In the context of the COVID-19 pandemic, businesses will need to consider whether they and their contracting parties are able to perform their contractual obligations and, if not, what legal mechanisms may be available to them.
Apart from implementing disaster recovery (DR) and business continuity (BC) plans, where possible, the most relevant legal issues will be frustration and force majeure.
Where it becomes impossible for a contract to be performed (or would be performed in a materially different way to that which the parties envisaged), because of an unforeseen event or an essential element is no longer available or has ceased to exist, the contract will be frustrated. (From the case law, an example is where a contract for musical performances at a particular venue was frustrated when the venue burnt down before the first performance).
If the contract is frustrated, it ends automatically and, due to this, the evidential burden for successfully claiming frustration is high.
A circumstance or event which simply delays performance or makes performance more expensive is not likely to justify a claim of contract frustration.
Parties are likely to consider the issue of frustration where there is no applicable force majeure provision (as to which see below).
There is always a risk that, if a party acts in the belief that a contract has been frustrated, but a court decides otherwise, that party could face a significant claim for damages from the other contracting party for wrongful termination.
The term “force majeure” has no particular meaning under English law, so the starting point will be to consider whether the contract contains such a provision (it may or may not be written in terms of force majeure) and what is the meaning of the precise wording used.
The purpose of a force majeure clause is to excuse late or non-performance of a contractual obligation where this is due to an event or circumstance beyond the reasonable control of a party. (Some clauses simply refer to “beyond the control” of a party, but that sets a much higher threshold and removes the element of objectivity, making it more expensive for a party to achieve the qualifying threshold).
Typically, a force majeure clause will refer to “events or circumstances beyond a party’s reasonable control” and then include a list of non-exhaustive examples. Few such clauses contain an express reference to an epidemic or pandemic and so the particular circumstances will need to be analysed to establish whether it was the pandemic itself which caused the late or non-performance.
There needs to be a careful analysis of the circumstances- it does not follow that just because we have a pandemic, the force majeure clause will apply. Clauses are usually written by reference to contractual obligations, so if a contract is so one sided that one party has no obligations, that party is unlikely to be able to claim force majeure.
There is a rule that the alleged event or circumstance claimed to be a force majeure event must be the sole cause of the late or non-performance – it cannot be one of two independent contributory reasons.
The event or circumstance must legally or physically prevent performance, not just make it more difficult or less attractive as a commercial proposition.
The clause will also usually include a list of events and circumstances which cannot be the subject of a force majeure event. An example would be a strike or other industrial action by the relevant party’s workforce. Some clauses also state that an obligation to make payment can never be avoided by claiming force majeure.
If the force majeure clause applies, unlike frustration, it would not normally lead to the automatic termination of the contract – the contractual obligation would be suspended.
Normally, the clause would provide for a maximum period for this suspension, on the expiry of which a right to terminate the entire contract would arise. This right may be given to either party or only the party who has not suffered the force majeure event (or only the party with the stronger bargaining position when the contract was made!)
Some clauses contain a provision under which, if the event of force majeure ceases during the notice period, the notice is deemed void and of no effect, so the contract will continue.
Where a force majeure provision is invoked successfully, the party doing so would usually not have any liability to the other party, including where the contract is terminated as a result. The clause may provide for this to be without prejudice to pre-existing obligations, such as making payment.
Similar to frustration, terminating a contract for a force majeure event is not always easy to justify. The party claiming the force majeure will have the burden of proving that one exists, that it applies to the circumstances and that it has taken all reasonable steps to avoid or mitigate the effects of the alleged force majeure event. It is therefore not a step to be taken lightly.
Our Final Thoughts
While it is always possible that COVID-19 could give rise to contract frustration or a valid claim for force majeure, both routes require careful consideration and legal analysis. It should certainly not be assumed that COVID-19 will automatically excuse no or late performance of a contract.
Businesses may wish to consider alternative approaches – for example, agreeing a moratorium on performance/payment for a relatively short, defined period, so the parties have time to consider wider implications.
As mentioned earlier, businesses should have implemented their DR and BC plans as a reaction to the COVID-19 pandemic (if they have them) and a party being notified by another contracting party of a claim of frustration or force majeure will no doubt question whether the notifying party has fully implemented their own DR and BC plans. This is because a party claiming force majeure may be subject to an express or implied obligation to take all necessary steps to avoid or mitigate the effects of an alleged force majeure event.
The key message is that businesses should consider these issues in relation to their contracts before they arise in practice. The takeaway action points are:
- Which contracts are affected?
- Are they governed by English law?
- Is there a force majeure clause?
- What exactly does it cover?
- Is the contractual obligation prevented by the force majeure event (the pandemic itself)?
- What notices have to be given, how and when?
- Can anything be done to avoid or mitigate the effects?
- Is there a BC/DR plan and has it been implemented?
- Are there any realistic alternatives to force majeure?