Force majeure clauses – can you rely on them in response to the COVID-19 outbreak?
Following the Prime Minister’s announcement earlier this week and the coronavirus outbreak generally, many businesses face inevitable concerns about their position with their employees and commercial contracts. In this mini-series of articles, our Corporate and Commercial and Disputes teams consider some critical issues which require careful consideration from a legal and commercial perspective, including: (i) the dangers of varying contracts during the coronavirus outbreak, (ii) force majeure clauses (below), (iii) frustration and (iv) what your insurance may (and may not) cover.
As the coronavirus continues to spread and more stringent ‘lockdown’ measures are put in place this week, many businesses are concerned that they may not be able to perform their contracts with customers or they may receive similar notifications from those in their supply chains. On the face of it, non-performance will be a breach of contract subject to two key exceptions:
1. an express force majeure provision within the contract, or
2. in the absence of such a provision, a reliance on the common law doctrine of frustration (which we will consider in our next update).
What is a force majeure clause?
A force majeure clause is a provision in a contract that excuses a delay or a failure to perform contractual obligations due to events or circumstances outside the reasonable control of the person required to undertake performance.
Does your force majeure clause expressly cover coronavirus?
If you are under an obligation to supply goods or a service, and you find yourself unable to fulfil that obligation on account of the effect of coronavirus, will the force majeure clause in the contract come to your rescue? Or will you still be liable for the consequences of your failure to comply with your contractual obligations?
The answer is that it depends on the wording of the clause. Some clauses expressly include as force majeure events “the effects of epidemics and pandemics” or “governmental actions”. In light of the World Health Organisation’s announcement that coronavirus constitutes a pandemic and last night’s further lockdown measures from government, these clauses may well be engaged.
Other clauses do not expressly refer to what constitutes a force majeure event, but use general wording such as “any event or circumstance outside the party’s reasonable control”. In that case, it will be a matter of interpretation as to whether the force majeure clause can be relied on.
Our Construction team has also recently published practical and concise guidance on how force majeure clauses may affect the construction contracts specifically in this article.
Other important considerations
Even if the force majeure clause specifically refers to an outbreak of a pandemic or governmental action as a force majeure event, there are still further issues to be considered before reliance can be placed on such a clause, for example:
– can the party relying on the force majeure clause demonstrate a causal connection between coronavirus and its inability to perform; and
– whether steps have been taken to mitigate the impact of coronavirus.
During these unprecedented times, these are fundamental questions at the heart of businesses and contracts across the world. The law is complex, and it is now more important than ever to ensure correct steps are taken to protect your business. Our highly experienced legal teams, across all sectors, are on hand around the clock to provide urgent advice should you have any concerns.Back to Our Thinking →