This article examines the ongoing coronavirus public health crisis and its impact on contracts, the ability to terminate or cancel contractual obligations and refers to a recent case study.
In general terms “Force Majeure” (FM) is a legal concept defined under a contract relating to the occurrence of events outside the control of the parties. In an attempt to deal with the impact of unforeseeable events on the performance of contractual obligations and any resulting liability, many contracts include a force majeure clause. Force majeure clauses tend to include a definition of what constitutes a force majeure event and an operational provision setting out what happens should such an event occur.
Can a Force Majeure clause be relied upon to provide contractual certainty in the current coronavirus pandemic?
Businesses, government and individuals are grappling with the fallout from the current public health crisis and this is truly unchartered territory. There is no current reported case law or English law authority on the operation of FM clauses in the context of epidemics or pandemics. This is not to say that a well-drafted FM clause cannot be relied upon, more that this specific application of FM in this jurisdiction in the context of a pandemic is new ground and untested territory.
As there is no statutory or common law definition of FM, this means that the contractual clause must be carefully interpreted to assess whether the coronavirus outbreak and the current conditions in the UK amounts to an FM event.
Force Majeure – check the contract
FM events are generally understood to amount to events or circumstances beyond the reasonable control of a contracting party or both parties rendering performance of the contract impossible.
Often clauses contain a “force majeure event” example list (check the wording to see if it is exhaustive or non-exhaustive) which, if positively identified by the circumstances, are helpful in bringing greater certainty to recognising the applicability of the clause. For example, such a list may refer to acts of terrorism, civil unrest, war, government action or pandemics. If you are in the middle of a contract negotiation, as a minimum we recommend tightening up the wording to ensure that “pandemic” and “government action” are included.
Generally, a contracting party is able to rely on a FM clause if a FM event is established and that FM event makes performance of the contract impossible. If established, such a clause may provide for the suspension or cancellation of the affected party’s contractual obligations. This will not catch all circumstances, for example if the impact of a pandemic makes trading conditions more economically challenging such that materials for the supply and manufacture of goods become more expensive, this scenario is unlikely to be caught. Such a scenario presents tougher commercial conditions, however this does not in itself make performance impossible. The affected party might have to pay more for materials because of the unfavourable economic climate, but its ability to perform the contract is not compromised.
In these uncertain times, we have seen a rise in the number of clients wishing to review their options in terms of FM and the extent to which relief may be available within their existing contractual terms. There is no “one size fits all” approach and establishing the extent of relief varies on a case-by-case basis depending on the wording of the clauses and the circumstances facing the business.
Force Majeure case study
We recently advised a client responsible for holding a key national event and advised in the context of assisting the client with dealing with the postponement of the event.
At the time of the advice, the UK Government had not announced the ban on public gatherings of two or more people. Now with such an announcement in place, there is no longer any ambiguity as to whether events are able to take place. Accordingly, the provisions of FM are more likely to be triggered if the organisation’s contractual performance involves the holding and hosting of a public event, although this is always subject to the wording and existence of such a clause.
As part of the event, exhibitors paid to reserve a physical space to operate commercial activities during the event. Within the terms and conditions, an option was available to cancel the event independently of the FM clause. Such an option allowed the retention of part of the initial payment.
In these circumstances, relying on such provisions presents a risk of unjust enrichment claims, exposure to an assessment of the reasonableness of the clause under UCTA and reputational damage to the party attempting to rely on such provisions.
With a strongly drafted FM clause together with a clear decision from the UK Government in relation to the temporary ban on public gatherings, in the context of the case study this provided clarity and further comfort in terms of relying on the FM clause. However, interestingly the point at which the contract became impossible to perform was only confirmed for certain following the ban on public events and arguably not as a direct consequence of COVID-19 and the impact of the pandemic.
If you have a contract which does not include a FM clause, and it appears that you are unlikely to be able to fulfil contractual obligations as a direct result of the pandemic, the English concept of frustration may apply and be of assistance. If established the impact would be similar to terminating a contract on the basis of a FM provision.
If you require any advice or guidance in connection with your contracts or contractual obligations, we strongly recommend seeking legal advice and acting as soon as possible.