In the Commercial Dispute Resolution team we have recently seen a number of enquiries from our clients in relation to the impact of the Coronavirus.
The majority of the enquiries that we have received in the Commercial Dispute Resolution team are in relation to potential difficulties with contracts. Can a party to a contract seek to avoid performing its obligations due to the impact of the Coronavirus?
We have set out below what we consider to be key contractual issues and options. However, if these do not appear to fit your particular case, we would be happy to speak with you on an individual basis.
Coronavirus: can it be a force majeure event?
Broadly, a reference to force majeure in a legal contract is where due to unforeseen circumstances, one of the parties is prevented from fulfilling their contractual obligations.
Force majeure cannot be implied into a contract and can only be considered by a court if it is an express term agreed between the parties to the contract. The starting point is, therefore, to check any contracts that you have to see whether they contain a force majeure clause. If they do not, then you are arguably looking at other remedies potentially that are set out below.
If there is a force majeure clause in the contract, then it is important to read its terms carefully. Force majeure clauses normally set out how they are to be invoked e.g. by one party giving the other notice. It is then worth checking the clause to see precisely what is covered. Applying this to the Coronavirus, you would be looking to see whether epidemics or pandemics, or government imposed restrictions, are qualifying ‘events’ that would trigger the operation of the force majeure clause. If the force majeure clause is silent in this regard, there may be a wider catchall phrase, for example, ‘events or circumstances beyond the reasonable control of the parties’. It is easier to seek to rely on the force majeure clause where the triggering event is mentioned expressly, rather than seeking to argue that it falls into the wider undefined and more general category.
If pandemic or epidemic is not mentioned, and you do not have the more broadly and generally drawn catchall set out above, or similar, then arguably you may not be able to rely on the clause.
Prevent or hinder
There is a series of case law on the particulars types of wording of force majeure clauses. If a force majeure clause provides that the event must ‘prevent’ performance, then the relevant party must demonstrate that the performance is legally or physically impossible, and not just difficult or unprofitable. However, reference in the contract to words such ‘hinder’ and ‘delay’ have a wider scope and will generally be satisfied if performance is substantially more onerous.
It is worth making the point here that it is an established principal under English law that a change in economic or market circumstances, affecting the profitably of a contract or the ease with which the parties’ obligations can be performed is not considered to be a force majeure event.
Burden of proof
The burden of proof falls to the party seeking to rely on the force majeure clause. So it would be for that party to provide evidence that non-performance was due to the triggering event. This is likely to be a significant burden to substantiate in most cases.
There is also case law which states that the force majeure event must be the only effective cause of the default. Where there are one or two competing events, this may render the force majeure clause inoperative.
Duty to mitigate
It is expected that the party seeking to rely on the force majeure clause will have tried to mitigate their circumstances in relation to the event and taken appropriate steps in this regard. Failure to mitigate may be a factor in relation to the applicability of the force majeure clause.
Effect of a force majeure clause
Normally the effect that any force majeure clause would have is set out in the force majeure clause wording. It normally falls to be one of the following:
- Suspension – the parties’ obligations are suspended while the triggering event is present. However, once this passes the contract resumes.
- Non-liability – the clause may seek to limit the non-performing party’s liability for non-performance or delay. However, again, once the event has passed, liability resumes.
- Right to terminate – the clause may give the parties the right to terminate the agreement. It may therefore be a case of the parties not wanting to rely on the force majeure clause as they would rather seek to keep a lucrative contract in place. They may wish to seek to negotiate instead.
- Obligation to mitigate – sometimes it is expressly stated that if mitigation does not take place and cannot be demonstrated, the clause cannot be relied on.
Statutory control
The parties may be able to challenge a force majeure clause if it is unreasonable under the Unfair Contract Terms Act 1977. Here, a party cannot rely on any term to exclude or restrict liability for its own breach of contract, or claim to be entitled to render a contractual performance which is different substantially from that which was expected or to render no performance at all, unless such a term satisfies the reasonableness test under the 1977 Act.
Consumer contracts
Consumer contracts made on or after 1 October 2015 are governed by the Consumer Rights Act 2015. A supplier’s force majeure clause would need to satisfy the 2015 Act’s concepts of fairness and transparency.
Frustration
In the absence of a force majeure clause, parties may have the opportunity of seeking to rely on the common law doctrine of frustration. This is where a party is discharged from their contractual obligations if there is a significant change in their circumstances which makes it physically or commercially impossible to perform the contract, or doing so would render the performance radically different. This is a very difficult area of law to succeed in and has been interpreted relatively narrowly. In the recent case of Canary Wharf (BP4) T1 Limited v European Medicines Agency [2019] the High Court rejected a claim that a tenant’s 25-year lease was frustrated by Brexit. However, as a result of this case there has been a great deal of discussion about express Brexit clauses being included in contracts. Following the Coronavirus, it is anticipated that there will be discussions in relation to a Coronavirus clause being included. In other words, the parties agree a specific force majeure style clause in relation to specific catastrophic events caused because of it.
The Coronavirus may lead to more cases of frustration succeeding. For example, where a contract needs to be performed in a region where a state has imposed strict quarantine regulations, this may lead to an event which would qualify. If frustration does apply, the Law Reform (Frustrated Contracts) Act 1943 operates, which sets out the consequences. Broadly these can be summarised as the 1943 Act allowing a recovery of monies paid under the contract before it was discharged, subject to an allowance, at the court’s discretion, for expenses incurred by the other party.
Insurance
It is worth consulting your insurance documents to see whether the Coronavirus would be covered. It is important that you review your policy wording carefully. Business interruption insurance will not necessarily automatically cover an epidemic scenario. It often deals with business interruption caused by property damage i.e. fire.
Conclusion
It would be worth taking early legal advice in relation to your situation if you are finding that the Coronavirus is impeding your ability to perform your obligations under a contract or a contracting party is seeking to avoid their obligations to you. Similarly, if you are entering into a new contract, it will be worth considering having a specific Coronavirus or force majeure clause inserted.
While force majeure cases have come before the English courts over the years, they have never been a major consideration of English litigation. Now, faced with these challenging times, they are likely to become more relevant.
If you have any queries in relation to contractual obligations caused by the Coronavirus, please do not hesitate to contact Graham Mead on 01473 298234.
