In these unprecedented times, many businesses will be worried about their supply chains. Contracts that were, until very recently, capable of performance have now been impacted by the coronavirus outbreak in ways that could not have been foreseen just a few weeks ago.
Understandably this is causing much concern. Contracting parties are poring over contracts in search of their force majeure clauses and contemplating options that may provide relief from ongoing performance obligations. Indeed, force majeure may well have been a phrase as alien to you as COVID-19.
David Cunningham, a partner in our commercial team, explains force majeure and what it means in the context of a commercial contract, and explores what other options might be available to you within your contracts and at law to help steer through any performance related issues that you might now be facing.
What is a force majeure clause?
In English law, there is no legal definition of force majeure and, if you want to be excused performance by reason of force majeure, your contract must include an express term that grants that right.
Force majeure is a clause in a contract that suspends, and may excuse altogether, the parties’ obligations and liability where a party cannot perform its obligations because of events outside its control. It may also lead to termination of the agreement.
In addition, but not essential, is the inclusion of a defined term setting out a list of what is to be classed as a force majeure event. In some contracts that definition may do no more than define a “Force Majeure Event”, in general terms, as the occurrence of an “event beyond a party’s control”. This is often the case in shorter contracts.
In more detailed contracts – typically long-term supply contracts – “Force Majeure Events” tend to be defined both generally and by reference to a longer list of possible events. Examples include war, terrorism, acts of God; a national emergency declared by the Government; and the outbreak of disease, a pandemic or epidemic.
It is important to understand that there is no single definition of a “Force Majeure Event”, and each contract should be carefully checked, especially to ensure that the event you are seeking to rely on has not been excluded from the definition. For example, it may be the case that events affecting a third-party sub-contractor’s workforce cannot be relied on as a force majeure event under your own supply agreement.
If my contract has a force majeure clause, can I stop performing my obligations due to the coronavirus outbreak?
No, it is wrong to assume that if your contract includes a force majeure clause you can simply rely on it to no longer perform your obligations.
The ability to invoke a force majeure clause is often conditional upon other factors within the contract which impose additional duties on the party seeking to rely on it. The most common duties are: (1) an obligation to give notice to the other party that it has been affected and that it can no longer perform; (2) proof that continued performance is impossible; and (3) an obligation to mitigate its effects. Until such duties are met then relief will not be available.
More detailed force majeure clauses often include wider ranging duties requiring:
- the affected party to provide a plan to spell out how it will mitigate its effects;
- a requirement for the affected party to invoke its business continuity plan before it can be excused by the force majeure event; and
- the parties to work together to agree appropriate amendments to the agreement to work around the force majeure event and to maintain some level of performance.
As well as complying with specific obligations, the contract may also specify that relief will not be available if the force majeure event is as a result of a wilful act (it arose because of something you did or did not do, such as the failure to mitigate the threat of the COVID-19 outbreak on your workforce) or neglect (allowing conditions to persist) or failure to take reasonable precautions (knowing that the event was likely to occur and failing to adjust working patterns in advance) by the affected party.
If I follow the contract is there any other relevant information that I need to know?
Yes, it is also worth pointing out some additional limitations:
- A force majeure event affecting one party only cannot be used as an excuse not to perform by the other party where that party is not affected.
- The force majeure clause generally relates to being excused from future performance and additional liability from the point in time that the event occurred. Accrued rights and obligations are not generally excused. For example, if you are a customer whose business has been affected by a force majeure event but you have received goods from a supplier which you can now no longer make use of you are still obliged to make a payment to that supplier.
- Specific obligations to meet future obligations may not be protected by a force majeure clause. For example, this could be an enduring obligation to meet minimum guarantee payments or to refund cancellation fees. If those obligations are not made subject to the force majeure clause, it may be hard to avoid that liability.
My contract does not have a force majeure clause, but I cannot perform my obligations due to issues arising from the coronavirus outbreak, what now?
If your ability to perform is affected by an event outside of your control and your contract does not have a force majeure clause then you risk being in breach of contract. Failure to perform risks a damages claim and termination.
Alternatively, the affected party may be able to rely on the common law doctrine of frustration. Frustration allows a party to stop performing its obligations because circumstances beyond its control have arisen and performance is now impossible. Claims that a contract is frustrated because COVID-19 means it is now harder to perform or needs to be performed differently are unlikely to be enough to pass that test. If a contract is frustrated, then the parties are no longer bound to perform their obligations and the contract is terminated. However, accrued obligations, such as the obligation to pay invoices that were triggered before the date of frustration are still enforceable.
Are other options available?
Yes, there are other options. If an event has occurred that means a party cannot perform then perhaps the contract can be modified to accommodate the change in circumstances. Often contracts contain a change control procedure to enable that to happen, but in the absence of that the parties are free to vary each contract, by agreement, in writing.
Long term supply agreements may also contain clauses – often known as excusing causes or relief events - which set out a process to allow the parties’ relief in circumstances that stop short of being outright force majeure events.
These mechanisms usually provide relief for a supplier who may be about to be delayed in its performance obligations or is about to suffer some form of financial hardship as a result of a continued obligation to perform – both very real possibilities in the current pandemic. Like more detailed force majeure clauses, excusing cause and relief event mechanisms provide relief to the affected party (usually the supplier), so as long as it: (1) notifies the other party of the potential delay; and (2) takes steps to mitigate the effects of the delay then relief can be granted in the form of:
- an extension of time/adjustment to the contract to meet performance obligations;
- not being held in breach of contract; and
- relief from service levels/service credits and other forms of liquidated damages.
Step-in rights may also exist. This mechanism allows a customer to effectively “step-in” to the supplier’s shoes in order to temporarily perform (either by itself or, more likely, by appointing a third party) the services that the supplier is unable to perform. These rights are commonly seen in detailed outsourcing contracts and are generally resisted by suppliers. However, in the present COVID-19 outbreak they should not be easily dismissed as they give the option of flexibility and the chance to keep a contract alive without resorting to termination.
Are there any other considerations I should make?
Yes, relying on force majeure is fraught with difficulty – it is down to the party relying on the force majeure event to prove that has been affected. This is open to challenge and, ultimately, a potential dispute between the parties if the unaffected party is unwilling to accept the circumstances you claim to have arisen as impacting your inability to perform.
A force majeure clause that is invoked without good reason could leave you exposed for breach of contract. There is also reputational risk – holding on to cash for services rendered because your business cannot now perform or refusing to refund cancelled events for which you have already received ticket fees are likely to have a wider business impact when the business recovers from the force majeure event.
Insurance policies should also be consulted, especially those which cater for business interruption.
The key is to be as flexible as possible in these times. Everyone hopes that this period of uncertainty is short lived, and that business relationships can continue on as normal a footing as is possible both during and beyond the COVID-19 outbreak. Rather than pulling the plug on contracts, parties should be doing everything they can by looking at all the possible options available to maintain their working relationships when this period is over.
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