Coronavirus (COVID-19) and force majeure contract clause - Kuits Solicitors Manchester
  • Insights
  • Coronavirus (COVID-19) and force majeure contract clause

Coronavirus (COVID-19) and force majeure contract clause

Coronavirus (COVID-19) and force majeure contract clause

16th March 2020 - Published by

What is a force majeure (FM) clause?

A contractual provision that excuses a party from performing its contractual obligations owing to the occurrence of specific events that are outside of either party’s reasonable control. The FM event renders performance of contractual obligations inadvisable, commercially impracticable, illegal or impossible.

Affected parties should consider whether their contracts make provision for FM clauses. Unfortunately, English common law has no general concept of “force majeure”, and it cannot be implied into a contract governed by English law.

Is COVID-19 a force majeure event?

English courts have consistently focused on the language drafted into FM provisions and, often, the result is that each particular case rests on its own set of facts and contractual language.

Consequently, consideration should be given to the precise drafting of the relevant FM clause to ascertain whether the outbreak falls within the protection afforded to the contracting parties. Often, FM is frequently used to refer to several distinct types of provisions as follows:-

  1. A provision which excuses non-performance – this usually defines or lists the excusing FM events followed by a “catch-all” provision and suspends relevant obligations upon a FM event arising. Usually, if the FM event prevents performance of certain obligations for a defined period, one or both parties may then terminate the contract. It is quite common for “epidemics” or “pandemics” to be included as specific FM events in supply contracts (depending on the particular market).
  2. A “hardship” clause which adjusts the commercial terms for a defined change in economic/market circumstances – this FM clause provides for some form of amendment or right of renegotiation of the contract in the event of substantial hardships to a contracting party. What constitutes “hardship” and the nature and extent of the adjustment will depend on the wording of the particular provision. This may be of more limited application, but offers a more attractive remedy for a party seeking to change the contract rather than avoid their contractual responsibilities.
  3. A provision which automatically terminates the contract upon occurrence of a defined FM event – usually acts in a similar manner to the English law doctrine of frustration. Most likely to apply to a scenario where government crisis measures made the supply permanently unavailable.

Will FM claims be successful?

Ultimately, it depends on the circumstances and drafting of the FM and other contractual provisions. Commonly, FM drafting requires the claiming party to show that it has taken all reasonable endeavors to avoid or mitigate the event and its effects.

For example, if the FM provision provides that the relevant event must prevent performance, the claiming party must demonstrate that performance is impossible (legally or physically) and not merely that it is more difficult or expensive in light of the event.

By contrast, the English courts have favored the scope of words such as hinder or delay and FM may be satisfied if performance has become substantially more onerous.

Recent Court of Appeal authority in Classic Maritime v Limbungan Makmur Sdn Bhd [2019] EWCA Civ 1102 establishes that the claiming party must also establish that it would have been ready, willing and able to perform the contract but for the FM.

Note that pursuant to Thames Valley Power Ltd v Total Gas & Power Ltd [2005] EWHC 2208 (Comm); Tandrin Aviation Holdings Ltd and Aero Toy Store LLC and others [2010] EWHC 40 (Comm)), a change in economic or market circumstances affecting the profitability of a contract is not generally a FM.

Consequences of declaring a FM

Contracting parties must be cautious in declaring a FM event on the basis of the coronavirus outbreak and ceasing performance of their obligations. Incorrectly declaring a FM event may result in a contracting party repudiating the contract and may provide the other party with a right to damages.

Practical steps going forwards

Corporates should consider risk management measures such as:

  • Inserting express infectious disease/epidemic/pandemic wording into new contracts, and amending existing contracts to include this where possible;
  • Check the terms of existing contracts for protection, including FM clauses;
  • Check insurance arrangements;
  • Conduct risk assessments, assessing factors specific to suppliers/customers; and
  • Auditing suppliers and reviewing their respective work health and safety systems and policies relating to virus and disease control to ensure they are up to date and adequate.

To navigate the effects of the coronavirus on your business, please do not hesitate to be in touch with a member of our Commercial Team on 0161 838 3434 or contact us here.

Subscribe to our mailing list