Force majeure and covid-19

Force majeure has often been talked about in recent weeks as, quite literally, the legal get out clause of the moment.

Force majeure is a civil law concept by which unusual, unforeseeable circumstances prevent someone from fulfilling their contractual obligations. The phrase ‘force majeure’ is not often specifically included in leases and other commercial contracts and, indeed, there is no legal definition of the phrase.

Force majeure wording varies but includes phraseology around pandemics, epidemics and illnesses; government action and terrorism, and other events beyond the parties' reasonable control.

Frustration is a different concept and it could be trickier for someone to rely on frustration of the contract because it requires the existence of an ‘unforeseen subsequent event’ outside of the parties’ control. Epidemics and pandemics are not new, even if it is more than 100 years since the last serious pandemic, Spanish Flu, hit the UK; so it would be more difficult to argue the coronavirus was not foreseeable. On the other hand, in the case of force majeure the event or circumstances does not have to be unforeseeable to successfully rely on it

The triggering of force majeure clauses results in different consequences depending on the clause and the situation that is a purported force majeure. Those consequences could include, for instance, the right to terminate the contract; excuse part of the party’s performance of its obligations; allowing an extension of time; and so on.

So does a pandemic qualify as force majeure enabling a party to avoid or delay their contractual obligations? There is, of course, no simple answer – it’s a matter of contractual interpretation in light of the precise wording of the contract, all the circumstances in the round. Importantly, it is for the party seeking to rely on a force majeure clause to excuse its non-performance or late performance to prove its case.

Does this novel coronavirus amount to a force majeure? It undoubtedly will do in contractual situations where the force majeure clause wording refers specifically to epidemics, pandemics and or plagues (absent anything else to the contrary).

What if the contract is silent as to one of these words, or similar? It is then a matter of contractual interpretation. Did the parties intend that a catastrophic virus would be covered so as to allow a party to avoid their obligations? The problem for the party attempting to assert that this was the intention has a high hurdle to jump in the absence of specific wording. That said, if there is very general wording which could arguably include epidemics and or pandemics, there could be a reasonable scope for arguing that it does.

The issue has not yet reached the courts – it is, after all, early days even if the lockdown restrictions seem to have gone on interminably. But we can be absolutely certain that disputes around force majeure will eventually flood the courts.

Indeed, it’s such a live issue for clients that one firm, Travers Smith, has quickly launched an app to extract force majeure language from clients’ commercial contracts. A report is then generated and sent to the sender. Though it specifies where force majeure-related language is detected by the app, the firm concedes that even the best tech is no substitution for specialist human review.

There’s little reason to suggest the usual approach to contractual interpretation would not be adopted. That is to say, objectively looking at what the parties’ intentions with reference to "what a reasonable person having all the background knowledge which would have been available to the parties would have understood them to be using the language in the contract to mean". Relevant factors, in addition to the wording itself, include the "documentary, factual and commercial context" of the contract.

Furthermore, the courts will only imply a term into an agreement if doing so satisfies the strict test that it is necessary to give business efficacy to the contract or it is so obvious it goes without saying.

Some commentators suggest the courts will probably be generous in their interpretations of contracts in the context of covid-19. There could, for instance, be some reasonable mileage in the argument that it is “so obvious it goes without saying” that the parties intend or understood that a pandemic of the scale of the coronavirus would amount to a force majeure.

Even so, a contractual party seeking to rely on this argument would still have to demonstrate that its inability to perform – or delayed performance – was outside of their control and could not have been reasonably mitigated. It must essentially be physical, legally impossible to perform.

So notwithstanding the existence of force majeure in the context of a specific contract, if for instance the party takes the decision not to perform its contractual obligations even if it is still possible – they are unlikely to succeed in their claim. The existence of a force majeure, however catastrophic the health and economic effects on society, does not automatically void or end a contract – or excuse late or non-performance of a party’s obligations under it.

In fact, it’s worth mentioning that (among the various authorities on force majeure) economic difficulties do not count. The High Court commented in Tandrin Aviation Holdings Ltd v Aero Toy Store LLC [2010] EWHC 40 (Comm) that “it is well established under English law that a change in economic / market circumstances, affecting the profitability of a contract or the ease with which the parties’ obligations can be performed, is not regarded as being a force majeure event.

“Thus a failure of performance due to the provision of insufficient financial resources has been held not to amount to force majeure . . . and likewise a rise in cost or expense”.

Successful reliance

Where a force majeure is successfully invoked, the party relying on it is effectively let off their legal obligations under the contract. They cannot then be sued for damages, though the specific terms of the contract in question may set out the right to, for instance, an extension of the time period during which the obligations may be performed; or impose the obligation on the non-performing (or late-performing) party to pay any excess costs incurred by the non/late performance.

Practitioners may therefore be wise to advise their clients to have their commercial contracts reviewed in light of this crisis, particularly if there is a potential impact on their specific obligations.


Posted on 13.05.20