COVID-19 has changed society including the way we live and work. Most crucially perhaps, it has significantly and immediately impacted the way we do business causing potential uncertainty for the future.
The effects of, and the Governments response to, COVID-19 is unprecedented not only in the UK but worldwide. Reductions in the workforce and travel and trade bans around the globe are just a few things that have fundamentally affected how we do business. This, in turn, has meant that many UK businesses are at risk of non-performance of their contractual obligations with suppliers, customers, and commercial partners.
Whilst the general principle is that a failure by parties to fully perform their contractual obligations amounts to a breach of contract there are some exceptions to the general principle as follows:
- where a Force Majeure provision applies; or
- where the contract has been ‘Frustrated’.
A Force Majeure event is one which is unforeseeable, unavoidable and beyond the parties’ reasonable control. Sometimes these are referred to ‘Act of God’ events such as flooding, droughts and earthquakes. However, this may also include pandemics such as COVID-19.
You should consider the following:
- Does my contract contain a Force Majeure clause? The clause may not necessarily be titled ‘Force Majeure’. You are looking for a provision which: a) refers to an unforeseeable event beyond the parties’ control which affects the parties’ performance; and b) which relieves or suspends one or both parties from performing some or all their obligations, as a result of such an event.
- Does the Force Majeure clause in my contract cover COVID-19? This largely depends on how the clause is drafted. The clause may state that, to be triggered, the Force Majeure event must ‘prevent’ performance. Alternatively, the clause may state that the Force Majeure event must ‘hinder’ performance. This distinction is important as it will affect the level of disruption that must be met for the Force Majeure event to be triggered.
In addition, the Force Majeure clause may provide a definitive, specific list of events which are considered to be Force Majeure events, or the clause may be drafted more broadly and require further interpretation in light of the context of the agreement. You should also determine whether the Force Majeure events cover any governmental action taken in response to Covid-19 which may affect your ability to perform the contract.
- Is it the Force Majeure event (COVID-19) that is preventing performance? It may be that there are several factors, and not just COVID-19, which are preventing your performance of your contractual obligations. If there are several factors, this may affect your ability to rely on the Force Majeure clause.
- Have you considered any mitigating factors? Parties must ensure they have taken steps to mitigate the effects of the Force Majeure event. If not, they may not be able to rely on the Force Majeure clause. It is important to note that Force Majeure is based on the parties’ inability to perform their contractual obligations. A Force Majeure clause may not be relied upon merely to avoid performance of a party’s contractual obligations merely because the benefit of the contract is lost or reduced.
- What procedural steps do you need to take to invoke the Force Majeure clause? Do you need evidence or to provide notice to trigger the Force Majeure clause? Are there any time limits which will affect your ability to rely on the clause? Does the Force Majeure clause give you the right to terminate the contract or suspend your obligations under the contract? Again, this will depend on how the clause is drafted.
If you do not have a Force Majeure clause in your contract or you are unable to rely upon the Force Majeure clause, you should consider whether the contract has been ‘Frustrated’.
A contract is Frustrated where an unforeseen event makes performance of the contract impossible for all parties to the contract. It may well be, depending on the facts of the case, that COVID-19 has Frustrated the contract. However, the burden for proving that the contract has been Frustrated is high. A contract is unlikely to be Frustrated merely if ‘performance is difficult’ or ‘less economically attractive’.
If the contract is Frustrated, the parties will be completely released from their obligations under the contract.
Can the parties vary the contract or renegotiate its terms?
In a time of such uncertainty it may be advantageous to take a pragmatic approach. You may wish to attempt to avoid contractual disputes during these unprecedented times and preserve the commercial relationship. Consider, therefore, whether the parties can reach an amicable and creative commercial solution.
This article contains a brief overview of matters to consider. Whether the COVID-19 outbreak is a Force Majeure event or Frustration of contract will depend on the drafting and interpretation of each contract. If you require further information on whether your contract does indeed a Force Majeure clause and whether it may be triggered by COVID-19 or you require assistance in renegotiating your terms, please contact us on firstname.lastname@example.org or 020 3826 4508.
Satia Chotai, Fusion Law
Fusion Consulting is a multi-disciplinary consulting firm focused on fast growth and entrepreneurial businesses. We work closely with business owners assisting them with business advisory, accountancy services, tax, legal services and digital marketing.