With businesses facing pressure from all quarters the legal provision of “force majeure” could offer some relief to those struggling with their contractual obligations. In our latest FAQs, we outline how this lesser used provision might be able to help.
What is force majeure?
In a legal sense, force majeure addresses what happens when a contracting party suffers events outside of its control. Usually such events prevent that party from performing, or continuing to perform, its obligations.
That sounds helpful. Will it apply to me?
Since force majeure requires a specific contractual provision, whether or not it applies will depend on what is contained in your contract. There are dramatic variations in the breadth and depth of force majeure clauses, but essentially any contractual party will need to identify two questions. Firstly whether current circumstances are such that they are capable of triggering the force majeure clause in the first place, and secondly, what are the implications for them?
Is force majeure triggered by the Coronavirus COVID-19?
It is impossible to say without a careful examination of your contract. Classification by the World Health Organisation as a pandemic is certainly helpful, but not conclusive unless the clause specifically includes such a reference. If not, it could be argued that it falls into the same category as a natural disaster or act of God. The important part for the purposes of the provision is that this prevents that party from performing its contractual obligations. Whether or not this is the case will depend on the actual facts and circumstances, and it could be that it is not COVID-19 which is the disrupting agent but rather the centrally imposed action to stem its spread.
What types of contracts are likely to be affected?Potentially any agreement can have a force majeure clause. But it is more common where a contracting party is dependent on others for its proper performance. Typically, an agreement to supply commercial goods depends on the supplier being able to source and process raw materials. If these cannot be obtained for whatever reason then arguably this is a force majeure provision. Similarly, the government shutdown of recreational locations would mean that a contract to hire a wedding venue could not be performed. Again, this would bring any contractual force majeure provisions into focus.
I’m confident that my contract allows for this scenario. So what’s next?That is fortunate, but we are not there yet. Provided the situation is covered, and it has prevented you from performing your obligations, the next part this will depend on the contractual provisions themselves. Typically, your time for performance will be extended allowing all parties a bit more breathing space.
So I can just sit back and do nothing?No, not at all. If you are struggling with your contract, you will almost certainly need to notify the other party. The precise terms of such notification will vary but generally the notice will state that the force majeure condition has occurred and the reasons that it makes performance impossible.
Is that it?No. You will be under a duty to mitigate, which means that you will have to investigate alternative ways to perform the contract to minimise any disruption.
OK, I have done all that, and there is no way out. Even a delay will not help. What next?There may be additional provisions allowing the contract to be terminated. This should only be a last step, since usual termination provisions will apply. But if the terms of the clause have been followed it would be difficult for a party to seek remedies based on events after the service of the force majeure notice, even though prior breaches will still be relevant.
I don’t have a written contract, or my contract doesn’t contain the necessary provisions. Can I still invoke force majeure?Not quite. But there is a common law doctrine called “frustration” which might offer some help. This establishes that a party is discharged from its legal obligations if change in circumstances makes it impossible to perform the contract. With such a high evidential threshold this should only ever be relied on as a last resort.
Any final thoughts?
Businesses facing COVID-19 related issues might like to review their insurance arrangements. These have been in the spotlight recently with many commentators doubtful that standard policies will provide suitable cover. Like most commercial matters it pays to take professional advice on all aspects of your arrangements.
Additionally, since the effects of COVID-19 are so widespread, it is possible that the case law surrounding force majeure and frustration may be due for further refinement in the months and years ahead.
If you would like to find out more about how the team can help you, contact our Company Commercial Team to arrange a free legal review.
This article was written by Edward Garston, Partner in the Company Commercial Team at Pinney Talfourd LLP Solicitors. The contents of this article are for the purposes of general awareness only. They do not purport to constitute legal or professional advice. Specific legal advice should be taken on each individual matter. This article is based on the law as of March 2020.