April 7, 2020

Coronavirus: Force majeure checklist for business to business contracts governed by English law

Posted in Corporate

Contractual performance is under the spotlight as the new coronavirus, known as COVID-19, sweeps across the globe. As a result many businesses are considering what happens if they or another business are unable to meet their contractual obligations.

For business to business contracts governed by English law, a party will not usually be excused from performing a contract.  An important exception is “force majeure”; a contract term which excuses a party from performing its contractual obligations if it is affected by an event which is outside of its control.

There is no standard wording for a force majeure clause and so its application and benefits should be assessed on a contract by contract basis using the following key questions:

1. Is the contract governed by English law?

A choice of law clause will usually be found at the end of a contract.If a different law governs the contract then overriding laws may apply and you should consider taking local advice. If the contract is silent as to which law applies, English law may be deemed to apply in certain circumstances e.g. a contract between English companies providing goods and services in England.

2. Is there a force majeure clause?

Force majeure is a contract term which cannot be implied into English contracts and so the contract must expressly include such provision in order for it to apply. The clause will usually be found towards the back of a contract (sometimes in a section headed “boilerplate” or “general”). Look out for words such as “act of God” or “unforeseen events” which may be used instead of “force majeure”.

3. Is COVID-19 a force majeure event?

Check whether the COVID-19 pandemic falls within the definition of a force majeure event. This is a new pandemic, it is therefore unlikely to be specifically listed unless the contract is new.However, since the WHO’s declaration that COVID-19 is a global pandemic, events which are more generally described such as “outbreak of disease”, “epidemic”, “pandemic” would almost certainly cover this current outbreak of coronavirus.If none of those phrases are used, there may be other indirect events caused by the pandemic such as government action or non-performance by suppliers which may still trigger force majeure. If the list is indicative (i.e. examples only) or there is no list at all (i.e. the clause simply refers to events which are “exceptional” or “outside of a party’s control”), the COVID-19 pandemic may still constitute a force majeure event depending upon how the clause is phrased.

4. Could the force majeure event have been anticipated?

Check if the force majeure clause excludes events which could have been reasonably anticipated or if the impact on your business could have been reasonably anticipated or avoided. This new form of coronavirus was unknown until December 2019 and its global impact is unprecedented and so it is unlikely that it could be anticipated prior to that time but, as the situation developed, consider whether the virus and its impact could have been foreseen, particularly in relation to new contracts entered into since the initial outbreak back in December last year.

5. Did the force majeure event make performance impossible?

Consider how the event has affected performance of the contract, whether this is on a temporary or permanent basis.Has it made performance impossible or is it possible but the performance will be hindered or delayed? Check for language used in the clause and whether it applies to your situation.

If force majeure relief can only be triggered when performance is strictly impossible (i.e. legally or physically) then it will not apply in situations where the performance is merely hampered or delayed.

Unless the force majeure clause expressly provides otherwise, it does not usually provide relief from performance in circumstances where it is more expensive (but still possible) to perform the obligations.

6. Did anything else prevent performance?

Consider whether there is more than one reason why the contract could not be performed. It will depend on the exact drafting of the clause, but it is unlikely that a force majeure will excuse a party from performing a contract if that party was, in any event, unwilling or unable to perform the contract for any other reason.

7. Have steps been taken to reduce the impact of the force majeure event?

Check if the force majeure clause makes it a condition that, before the affected party can claim relief, it must first have taken reasonable steps to mitigate the effects of the event in order to try continuing performing the contract. If so, consider what could have been done to reduce or limit the impact of the COVID-19 pandemic on performance of that contract. For example, could goods or services be delivered in another way whilst still complying with any specific delivery requirements contained elsewhere in the contract?

8. When and how do you need to notify the other party?

The non-performing party will usually be required to notify the other of the force majeure event within a certain period of time, regardless of whether or not the other party is already aware.

The recipient may also need to confirm receipt of the notice and confirm whether or not they agree with the non-performing party’s assessment that the relief has been triggered.

In both cases, check if:

  • There is a time limit or deadline for serving notice or replying to a notice.
  • Supporting documents and evidence are required.
  • The contract contains rules on the method of serving or replying to notices (e.g. by post, not email) which may be contained in a separate clause usually found near the back of the contract sometimes headed “notices” or “communications”.

9. What relief is available if there is a force majeure event and all conditions are met?

This will vary considerably depending upon the wording of the clause but typically provides for:

  • Time: An extension of time to perform the obligations (which prevents the other party from claiming damages for non-performance). This means the obligations are only suspended and will usually be re-activated when the force majeure event comes to an end.
  • Termination: If the force majeure event is still continuing and/or the obligations have not been performed after a certain period of time, one or both parties may be able to terminate the contract by giving notice to the other.

10. What should I do before triggering a force majeure claim?

Before triggering a force majeure claim, consider:

  • Do the available reliefs achieve your aims and outweigh any adverse or unintended consequences, such as damaging the future business relationship?
  • Will triggering a force majeure claim eventually permit the other party to terminate the contract?
  • Could alternative action (such as renegotiating contract terms) lead to a better long-term outcome?
  • Do you need to take legal advice? Mistakenly claiming a force majeure event has occurred (or that the contract has been frustrated – see below) can be a breach of contract in itself which could lead to a worse situation and entitle the other party to claim damages from you and/or terminate the contract.
  • Have you put in place a process for monitoring the COVID-19 pandemic and its impact on your business? As the situation develops, the virus may eventually be downgraded from a pandemic and the impact on your business may change. You may need to re-issue force majeure notices to recognise that the force majeure event is no longer the pandemic itself but rather the indirect consequences of it (such as continued government action or supply issues) and justify how they continue to affect performance.

Aside from a force majeure clause, the English law doctrine of “frustration” may also provide relief to a party unable to perform its contractual obligations where an event (such as the coronavirus pandemic), through no fault of the parties to the contract, makes it impossible to perform the contract. The circumstances when frustration can be invoked are very narrow; it will not assist a party merely because the performance is rendered more difficult or expensive.

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