Force Majeure clauses and COVID-19
As the coronavirus crisis continues to unfold with supply chains facing weakened demand, logistics bottlenecks and workforce capacity issues, companies' rights and obligations under contracts are firmly in the spotlight. One question we've been asked, right from the early stages of the pandemic is:
In light of COVID-19, can a force majeure clause excuse parties from performing their duties or from undertaking their commitments on time?
What is a force majeure clause?
Force majeure events are defined as individual acts, events or circumstances beyond the control of the parties, such as natural disasters or the outbreak of hostilities. A force majeure clause will typically excuse one or both parties from performance of the contract in some way.
- Excusing that party from a delay in performance
- Entitling the party to suspend (or claim an extension of time) for performance
- Providing that party with a right to terminate
Coronavirus: Can it be a force majeure event?
It depends entirely on the wording of the clause, the circumstances that were present when the parties entered into the contract and the allocation of risk between the parties. The term 'force majeure' is contractual and has no recognised meaning in English law - so the clause must be interpreted with regards to its exact wording.
Not all contracts have a force majeure clause; therefore, it's important to assess each contract in detail, to see whether the current situation is covered. Some contracts will include a general statement, discussing something "outside of the reasonable control of the parties" while others may be more specific with terms like "epidemic" or "acts of government".
It's also important to consider whether the coronavirus breakout has caused the delay or failure to perform. It is for the party that is seeking to rely on a force majeure clause to excuse non-performance or late performance, to satisfy a court or other tribunal. That said, a contract may require a party to notify the other as soon as possible, so reasonable steps may be necessary to attempt to minimise the effect of the force majeure.
What if the pandemic is not covered in the contract?
If the contract does not provide a suitable route, it may be possible to rely on the doctrine of frustration, which is a common law and does not need to be drafted into a contract. That said, the hurdle of proof is very similar. For example, the frustrating event must have had an impact on performance, making it impossible, or transforming the obligation to perform into something very different (from what was envisaged when the contract was formed). The party affected by the frustrating event must also be able to show that it took reasonable steps to mitigate the impact on performance.
If you require advice about your existing contracts or need some help drafting, advising upon, or negotiating such agreements, please send us a message today or call 7000 81 82 83.
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