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Coronavirus (COVID-19): Force majeure clauses in commercial contracts

14 May, 2020

Force majeure clauses have been widely discussed over recent months. We have been receiving an increasing number of enquiries from businesses who are having significant concerns about the lack of performance of their contractual obligations, or the other contracting party’s lack of performance of its contractual obligations, as a result of the current coronavirus pandemic.

This is further to our article on the impact of coronavirus on commercial contracts.

Many businesses are seeking advice on whether the force majeure clause in their contract entitles them to cancel the contract or be excused from performing their obligations under the contract due to the effects of the coronavirus pandemic.

It appears that these questions are widespread across a wide range of industries and, as a result, we set out below a more in-depth insight into some key points to be considered in respect of the relationship between the coronavirus pandemic and force majeure clauses in commercial contracts.

What is force majeure?

Unless there is an express contractual provision relating to force majeure, it is not a recognised legal doctrine in England & Wales.

A force majeure clause is a clause in a contract which changes a party’s obligation and/or liability under the contract when an event or situation beyond that party’s control prevents that party from fulfilling its obligations under the contract.

Is the clause engaged as a result of the coronavirus pandemic?

There is no straightforward answer to this.

There is no specific legal authority in England & Wales on whether the effects of coronavirus qualify as a force majeure event.

More generally, if an epidemic or pandemic is not listed as one of the force majeure events in the contract, there is little authority on whether an epidemic or pandemic constitutes a force majeure event.

The answer to whether a force majeure clause is engaged as a result of the effects of the coronavirus pandemic depends on many considerations including the particular situation that has arisen between the contracting parties and the precise wording of the clause in the contract in question.

It is for the party seeking to rely on the clause to prove that the relevant facts bring the case within the scope of the force majeure clause.

What must be proved in order for a force majeure clause to apply?

This depends on the specific wording of the clause in question and the circumstances that have arisen between the contracting parties. However, generally speaking, the party seeking to rely on the clause must prove the following:

1. That the effects of coronavirus fall within the definition of a force majeure event under the contract

The majority of force majeure clauses will adopt one of the following approaches when defining the type of event that means that the clause is engaged.

a) Specific events

Some force majeure clauses include a list of events that will fall within the definition of a force majeure event under the contract. The list of events may include, for example, war, terrorism, acts of God, acts of government, earthquakes, epidemics and pandemics.

Where the term epidemic, or pandemic, is referred to then it is likely that the force majeure clause will be engaged as a result of the current coronavirus pandemic (subject to any other relevant contractual wording, background facts and the circumstances that have arisen between the parties).

However, many force majeure clauses do not specifically make reference to epidemics and/or pandemics and, in these circumstances, it is less clear whether the clause will be engaged as a result of the current coronavirus pandemic. The answer will depend on the proper interpretation of the force majeure clause including, but not limited to, whether the coronavirus pandemic can fall within one of the specified events (e.g. acts of God) and, if not, whether the list of events included within the force majeure clause was intended to be exhaustive or non-exhaustive.

b) Broad criteria

Some clauses are drafted widely and refer to circumstances which are beyond a party’s reasonable control.

There is currently no agreement in the legal community or any specific authority on whether coronavirus is a force majeure event. Some key commentators believe that Courts are likely to be generous with their interpretation of broadly drafted force majeure clauses due to these unprecedented times. However, until any guidance is provided by the Courts, it is necessary to focus on the precise wording of the clause in question and the circumstances that have arisen between the parties to the contract in order to determine whether or not the clause is engaged as a result of the effects of the coronavirus pandemic.

2. That the force majeure event was the cause of the other party’s inability to perform its obligations under the contract or the other party’s delayed performance of its obligations under the contract

Clauses will often specify the impact that the force majeure event must have had in order for the clause to apply. Clauses often refer to the need for the force majeure event to, for example, have “prevented”, “hindered” or “delayed” a party’s performance of its obligations under the contract.

3. The other party’s non-performance or delayed performance was due to circumstances beyond that party’s control

4. There were no reasonable steps that the other party could have taken to avoid or mitigate the force majeure event or its consequences

If a party anticipates that it will struggle to perform its contractual obligations, it should immediately explore whether it can take steps to prevent delayed or non-performance to seek to prevent the other party from relying on the force majeure clause.

Other considerations

The contract must be reviewed as a whole to consider whether there are any other relevant provisions that will affect the interpretation of the clause.

In addition, all contractual procedures must be followed in order to rely on a force majeure clause including any requirements as to the content of, and service of, notices.

Parties should also ensure they keep full and comprehensive records about all matters that may relate to the operation of a force majeure clause including why performance was impossible, hindered or delayed; the steps taken to find alternatives and mitigate loss (if any); and the service of any notices.

Parties should also consider any other available remedies either under the contract or through agreeing binding variations to contracts with the other contracting party.

Finally, due to the fact that the coronavirus pandemic is causing significant disruption to many businesses, if a party believes that a force majeure clause may apply, it is beneficial for them to seek advice at an early stage so that any relevant steps can be taken to seek to minimise disruption.

*The information set out in this article is correct at the date of publication (14 May, 2020). The effect of coronavirus on businesses is a fast-changing area and so it is important to obtain legal advice to ensure you are properly protected. Visit our Coronavirus (COVID-19) Hub for more Leading Insights.

Contact us

If you have any questions regarding the impact of coronavirus on commercial contracts or are seeking up-to-date legal advice, contact Alice Toop on 01202 294566 or email AliceToop@steeleraymond.co.uk.

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