COVID-19 (Coronavirus): a Force Majeure Event?
It goes without saying that we are currently living in extraordinary times. Many thought that 2020 would be the year of scrutinising contracts as a result of Brexit, but now a new menace has emerged, one which couldn't be accounted for, and which usurps Brexit as the number one issue for most organisations: Coronavirus.
With the public being told to avoid all social gatherings, and with a large proportion of organisations operating with a skeleton staff as a result of self, or forced, isolation, not to mention the measures put in place by our friends overseas, it is clear that domestic and international trade has encountered unprecedented interruption and will continue to do so over the coming weeks and months.
Many organisations will need to consider the force majeure clause in a contract, possibly for the first time. A force majeure clause enables a party to be excused from, or to suspend performance of, its obligations on the occurrence of certain events which are outside of that party's control. Generally speaking, there must be a force majeure clause in a contract for a party to be able to rely on a force majeure event because the term "force majeure" has no recognised meaning in English law.
The force majeure clause must be broad enough in scope to cover the relevant event. The event might be mentioned in the clause for example, "pandemic" which would include Coronavirus, or it might be included in all embracing wording such as "any event beyond the reasonable control of a party".
If the clause requires the event to "prevent" performance, then performance must be legally or physically impossible as a result of the relevant event, not just more difficult or more costly. If the clause refers to the event "hindering" or "delaying" performance the clause will allow the contract to be temporarily suspended whilst the force majeure event continues, for example, a delay in obtaining materials that are essential for the timely performance of the contract.
It is also necessary to consider what the force majeure clause says about the long term consequences of the force majeure event. Some clauses will merely excuse performance for a period of time. Others will allow one or both parties to terminate the contract after the force majeure event has lasted for a certain period.
In the absence of a force majeure clause it might be possible to rely on the doctrine of frustration. It applies where a significant change of circumstances renders performance of a contract materially different from the obligations that were accepted by the parties. The change in circumstances must be due to an external event or change of circumstances that occurs without the fault of the party seeking to rely on it. Frustration might include a pandemic.
Historically, the courts have shown a reluctance to rule that a contract has been frustrated. Where the possibility of a change in circumstances is anticipated in the contract by a force majeure clause, it will generally prevent the contract from being capable of being frustrated.
When a frustrating event occurs, the parties are excused from all further performance and are not in breach of contract or liable for damages for non-performance. The contract is permanently frustrated. Unlike force majeure, the Courts will not recognise temporary frustration of a contract. However, and similar to force majeure, a contract is not frustrated if it simply becomes more difficult or more expensive to perform.
Where an organisation is seeking to rely on circumstances connected to Coronavirus as a force majeure or frustrating event, the contract will need to be carefully considered before taking any action. The position will not be the same across all contracts. These are complex areas and these terms will be used with increased frequency in the coming weeks as more and more events and organisations are affected by this pandemic.
If you have any queries in respect of this article, please do not hesitate to contact a member of our Commercial and IP Team.
This article is for general guidance only. It provides useful information in a concise form. Action should not be taken without obtaining specific legal advice.