Guidance on force majeure clauses amid COVID-19 outbreak

The closure of all public venues and suspension of air, road and maritime traffic between most countries (in some occasions even between cities) will inevitably lead to a devastating impact on trade and commerce.

Many business sectors are not able to operate and generate profits as they had before the pandemic and for this reason, some businesses may seek relief from the performance of their contractual obligations. The most relevant, but rarely used mechanism in such circumstances are “force majeure clauses”.

What is a force majeure clause?

Force majeure clauses are boilerplate provisions that are often included in contracts. The purpose of such clauses is to limit or remove the liability of a party concerned if it is unable to perform the obligations under the contract due to the occurrence of acts, events or circumstances beyond its reasonable control.

What does English law say about force majeure events?

A party of a contract can rely on a force majeure event only if the contract in question expressly provides a force majeure clause. Therefore, the “governing law and jurisdiction” clause is worth checking first. If such provision is not included for whatever reason, then a court will have to determine the governing law by reference to Rome I and Rome 2 Regulations, if the parties in dispute are within the EU. However, if at least one of the parties is outside the EU, then the court will have to refer to the Conflict of Law rules.

Does COVID-19 constitute a force majeure event?

The contract will normally provide for a general definition of force majeure events. However, in the context of the COVID-19 pandemic, one will need to closely look at the specific description, in particular, whether force majeure clause defines an “epidemic or pandemic” being force majeure events.

If the clause does, then the party will be able to rely on it. Otherwise, the party may still obtain force majeure relief, but only if the definition provides that the list of force majeure events is non-exhaustive.

The definition of a force majeure event will be interpreted on a factual basis on a case-by-case basis. Depending on the type of business, the interpretation may depend on measures adopted by the local government where the business is based or operates.

As an example, the liability may not be excluded if the party’s business in the UK has closed before the official order of the Government on 20 March 2020 to close all public venues.

The interpretation of the clause will also vary depending on the timing the Worldwide Health Organisation’s classifications of the COVID-19 outbreak being a “public health emergency of international concern”. Therefore, it is unlikely, that a party will be able to rely on the provision of the contract describing “epidemic or pandemic” being force majeure event before such an announcement has been made.

What will be the effect of a force majeure clause?

Where the existence of a force majeure event is established, one will need to consider the effect of force majeure clauses. It will largely depend on how the clause is drafted.

Generally, a force majeure clause may trigger some or all of the following consequences:

  1. a) Suspension

The majority of force majeure clauses have a suspension effect, which means that the obligations under the contract will ONLY be temporarily suspended. Consequently, when the outbreak is over, the contract will be re-activated and the parties may resume the performance of their contractual obligations.

  1. b) Exclusion of liability

Once the force majeure clause is triggered, the non-performing party’s liability for non-performance or delay in performance is removed, usually for as long as the force majeure event continues.

  1. c) Obligation to mitigate

Some contracts provide that the benefit of a force majeure clause should only be available where the affected party had taken all possible steps to avoid the event or the impact of its consequences. In many cases, this will be difficult for the affected party to prove. A duty to mitigate may be implied in any event.

  1. d) Right to terminate

In certain circumstances, it may become commercially unfeasible for the parties to suspend performance of the contract until the force majeure event ceases. For this reason, some force majeure clauses allow either or both parties to serve a notice terminating the agreement after a specified period so that they can make alternative arrangements.

Is a party required to serve a notice of the force majeure event?

Some contracts require a party relying on a force majeure clause to serve a valid notice of force majeure event on the other party to benefit from it.

In all other cases, the protections of the force majeure clause will automatically be available to the non-performing party when that event is triggered.

What if the contract does not include a force majeure clause?

Even if the contract does not provide for force majeure clause, one may consider whether the contract has been frustrated. The consequences of frustration are provided for in the Law Reform Act 1943.

The Act applies to many commercial contracts, except for contracts which have excluded its effect, certain shipping contracts, insurance contracts and contracts for specific goods which have perished.

The Act also only applies to contracts which are governed by English law and only to those contracts which have become “impossible of performance or been otherwise frustrated”.

Need advice?

If you would like advice regarding force majeure clauses, please speak to Madina Tatraeva.