Wayne Spolander is an associate solicitor in our corporate and commercial team. He recently advised the title sponsor of a large international sporting event about coronavirus and a force majeure clause in a six-figure sponsorship contract.
In this article, he provides an overview of force majeure clauses in business contracts and touches on the following (click headings for quick links):
We are trying to provide our clients with as much information as we possibly can during these uncertain times. All of our articles concerning coronavirus can be found on our COVID-19 page here.
Force majeure clauses in business contracts are currently being reviewed and considered carefully by management and business owners due to the recent escalation of the coronavirus (COVID-19) from epidemic to pandemic.
There is a need to understand the contractual implications as there is a real risk of further and continued disruption for many businesses due to the coronavirus outbreak.
Owners and management must decide whether urgent action is required to mitigate the exposure their business has in the face of the current levels of the coronavirus pandemic and any projected escalation of the outbreak.
Matters such as considering the potential for their business to avoid performance of obligations or exiting the contract are in focus plus whether changes to their business continuity plans are needed.
Can the Coronavirus outbreak itself be a trigger under any ‘force majeure’ clause?
Can the Coronavirus outbreak itself be a trigger under any ‘force majeure’ clause in the contract the business has with its customers or suppliers? If it is deemed a valid trigger allowing the affected party to suspend its performance under the contract or, in some cases, cancel the contract, then usually the affected party will not be liable for a resulting failure to perform its contractual obligations as a consequence of the relevant force majeure event.
As there is no standard definition of a ‘force majeure event’ under English law, it is up to the parties to the contract in question to define the sorts of events which will trigger any ‘force majeure’ provisions and to detail the specific legal consequences of the clause being triggered will be.
Does the coronavirus outbreak itself constitute a ‘force majeure event’ when having regard to the specific wording of the ‘force majeure’ clause in the contract concerned?
There will be various factors to consider, such as (but not limited to) the following:
Does the contract define a force majeure event?
If it does, is there express wording in the force majeure clause dealing with epidemics, pandemics or similar events? This may be material in deciding whether the coronavirus is covered by the clause
If the definition does not expressly refer to epidemics, pandemics or similar events:
There may be other wording in the force majeure clause (such as events beyond the reasonable control of the parties or acts of God) which may be enough to attempt to argue that the coronavirus outbreak triggers the provisions of the force majeure clause.
Whether such an argument can be run or the chances of winning the argument will depend on the drafting of the clause and contract as a whole and possibly the intentions (and circumstances) of the parties at the time they entered into the contract.
If the force majeure clause states that the relevant trigger event must ‘prevent’ performance:
The affected party seeking to invoke and rely upon the force majeure clause due to COVID-19 will need to demonstrate that performance is either a physical or legal impossibility and not just difficult or unprofitable.
For instance, an increase in the cost of performing the contract is probably not sufficient reason to trigger protection under a force majeure clause (unless, of course, the wording of the clause and contract expressly allows.
If the force majeure definition expressly excludes events that could be considered reasonably foreseeable:
Pandemics or epidemics like coronavirus may fall outside of the force majeure protection as there have been previous outbreaks of similar viruses. It might be difficult to prove that another variant (such as COVID-19) of a similar virus was unforeseeable.
Having said that, other specific factors linked to the current COVID-19 outbreak (like the unprecedented lockdowns associated) may sufficiently distinguish COVID-19 from other previous similar virus outbreaks.
Exiting a contract on the grounds of frustration
It may be possible for the affected party to exit the contract on the grounds of frustration but this may only apply in very limited circumstances. The reason is frustration applies where a significant change of circumstances renders performance of a contract very different from the obligations that were originally undertaken – impossibility of performance is the key requirement for frustration.
An extremely high threshold has been set by the English courts for holding performance to be impossible. Therefore, if performance under the contract could have been delivered (even if this would have been a burden and expensive for the affected party) then frustration is unlikely to be available for the affected party to avoid performance of their contractual obligations.
Practical steps for business owners and management when considering the Coronavirus (COVID-19) pandemic
- Review the latest versions of all customer and supplier contracts, particularly those key or critical to the business.
- If seeking to rely upon a force majeure provision in any contract, note that the affected party must be able to show it has taken all reasonable steps to avoid or mitigate the event and its effects on that affected party’s contractual performance.
- Specific requirements on how a party must notify the other party or parties to a contract of a ‘force majeure event’. Further, these may be drafted to be conditions precedent i.e. if the specific provisions are not strictly followed as required in the contract then a party may lose the right to rely on the force majeure provisions.
- Costs – usually each party bears its own costs during the existence of a contractual ‘force majeure event’.
- Additional considerations for force majeure events
When dealing with the other party or parties to a contact where you are seeking to rely on a contractual force majeure event, in addition to the above, you should have regard to:
- Change control and/or variation provisions in the contract which may govern how the parties can agree to amend or unilaterally amend the contract.
- Termination and suspension provisions
Contract review for coronavirus (COVID-19)
Wayne says: "In my experience, before making any decision and notifying other party or parties to the contract, there is no substitute for a full review of the contract in question, doing so with an understanding of and bearing in mind what are the key objectives of that review.
The coronavirus situation is rapidly evolving and, as a consequence, this guidance may change in light of further government announcements."
Legal advice on force majure in business contracts
If you need legal advice relating to Force Majeure clauses in business contracts (whether or not specifically related to Coronavirus), please contact Wayne Spolander by email on email@example.com or fill in the form on this page. We offer a free initial meeting for all new clients, which will, during these times, take place over the phone.
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