The continued spread of the coronavirus COVID-19 and the unprecedented lockdown measures implemented by governments around the world raise significant challenges for businesses, and important questions about performance of contracts that are impacted by the ongoing crisis. In this article, we look at two key contract principles, force majeure and frustration, and how they might apply to contracts in the current extraordinary situation.
“Force majeure” is a term often used to refer to an event beyond someone’s control, but it is important to note that force majeure is not a term with a recognised meaning under English law, and there is no general legal principle of force majeure that automatically applies to contracts. Force majeure will only be relevant to a contract if the contract actually contains a specific force majeure clause.
If a contract does contain a force majeure clause, its effect will depend on the exact wording of the clause in each case. The crucial questions to consider are:
- What events are capable of being “force majeure events”?
- What impact does a force majeure event need to have for the clause to be triggered?
- What options does the clause give the parties when triggered?
Defining a force majeure event
A force majeure clause will generally contain a specific definition of the what is capable of constituting a force majeure event. Typically, there will be a general definition such as “any circumstance beyond the reasonable control of the party affected by it”, coupled with a non-exhaustive list of examples. That list of examples may include “viral outbreak” or “pandemic”, or “government action”. Where there is not a specific example listed that clearly captures the outbreak of COVID-19, unless the clause specifically states that viral outbreaks or pandemics will not qualify as force majeure events, it is likely that the outbreak, and the government response to the outbreak, would fall within the general definition and so be capable of constituting a force majeure event.
Assessing the impact of the force majeure event
Once it is established that the current situation amounts is capable of being a force majeure event under the contract, the next question is what impact the spread of COVID-19 has to have on the party looking to rely on the force majeure clause in order for it to qualify as a force majeure event that triggers the clause. Again, this will depend on the exact wording in question, but it is likely that the clause will require that a party be “prevented from” or “delayed” in fulfilling its obligations by the force majeure event. The burden of proof falls on the party looking to rely on the clause, and so they would need to be able to demonstrate that the outbreak of COVID-19, or the government response to COVID-19, has actually had the impact specified in the clause.
In most cases, the fact of the outbreak of COVID-19 on its own will not enable a party to rely on the force majeure clause. That party would need to show that performance of its obligations is actually now legally or physically beyond its control, or that it is unable to avoid delays in performance of those obligations, because of the outbreak of COVID-19 or the government response.
With widespread lockdowns and travel restrictions in place, and significant resulting consequences for availability of supplies and ways of working, there will undoubtedly be lots of situations where the outbreak and/or the related government response do result in the required impact, but it is important for businesses to keep in mind that a contract being more expensive or less convenient to perform than originally anticipated will not be generally be enough to trigger a force majeure clause.
Options if the force majeure clause does apply
Finally, if it is clear that the ongoing crisis does constitute a force majeure event that has had the required impact on contract performance, the clause will set out what the means for the parties going forward. Force majeure clauses will typically state that a party will not be liable for its non-performance or delayed performance for as long as the force majeure event continues to prevent or delay performance. If the clause requires the affected party to notify the other party, it is crucial to follow the instructions for notification set out in the contract to ensure that the force majeure clause is validly activated.
Force majeure clauses will also often allow the other party to terminate the contract if the force majeure event prevents or delays the affected party’s performance for a certain period of time. Before choosing to terminate in this scenario, the unaffected party should carefully consider the provisions in the contract that apply following termination. It is important for the other party to remember that, prior to any such termination, its obligations will generally continue as normal unless that party also seeks to rely on the force majeure clause in relation to its own obligations.
Frustration of contracts
If a contract does not contain a force majeure clause, in extreme circumstances the doctrine of frustration may apply to discharge a contract that it is now impossible to perform, meaning that the contract would be automatically terminated and all parties would be released from their future obligations under the contract (and where the Law Reform (Frustrated Contracts) Act 1943 applies, deposits and other pre-payments paid before the frustrating event would be potentially recoverable).
There is no single, definitive test for when the doctrine of frustration will apply, and a court would look carefully at the facts of each case and apply a very high threshold before determining that a contract has been frustrated. In broad terms, a frustrating event is one which:
- occurs after the contract has been entered into;
- goes to the root of the contract and is completely beyond what the parties contemplated when entering into the contract;
- does not result from a party’s fault; and
- results in further performance of the contract being impossible, illegal or radically different from that contemplated at the time of entering into the contract.
Whether or not the outbreak of COVID-19 means that a contract is frustrated requires detailed analysis of the actual impact of COVID-19 on the contract. If a contract is more difficult be performed, but ultimately can still be performed, then it will not meet the test for frustration. It is also important to note that, because the frustrating event has to be completely outside what the parties contemplated when entering into the original contract, if a contract does contain a force majeure clause that would apply in relation to COVID-19, frustration would not apply.
Claiming force majeure or frustration
If, as a result of the COVID-19 pandemic, you are having difficulty in performing your obligations under a contract, or if you believe that your counterparty is struggling to comply with theirs, and you are considering invoking a force majeure clause or arguing that the contract is frustrated, you should give careful thought to the exact circumstances and consider taking further legal advice.
If you incorrectly treat a contract as partially suspended or terminable under a force majeure clause or discharged for frustration, your actions could amount to a repudiatory or anticipatory breach which could potentially lead to the other party being able to terminate and claim damages. In these unprecedented circumstances, it is critical to ensure that you take the correct steps in accordance with your rights.