serious consequences, including amounting to a breach of contract or a repudiation of the contract. If the facts do not support issuing a force majeure notice, the counterparty may seek to treat the notice as a repudiatory breach of contract, accept that breach, and bring a claim for damages. This may potentially expose the wrongful party to a high measure of damages and it may be unable to rely further on the contract.

Conclusion

Whilst it is inevitable that numerous disputes across a wide range of sectors will come before the English courts as a consequence of the pandemic, it will be some time before it can be determined whether these will further develop and expand the contours of the law on force majeure and frustration.  It is unlikely, however, that the English courts will stray from the well-developed commercial approach to the construction of contractual terms, or broaden the very limited circumstances in which a contract will be held to have been prevented, or discharged (in the case of frustration).  Instead, successful claims are likely to turn on the particular facts of those cases, including specific contractual wording that includes the event in question.  It is with that in mind that parties should carefully consider all proposed terms when negotiating future contracts, including those sometimes referred to as ‘boiler plate’ or ‘template’ clauses, such as those relating to force majeure. 

 

[1]  National Carriers Ltd v Panalpina (Northern) Ltd [1981] AC 675 at 700F, per Lord Simon

[2] Tennants (Lancashire) Ltd v CS Wilson & Co Ltd [1917] A.C. 495.

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