As businesses struggle to deal with the implications of Covid-19, there are undoubtedly going to be difficulties in fulfilling contractual obligations. Many contracts will include “force majeure” clauses which cover some circumstances in which contracts cannot be performed.
What is force majeure?
The nature of any contract is that the parties take on obligations to which they are then bound and it is necessarily difficult to escape such obligations. A force majeure (meaning “superior force”) clause deals with extreme events outside the control of the parties, which allows a party to be excused from performance of some or all of its obligations, whether temporarily or permanently.
The events covered will usually be extreme events, not caused by the contracting party themselves, and may include things like the outbreak of war or natural disaster.
Is Covid-19 a force majeure event?
In short, this will depend to a large extent on the precise drafting of the force majeure clause. If there is no force majeure clause, one will not be implied into the contract and the clauses will be interpreted strictly. There is no doctrine of force majeure outside of the contract.
Given that the Covid-19 outbreak is a fairly new phenomenon, it is likely that most force majeure clauses will not refer expressly to an outbreak. However, wider drafting referring to epidemics might cover the current situation, or alternatively, actions arising from the outbreak, such as work stoppages or government guidance might be caught by the clause.
What happens if Covid-19 is covered by a force majeure clause?
If the force majeure clause does cover the current situation, the performance and obligations under the contract will generally be suspended for a period of time and/or the parties may be able to terminate the contract. The clause may specify exactly how parties must go about attempting to satisfy their obligations and how they must invoke the force majeure clause.
If there is no force majeure clause one or more of the parties might seek to argue that the contract has been terminated by the doctrine of “frustration”. This will apply where the circumstances in which the parties find themselves is such that it becomes effectively impossible for the contract to continue. Courts are generally slow to accept arguments in this regard, given that they run contrary to the general need for contracts to be binding.
If you need to deal with a force majeure clause
Before taking action, you should seek specific legal advice on the clause in question and should think carefully before taking any unilateral action. Whilst parties may find themselves in very difficult situations and whilst there may be a degree of sympathy from the Courts, this will not prevent the Courts from interpreting force majeure clauses with appropriate rigour. Acting without considering the contractual position may make a difficult situation worse.
Parties should ensure that they keep careful records in order to back up any claims they might have, and consider also whether any insurance policy is held (e.g. credit insurance policies) that might be relevant, with insurance companies being notified appropriately.
If you need any advice on force majeure or other contract disputes, please contact our litigation team or Philip directly at email@example.com