The unprecedented disruption being caused to life and business by the Coronavirus pandemic is causing many businesses, organisations and anyone working with or for them major problems and stresses.
One way to alleviate of some of those problems and stresses could be the application of a force majeure clause contained within a contract, which could release parties of their obligations under these circumstances.
For some, the C-19 outbreak may be the first time they have had to consider the force majeure clauses in their contracts.
Does the contract contain a force majeure clause?
There must be an express clause: if there is no force majeure clause in the contract, the common law doctrine of frustration may apply,but frustration only applies in certain circumstances where performance has become impossible. Please see our guide on Frustration for more information on this.
If there is a force majeure clause in the contract, this should set out to relieve one or more parties to a contract from liability which might otherwise arrive in certain circumstances.
It is impossible to explain what could be included or omitted from a force majeure clause. It depends on the drafting which was undertaken at the point of negotiating and entering into the contract.
What might a force majeure clause cover?
Short form clauses excuse liability generally for circumstances outside of the reasonable control of the party invoking the clause. This leaves for interpretation what is within a party’s control and what is not. In these clauses, specific events are not specified as being automatically force majeure triggering events.
Long form clauses will spell out which events are within the scope of the clause, such as;
- War or civil war
- Act of God
- Natural disasters
- Court order
- Epidemic or disease
- Governmental authority action
You would need to check the clause to ascertain if the COVID-19 outbreak is within the scope of specified force majeure events on a clause by clause basis. If so, force majeure may shield you from liability or come to the aid of the other party to your contract.
Is there anything else to look out for?
Beware of termination rights in contracts which cross-refer to force majeure events. Contracts are often terminable if a force majeure event lasts for a period of time, sometimes even if the parties are able to resume their contractual obligations.
Where a party would prefer to renegotiate, for example, because the prices now seem high, the existence of a force majeure event for a lengthy time can provide an opportunity to terminate.
How are the words interpreted? Under the ejusdem generis rule, general words are limited in meaning to the same kinds of things, as mentioned in the specific words listed.
Is the clause unfair? The force majeure clause and its application could equate to an exclusion of liability which would then, under UCTA, be subject to the reasonableness test. Consideration as to its lawfulness should be given to the respective bargaining strength of the parties.
What about consumer contracts?
If your contract is with a consumer then you would need to consider the consumer’s statutory rights. For any contract entered into, on or after the 1st October 2015, the Consumer Rights Act 2015 (CRA) will apply.
Whilst it is permissible to exclude liability for non-performance or delay, this is only where this is due to an event outside the trader’s control. However, whether a force majeure clause would satisfy the CRA’s requirement to be fair and transparent when dealing with consumers would need to be looked at on a case by case basis.
The term ‘force majeure’ itself may not be understood by consumers, so the actual wording used in any clause in consumer contracts would be a key factor.
What effect does the force majeure clause have?
Suspension of the obligations of the parties for a period of time, as defined in the clause and whilst the event of force majeure is preventing performance.
Many contracts provide for termination (usually on notice being served) if a force majeure event subsists for a period of time (say, 60 days). A party seeking to excuse liability in a force majeure scenario may inadvertently start the clock running for a termination right to accrue for the other party. This may not be something you want to do; consideration must be given, and advice taken before invoking the force majeure clause.