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Contractual obligations – Force Majeure

Posted on 21st April, 2020

Introduction

Everyday life has been changed dramatically by the measures to restrict the spread of COVID-19 and this has meant that people and businesses cannot, or will not, comply with their contractual obligations. One of the ways contracts under English law seek to deal with such situations is a ‘force majeure’ clause. This article will give some general background and considerations, and a few practical pointers for those affected.

First, and very important, is to note that force majeure is not a concept recognised by English law; the parties must specifically agree that it applies. Contracts at their root are an obligation to do something in return for someone else doing something, they are binding, and it is the certainty this gives which makes them so useful. Any uncertainty about whether the parties are genuinely obliged to comply would weaken the whole concept.

That position would be ideal, in an ideal world. If one of the parties has failed to do what they agreed to do, because they miscalculated, neglected to do it, or otherwise, then that is a breach of contract and the innocent party can use the contract to either force compliance or recover damages from the ‘at fault’ party.

But in the messy, unpredictable real world, things can, and do go wrong. It may be that the failure was caused by something unpredictable and outside of the ‘at fault’ party’s control. It is for this reason that the parties can agree to change the contractual obligations in the case of unforeseen external events, and this is known as a force majeure clause (from the French meaning ‘superior force’).

Is force majeure applicable?

If you are facing a situation where you, or a party with whom you have a contract, are unable to perform their contractual obligations because of some external event beyond your or their control, you may be able to rely on force majeure. To work out if you can, there are three things to consider:

  1. The contract will almost certainly have to be written;
  2. It will need to contain a force majeure clause; and
  3. The circumstances will need to be covered by the wording of the clause.

The first two are easy to assess, it is the third where the detail matters. Remember that the only reason force majeure can apply is if the parties agreed it could apply, so this is really an exercise in working out what was agreed at the time of the contract. Number three can be broken down into a further two broad categories:

  1. Is the ‘event’ covered in the force majeure clause?

If the clause is too wide it fundamentally undermines the contract, so it is likely that there will be some restrictions on the events which can trigger it. Most such clauses are drafted along the lines of a general description (‘an event or events beyond a party’s reasonable control preventing or delaying performance of its obligations’) with a list of examples to show what the parties have agreed. If there was just the general description, almost anything could be covered and the parties could not be certain that the contract will be performed, so the examples are very important.

Consider the list: ‘acts of government’, ‘failures of supply chain’ ‘import/export restrictions’ are commonly included but may be further defined so check carefully. You also need to consider any modifiers, caveats or exclusions. For example, the clause may have ‘including but not limited to’ before the list, which has the effect of making the list more indicative, as opposed to exhaustive.

A relatively common caveat is to limit the events to those which could not have been reasonably anticipated at the time of the contract. This could be very important and also very complex to argue. If the parties had actually considered that a specific event was likely to happen it is likely to be excluded, meaning the clause cannot be relied on, or it may be covered elsewhere in the contract. If they have not included it, why not? Is it because it was not considered likely to happen?

When assessing if the event is covered, keep in mind that the party wanting to rely on the clause will have to show that the event falls within the description and that the clause will be strictly interpreted.

  1. How has the event affected performance of the contract?

Again, the wording of the force majeure clause will determine if the effect of the event is sufficient to trigger the clause. Does it require that the party or parties be prevented from performing the contract, or is there another standard to meet? It is unlikely to be enough to trigger the clause that the contract has just become more difficult or unprofitable (that risk is why we use contracts).

Taking this one step further, what requirement is there in the clause that the force majeure event caused the non-performance of the contract? Commonly, the party trying to rely on the clause will be required to show that ‘but for’ the event they would have performed the contract. It may appear clear, for example, that a contract for the sale of a product which is shortly after made illegal would be included but what if the seller had forgotten to place the order from the wholesaler, so would have been unable to perform the contract anyway? A force majeure clause could be drafted which includes both or includes the former but excludes the latter. Again, check carefully.

It is not unusual for contracts to require the party affected by the force majeure to seek to mitigate the effect. Often there will be obligations elsewhere in the contract to try to achieve this, such as a requirement to implement a disaster recovery procedure. A force majeure clause could require a party to use ‘best endeavours’, ‘reasonable endeavours’ or similar to avoid the effect before relief can be sought. If that is the case, specialist advice should be sought because the extent of these obligations often cause long and expensive arguments.

What are the effects of relying on force majeure?

If it appears that this is force majeure, the next step is to look at the contract to see what remedies are available and to whom. There is no requirement for the parties to be treated equally by force majeure (Unfair Contract Terms Act 1977 aside) and there is no set formula for the remedies.

Force majeure may cause only a delay in performance or it may prevent performance altogether, and the contract may deal with the two differently. Does the contract require notice to be given to the other party? Does it need to be in a specific format and is there a time limit? It is always worth getting the formalities correct, errors can be very costly.

The remedies which could be available range from a short suspension of obligations to an immediate and automatic termination, with almost everything else in between. Some clauses just allow for delay, so that performance must still happen, just later, while others excuse performance altogether. For example, this month’s payment may be waived, or just payment this month may be waived with the amount due added to the other months’ payments.

And finally, practical considerations

If you are looking at force majeure in the context of COVID-19, you will want to look at the list of events first. ‘Pandemic’ is sometimes included (the SARS scare of the early 2000s convinced some that it was necessary) but check the definition. Government action, import/export restrictions and supply chain disruption are also possibilities.

You will need to consider when the contract was formed and whether the COVID-19 effects could have been foreseen if that is a requirement for your clause. China imposed a lockdown on Wuhan and district on 23 January 2020 and Italy followed on 9 March 2020; do these mean our current circumstances should have been foreseen?

Is contractual performance genuinely prevented? Can performance be achieved with some protections, such as social distancing or PPE? The W.H.O. guidance and governmental announcements will likely provide good evidence.

If you are facing a claim of force majeure, in addition to the above, you should consider if the clause could be challenged as an unfair contract term. This is more potent if you are a consumer but always worth considering. The person claiming the clause is fair must prove it is fair, just as they will also have to prove that force majeure applies. Hopefully, you will know what the clause says because you agreed it, but you may not have been aware if the you contracted on the other party’s standard terms.

Just because contracts are running smoothly now, that does not mean they will continue to do so. Reviewing the terms now could avoid any nasty surprises later. What if you do not have a force majeure clause? You may be able to rely on the common law doctrine of frustration.

A final, final thought. Many situations do not definitely sit one side or the other of a force majeure clause, agreement and cooperation may be required. Try to keep a line of communication open. Most are experiencing disruption, and all can see the effects.

David Artley, Solicitor, Corporate & Commercial

If you have been affected by any of the issues above, please contact Tony Wentworth at twentworth@jacksons-law.com or David Artley at dartley@jacksons-law.com or call 01642 356500.

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