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8 April 2020

Force majeure clauses and Covid-19

Many businesses concerned about potential disruption as a result of the coronavirus outbreak are reviewing their key contractual arrangements to understand potential contractual implications. Businesses must decide whether urgent actions to mitigate exposure are needed (such as avoiding performance of obligations or exiting the contract) and whether changes to existing business continuity plans are required.

It is worth considering whether the coronavirus outbreak could trigger the application of the force majeure clause in a contract (where it contains such a clause), meaning that a party may not be liable for a resulting failure to perform its contractual obligations. There is no standard definition of a force majeure event under English law, meaning that it is up to the parties to a contract to define the sorts of events which will trigger any force majeure provisions. They are also required to set out what the specific legal consequences of the clause being triggered will be.

When considering whether the coronavirus outbreak itself constitutes a force majeure event under a contract, thought should be given to various factors, such as:

  • Does the contract define a force majeure event?
  • If the definition of force majeure expressly includes wording around pandemics, epidemics or similar events this may be material in deciding whether the coronavirus outbreak falls within the scope of the applicable force majeure clause;
  • If the definition does not expressly refer to pandemics, epidemics or similar events, other wording in the force majeure clause such as events beyond the parties’ reasonable control or acts of God may be enough to at least run an argument that the coronavirus outbreak triggers the provisions of the force majeure clause;
  • If the force majeure clause states that the relevant trigger event must ‘prevent’ performance, the relevant party will need to demonstrate that performance is either a physical or legal impossibility and not just difficult or unprofitable. An increase in the cost of performing the contract, for example, is unlikely to be sufficient to trigger protection under a force majeure clause (unless the drafting expressly permits this);
  • Where force majeure provisions are absent in a contract, it may be possible to exit a contract on the grounds of frustration but only in very limited circumstances.

Practical steps and considerations:

If you are considering the application of the force majeure clause in a contract, you should:

  • Identify, locate and review latest versions of all key customer and supplier contracts.
  • Bear in mind, that when seeking to rely upon force majeure provisions, the affected party must be able to show that it has taken all reasonable steps to avoid or mitigate the event and its effects on the party’s contractual performance. Therefore, the affected party should identify what appropriate steps can be taken to avoid or mitigate adverse effects and execute these actions or consider “why not”.
  • The contract may include specific requirements on how a party must notify the counterparty of a force majeure event and it is important to note that such provisions may amount to conditions precedent. This means that if the specific provisions are not followed to the letter, a party may lose the right to rely on the force majeure provisions.
  • Each party generally bears its own costs during the existence of an event which is a contractual force majeure event.

When reviewing a contract for the purpose of understanding the impact of an outbreak of coronavirus on the parties’ obligations and possible mitigating actions available, the force majeure provisions are not the only contractual provisions to consider.

It would also be advisable to look at change control or variation provisions (which may govern how the parties can agree to amend or unilaterally amend a contract), as well as termination and suspension provisions. There is no substitute for a full contract review with an understanding of what the key objective of the review is intended to be in mind.

At Steeles Law we have a experienced team of commercial lawyers who can advise on all aspects of running your business, please call the team on 01603 598000 or email info@steeleslaw.co.uk and a member of the team will contact you.

*The information provided in this article is designed to provide useful information on the subject, not to provide specific legal advice.

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