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Contract Work

Force Majeure Clauses and the Effect of Coronavirus on Businesses

The coronavirus pandemic has made force majeure clauses one of the hottest legal topics worldwide. 

To help businesses navigate this issue, we asked Tom Bohills, an English qualified lawyer and the Founder of Chronos Law, to explain what a force majeure and its effects are. 

What is a force majeure clause and a force majeure event?

Well, the first thing to say is that the concept of force majeure does not originate from English common law. Like a latter day Norman Conquest, it appears to have crept into UK commercial contracts from French civil law and is now widespread. Indeed, the use of force majeure clauses has become so prolific by UK practitioners that the clause is often buried in the ‘boilerplate’ at the back of the contract. The phrase itself means ‘superior force’ which gives you some insight into what it seeks to deal with.

In short, a force majeure event is a scenario outside the reasonable control of either party to a contract (sometimes referred to as an ‘Act of God’) which prevents a party from delivering on some or all of its obligations. Its contractual definition usually includes floods, droughts, earthquakes, and other natural disasters along with riots, civil disturbance, and war. However, interestingly, another word is often used in these descriptions which has great contemporary relevance…‘pandemic’.

What are the effects of invoking a force majeure clause?

The party seeking to benefit from the force majeure remedy must be the one to prove it applies. This will come down to the exact drafting of the clause itself and the way a force majeure event is defined. For example, if it refers to a party needing to be ‘stopped’ or ‘prevented’ then the bar for triggering it is much higher than where a party must merely show they were ‘disrupted’, ‘hindered’ or ‘delayed’ from performing their obligations.

The remedy will, again, be based on the wording of the clause itself. However, the normal drafting will permit the affected party to suspend the obligation for a certain period of time and then to terminate the contract without fault if the agreed period of time elapses. The party seeking to rely on this course of action should follow the notice and other provisions of the clause to the letter. Incorrectly claiming force majeure or failing to follow the defined contractual process can lead to the non-defaulting party disputing the termination and even countersuing for damages. 

Will a force majeure clause apply under common law if it is not stipulated in the contract?

The simple answer is no. Force majeure is still not a recognised concept under common law so if there is no express clause then it cannot be invoked. Also, drafters beware, there is no implied definition of force majeure under English law. That is to say: if you have not included a definition of what force majeure actually is and what it should cover, the whole clause is likely to be void for being uncertain. See the case of British Electrical and Associated Industries (Cardiff) Ltd v Patley Pressings Ltd [1953] where a reference to ‘usual force majeure events’ was struck out by the court on this basis.

The general view under the English system is that a contract should always be honoured, even if it has become more difficult, disruptive, or expensive than originally anticipated. However, one remedy remains for a party under an English law contract without a force majeure clause – the doctrine of frustration.

Frustration is a common law concept with its origins in the 1860’s which allows a contract to be completely discharged in certain and very limited circumstances. The bar to a successful frustration claim is extremely high. Essentially it can only be sought where a contract has become illegal or impossible to perform, or the circumstances have become so radically different to the original intention of the parties that it goes to the very root of the contract.

To give an example of how difficult frustration is to invoke, the High Court recently found that the fairly seismic decision of the UK to leave the EU was not enough to frustrate the 25-year lease of the European Medicines Agency (an EU body) in London.

Is COVID-19 enough to trigger force majeure clauses in English law contracts?

This is yet to come before the English courts but, in theory, yes. There are certainly reports of force majeure clauses being triggered by the maritime and shipbuilding industry in China. Given they are a few months ahead of Europe in terms of the spread of COVID, this may be a sign of things to come. 

Whilst in my particular area of software and Fintech it is highly unlikely that there will be a raft of cases, it is not difficult to see issues springing up in contracts which involve the movement of goods or people. With planes grounded and our normally interconnected world putting up borders and quarantine restrictions, I have no doubt we will start to see cases hit the English court system by the end of the year, particularly in the events, travel, maritime and construction sectors.

What steps should a party that is unable to perform obligations under a contract due to the pandemic take?

A party that is unable to perform certain services under a contract should not simply stop performing the contract altogether. It is quite possible that the force majeure event applies to some but not all of their obligations - for example, a shipment of goods sent in multiple batches. When triggering a force majeure clause, the relevant party should continue to honour its other contractual commitments to the fullest extent possible. Otherwise it may succeed in its force majeure claim but find itself subject to a counterclaim in damages for other breaches.

Parties should also always bear in mind the importance the English courts place on mitigation. Even if the contract cannot be performed, are there ways to limit the fallout? Could taking certain actions help to prevent damage to the non-defaulting party? Further, it is always advisable to keep the other party notified and informed of the situation. Prompt, comprehensive communication and the pursuit of mitigation strategies are not simply good business practice; they may also help to ensure a favourable settlement on any costs.

What final word of advice do you have for lawyers drafting a force majeure clause?

Wow, ok where to start!?! Well, let me start by saying that lawyers should never ignore the boilerplate terms. Force Majeure is one of just a number of clauses that can be hidden in among its far more innocuous legal cousins. Failing to spot it can have serious consequences for your client.

As a broader point, ask yourself if you really want it in your contract. Is it actually helpful for your client? Unless the global financial system collapses, does a receiver of goods or services actually need a force majeure clause - given their sole obligation is to pay? Probably not. 

If you do decide to have a force majeure clause, make sure it is defined clearly and ensure the manner in which it is triggered is obvious and practical (thinking particularly around notice provisions). Be transparent about whether the obligation needs to be entirely prevented or merely hindered. Likewise, should it relieve the affected party of the whole contract or just that obligation?

As ever, the devil is in the detail. 

 

Legal Nodes is beyond grateful to Tom for doing this interview with us. And if you need further help with force majeure clauses – Tom and other lawyers from the Legal Nodes’ network are here to help

 

Disclaimer: information in this article is provided for informational purposes only. You should not construe any such information as legal, business, tax, investment, trading, financial, or other advice.

Tom Bohills 
Founder of Chronos Law

Interviewed by the Legal Nodes Team

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Tom

United Kingdom

8 years of practice

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