In the midst of the global coronavirus pandemic, many businesses are seeking to rely on force majeure as a means to escape liability for delays or failure to perform their contractual obligations or even to terminate contracts. Here, we consider the application of coronavirus as a force majeure event through three key scenarios.
What is force majeure?
Force majeure has no technical meaning in Scots law. Whether there is a force majeure event will therefore be determined in accordance with the wording of any force majeure clause in the contract. What is actually meant by an event of force majeure event will be defined in the contract and so may vary widely.
A force majeure clause typically excuses one or both contracting parties from performance of all or part of their obligations under that contract, following certain events that are outwith its control. Parties may be excused from their obligations or may be allowed to suspend performance for a certain period, after which one or both parties may be able to terminate the contract without liability.
Force majeure clauses often set out steps that should be taken by a party unable to perform its obligations. This will likely include providing, as soon as possible, notice to the other party of what is delaying or preventing performance, what the party is doing to address the issues and an estimate of how long the event is likely to continue.
Generally, the party affected by the force majeure event must keep the other party informed and endeavour to resume performance as soon as possible. Often, a force majeure clause will include an obligation to endeavour to mitigate the effect of the force majeure event.
Although many force majeure clauses go no further than suspending parties’ obligations for the period in which the force majeure event continues, it may not be always be commercially viable to resume performance after the event ends. To provide for this, clauses often include rights for one or both parties to terminate upon a delay persisting for a certain time, so that the parties can make alternative commercial arrangements.
It is common in practice for the contract to set out a balanced position whereby the party experiencing the force majeure event is relieved from performance without liability and for the party who is not experiencing the force majeure event to have the right to terminate the contract. However, the interpretation of each force majeure clause will always depend on the exact wording of the contract – no one size fits all.
What constitutes a force majeure event?
Common examples of force majeure events in commercial contracts include acts of God, such as natural disasters, or human acts that are disruptive and unforeseeable at the time the parties entered the contract, e.g. terrorist attacks or industrial action. Epidemics and pandemics may also be included. Economic hardship, unless specified, is very unlikely to be considered as part of any general ‘catch-all’ force majeure provision.
Does a contract’s force majeure clause cover coronavirus?
We have outlined three contractual scenarios below, outlining how COVID-19 may apply as a force majeure event to each.
1. The contract has a force majeure clause which explicitly deals with epidemics/pandemics
Epidemics and pandemics may be specified in a force majeure clause. Where this is the case, parties may be able to suspend their obligations or terminate the contract. However, the onus is on the party seeking to rely on the force majeure clause to prove that the force majeure event has prevented, delayed or affected (depending on the wording of the contract) the performance of the contract.
For example, if a party cannot perform an obligation to supply staff because staff are off sick or self-isolating because of the coronavirus, this may be sufficient. However, the party seeking to rely on force majeure must establish that the force majeure event has prevented or hindered them from performance. This is generally a factual question but will also depend on the precise contractual wording. For example, some force majeure clauses require performance to have been rendered impossible and this presents a high bar for a party to show that it could not have found any replacement staff by any other means.
If a party no longer requires the service provided under that contract due to a change in market conditions arising from the coronavirus, but is not actually – whether legally or physically – prevented from performing their contractual obligations, then no force majeure event has occurred and a party may not be excused from its obligations.
2. The contract has a force majeure clause which does not reference epidemics/pandemics
If the force majeure clause does not explicitly reference epidemics or pandemics, then a party may be able to rely on more general force majeure wording commonly included in force majeure clauses such as events beyond its reasonable control or decisions or actions taken by government or government agencies.
Both the UK and Scottish governments have recently introduced new legislative measures, which broadly involve closing non-essential shops and community spaces; requiring people to stay at home, except for very limited purposes; and stopping all gatherings of more than two people in public.
A party may be able to rely on such events to escape liability if they are prevented from performing their obligations.
For example, a party being unable to perform its obligations due to the forced closure of its business may be sufficient to suspend its obligations based on wording around decisions or actions taken by government. However, again, the party seeking to suspend obligations or terminate the contract will need to carefully consider the relevant force majeure wording and must be able to prove that the closure of premises actually prevents or delays performance of its obligations. For example, it may be that a restaurant forced to close may still be able to supply food through delivery or takeaway services.
3. The contract does not include a force majeure clause
As force majeure is a contractual mechanism, i.e. parties may only rely on it where there is a clause in the relevant contract. Where there is no force majeure clause, parties may be able to seek relief through the doctrine of frustration. Frustration operates where an event has occurred which renders performance of the obligation impossible or radically different to what was contractually agreed. Frustration will only apply in very restricted circumstances and offers limited relief and remedies.
Courts will not allow a party to use frustration merely to escape a bad bargain and a contract will not be frustrated simply because performance has become more expensive or onerous due to changes in economic conditions. Frustration may occur due to changes in the law, death, illness or incapacity of a contracting party and destruction of the subject matter of the contract. However, circumstances must be considered on a case-by-case basis.
While under force majeure, contractual obligations may be temporarily suspended for a stated amount of time before possible termination, the effect of frustration is to discharge the parties automatically from further performance of the frustrated obligations.
Although frustration is a potential option for parties to a contract without force majeure provisions, the relatively high bar in proving frustration and its blunt nature means that for many businesses a more pragmatic approach, such as agreeing a moratorium or variation of the contract, may be a better course of action.
This article was co-written by Zoe Jarvis.