Nicholas Yapp Head of Dispute Resolution Department, Partner
A Force of God – the impact of Coronavirus on Force Majeure clauses: An English perspective
The worldwide human cost and impact of the Coronavirus COVID-19 outbreak is becoming more evident day by day. While the UK government is busy formulating an action plan for dealing with the increasing likelihood of a widespread outbreak on UK soil, it is essential that UK businesses also prepare for the worst in order to ward off (in so far as is possible) an economic cold.
UK businesses are stepping up their efforts to limit the spread of the disease, to include voluntarily closing their offices and imposing non-essential travel bans. These restrictions hint at the wider difficulties that parties may face in meeting their obligations under commercial contracts.
What happens if I cannot fulfil my contractual obligations because of a Coronavirus outbreak?
One key consideration is the usefulness of commonly incorporated ‘force majeure’ clauses in contracts. The purpose of a force majeure clause is to excuse a party from the sanctions of non-performance of its contractual obligations due to the occurrence of events that are considered to be outside the party’s control, and which render performance impossible. Typical examples include ‘acts of God’ such as natural disasters.
Declaring a force majeure event in the context of a pandemic is somewhat unchartered territory. It is of course not out of the realms of possibility that a contracting party may be unable to comply with its obligations against a backdrop of business closures and travel restrictions. The burden of proof in such cases would be for the party seeking to rely on the force majeure clause to demonstrate that Coronavirus made performance of the contract impossible.
The importance of checking your contract
However, everything will hinge on the specific wording of the contract. There is no legally accepted definition of the phrase ‘force majeure,’ and it is essential that any contract clearly defines the term.
It would therefore be advisable for any affected contracting parties to carefully consider the wording of the relevant clauses before declaring an inability to perform, or else risk facing (what may be severe) legal consequences of being held to be in breach of contract.
Is there an alternative to relying on force majeure clauses?
It may well be the case that the contract in question does not include any force majeure clauses. If this is the case, then it may be possible for a party to claim relief under the English doctrine of frustration.
This doctrine may allow a party to bring a contract to an end on the grounds that an unexpected event has occurred (outside of the control of the parties) which renders it impossible to fulfil. However, parties should bear in mind that the doctrine of frustration is not a ‘get out of jail free’ card to be used to escape a bad bargain. Its application by the Court has been limited to a handful of cases, none of which have yet considered the doctrine’s application in the context of Coronavirus.
Cross-border contracts – a word of caution
The lack of an internationally adopted uniform approach to dealing with Coronavirus muddies the waters even further. The UK government’s strategy is an evolving process and may differ from the approach adopted by other countries. This will particularly affect cross - border contractual relationships and may give rise to disagreements regarding whether Coronavirus can properly be regarded as a force majeure event.
What is the health warning to UK businesses?
While the commercial impact of Coronavirus remains unclear, the immediate health warning to UK businesses can be summarised as follows.
- Consider carefully whether your contract allows for a suspension of obligations as a result of a disease or pandemic, before declaring an inability to perform. We are well positioned to provide relevant advice. A failure to adopt such a cautious approach may open you up to a costly dispute.
- Consider further whether your contracts need to be amended to take into account the changing world that we find ourselves in, for example by extending the contractual definition of force majeure to include disruption caused by pandemics, including related local and national government restrictions which may have the effect of reducing the practical ability of parties to perform their contractual obligations. Prudent planning now may offer protection in respect of future potential difficulties.
If you are in the position of wishing to exit existing contracts that are onerous, the inability of your contracting counterpart to perform its obligations to you may provide a means of you doing so. This too will require a careful consideration of contracts and the governing law of those contracts. Again we are well positioned to provide relevant advice.
Please contact Nicholas Yapp (Partner) and Sarah Townsend (Senior Associate) should you wish to obtain further advice on any of the issues identified above.
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