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Client Alert 30 Mar. 2020
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The spread of Coronavirus (COVID-19), which was declared a pandemic by the World Health Organization on 11 March 2020, is impacting business relationships around the world and has created novel legal issues which affect various areas of law from contracts to banking, regulatory issues, taxation, employment matters, disputes and many others.
This note focuses on the relevance of force majeure on contracts under English law.
1. Force Majeure
In general terms, force majeure refers to events outside the control of the parties, for example, natural disasters or the outbreak of hostilities, which render performance under the contract impracticable or impossible, or which delay performance. It is common for the parties to a contract to provide that such force majeure events will not make the defaulting party liable if they prevent it from performing its obligations.
The concept of force majeure is derived from civil law and under English law it is wholly a creation of contract. There is no statute establishing the ability to rely on force majeure, and no statute which defines what will constitute a force majeure event. Instead, force majeure relies on the provisions specific to a particular contract. Therefore, under English law a party can only claim force majeure if the terms of the contract allow it. The details of the agreed contract are particularly important in this context.
Many contracts include force majeure clauses which contain a list of events, beyond the control of the parties, such as wars, riots, civil wars or other civil emergencies, as well as natural disasters such as floods, earthquakes and hurricanes. Parties can also agree to include a pandemic or epidemic as a force majeure event.
Whether COVID-19 falls within the scope of a force majeure clause will depend, therefore, on the language of the clause itself. Clearly, if the force majeure clause relieves a party from performing its obligations in the event of a pandemic or epidemic or government imposed quarantine, COVID-19 is likely to be a qualifying event. Subject to the specifics of the clause, it may also be necessary to show that the contractual performance is actually being impacted or delayed by COVID-19.
Even without an express reference to an epidemic or pandemic the current situation may still be covered by other language in a clause. For example, it is common to have “an Act of God” as a force majeure event. In such a case, it will be important to properly evaluate the entire language of the clause and its specific contractual context in order to assess whether COVID-19 is covered by this term. Currently, the English case law provides little guidance on the point. As such, we consider it likely that there will be significant litigation on this issue in the coming months and years.
2. How Is Performance Affected?
There must be a fundamental causal nexus between the force majeure event and the ability to perform the contractual obligation. Most clauses operate such that the performance must be prevented, hindered, or delayed. It will usually not be possible to invoke force majeure just because the performance has been made more difficult or less profitable.
In addition, a party invoking force majeure will usually have to show the attempts it has made to mitigate the non-performance and reduce for example the damages or the delay in performance. As a matter of evidence the burden of proof is with the party invoking force majeure.
3. Consequences Of Force Majeure
The precise effect of successfully invoking force majeure will vary from contract to contract. Often the successful invocation will result in some form of relief from the complete or timely performance of the contract. As well as being relieved from its obligations, the successful party may not be liable for damages as a consequence of its non-performance, or may get an extension of time to perform, or a suspension of certain other contractual terms.
4. Other Considerations
Adequate notices should be provided to the other party in accordance with the contractual provisions. Notices may have to be given within a certain period, and may require certain formalities to be complied with. The English courts strictly police compliance with such formalities.
In addition, going forward, businesses may consider to include “pandemic” or “epidemic” in their force majeure clauses.
5. Compliance With Law
It is common for contracts to have a general provision requiring compliance with the applicable law. It is possible that such clauses will provide protection to a party which has had its ability to perform the contract hindered by government ordered action, even where there is no force majeure clause.
6. Doctrine Of Frustration
When the contract is silent and does not contain any force majeure provision, it may be possible under certain circumstances to rely on the common law doctrine of frustration. For a contract to be frustrated there must be a significant change in circumstances, which is not the fault of either party, and which make the contract impossible to perform. In these circumstances, COVID-19 could be invoked as the supervening event.
For example, depending on the type of contract, it may be possible to argue that either one or both of the government lockdown or the COVID-19 virus itself has frustrated the contract. Long term contracts are less amenable to claims of frustration where the impact of COVID-19 may be severe but temporary. The consequence of frustration is that the contract comes to an end and the parties’ future contractual obligations are automatically discharged.
Businesses which have been impacted by COVID-19 would be advised to carefully:
In all cases the analysis should be targeted on the specific contracts and will have to be applied on a case-by-case basis.
Curtis’ experienced lawyers stand ready to assist with this analysis.
Attorney advertising. The material contained in this Client Alert is only a general review of the subjects covered and does not constitute legal advice. No legal or business decision should be based on its contents.
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