Force majeure explained
As the COVID-19 outbreak takes a tighter grip over the UK economy, many businesses affected by cashflow problems are unsure where they stand if they are unable to fulfil existing contracts with their suppliers and customers. We are currently dealing with more enquiries from businesses who are unsure if these contracts are enforceable or whether the current epidemic means that the contract is now unenforceable. A party looking to exclude or limit its obligations under a contract will need to rely on the contractual terms agreed with the other party.
Force majeure explained The term ‘‘force majeure’ is derived from French law and translates as ‘superior force’. It is a clause in a contract that provides for what happens should an unforeseen event that is outside of the parties’ control arise during the term of the contract and cause a party to be unable to fulfil its obligations. The party suffering the event is entitled to suspend performance or be excused from all or part of its obligations under the contract.
These are usually extreme events, such as natural disaster, acts of government or outbreak of war. A recent example of businesses looking to rely on force majeure as a way of suspending their performance under a contract includes the Icelandic volcanic ash cloud which grounded planes around the world and halted air travel and freight.
Many European countries set out force majeure in a civil code so that it can apply even if not included in a contract. The relevant government can, through legislation, deem an event a force majeure, as the Chinese government has done in response to COVID-19 – issuing force majeure certificates which can be relied upon by the defaulting party.
This is not the case in the UK. As the economy slows, is the COVID-19 epidemic likely to be considered an unforeseeable event under the principle of force majeure?
Will force majeure apply to my contract? There is no general right to be able to claim force majeure and English courts will not imply force majeure into a contract. If a party is to rely on force majeure then this must be explicitly included in the contract.
Where a force majeure clause has been included, the party seeking to rely on it must prove that the event falls within the specific definition of force majeure and that the non-performance was solely due to that event. A well-drafted force majeure clause will contain a list of events. It will be necessary to look at whether epidemic/pandemic is covered or perhaps government regulations (e.g. those creating ‘lockdown’). Sometimes the clause may refer to events outside parties’ reasonable control. It is possible that in light of the current circumstances the courts will be generous in their interpretation. We do not yet know, however, and may not until all this is over.
The implications of an effective force majeure clause are significant and so courts will look to interpret the wording of the clause carefully, considering what the parties intended at the time of making the contract.
What if my contract does not include a force majeure clause? If you do not have a force majeure clause in your contract, the English law doctrine of frustration may apply. If an unforeseeable event means that a party’s contractual obligations have become impossible to perform or where, for example, the virus outbreak causes the fulfilment of the contract to be radically different to what was agreed, it may be that the contract is ‘frustrated’. The party relying on the event is automatically discharged so that the parties are no longer bound to perform their obligations.
However, it is very difficult to show that a contract has been frustrated. The fact that performance has been made more difficult or costly is not enough. it is questionable whether the latest epidemic would be considered unforeseeable given previous recent epidemics and warnings that others are likely to occur. Whether or not it could be argued that the extent of the global government enforced lockdowns was unforeseeable remains to be seen.
In Practice Many businesses are going to be affected by difficulties in contract performance. As our politicians tell us: ‘we are all in this together’. If contractual performance is impossible then sensible parties will put their heads together and work out solutions. These solutions can be documented in a supplemental or further agreement or contract. Our doctrine of force majeure isn’t a solution which will automatically leap in to help parties out. The way in which it has been developed hasn’t left us with a solution which will automatically ‘slot in’ in these unprecedented times. Businesses are navigating their way through working in the best way they can and hopefully contracting parties will co-operate and see ways through. Doubtless this won’t happen in every circumstance, but we are living in different times.
It is possible the government is examining this now and could legislate. We don’t know. It has done something speedy with house moving and amendment to contracts but that is a relatively easy fix. Commercial contracts are all different and a one size fits all approach would be very difficult to adopt.
Wolferstans has a team of experts who can help with contractual issues. If you have any questions, please contact us on 01752 663295 or email firstname.lastname@example.org