Will your force majeure clause catch the coronavirus? Force majeure interpretation and drafting tips in light of COVID-19

The coronavirus has placed unprecedented pressures on businesses with respect to their ability to continue to perform their contractual obligations. This comes as further restrictions are placed on people's movement to flatten the infection curve.

 

Many businesses are currently looking for a way to suspend their contractual obligations at least until the virus runs its course.

Apart from having commercial discussions with the other party to the contract, businesses may achieve this by:


  • claiming that the coronavirus is a force majeure event pursuant to the terms of the contract; or
  • claiming that the parties' ability to perform the contract has been 'frustrated' as a result of the coronavirus.
Following on from our firm's previous article Impact of COVID-19 on your contract: Force Majeure, in this article we outline some practical tips that you can use to help to assess whether a force majeure clause in your existing contracts may cover the coronavirus, and things to look out for in such clauses in future contracts that you or your business are considering entering into.

What is a force majeure clause?

A force majeure clause is a clause often found in commercial contracts that can be invoked to allow a party to suspend performance of its obligations if an unforeseen event external to the parties delays or prevents a party from being able to perform its obligations under the contract. If a force majeure event is particularly lengthy or significant, it may also entitle a party to terminate the contract altogether.

If an unprecedented event like the coronavirus significantly affects your ability to perform your obligations, you would want to know that your force majeure clause is well-drafted to provide you with relief when an emergency like this hits.

Interpretation tips: determining whether the coronavirus is a force majeure event under your contract

What does the contract say?

The starting point in determining if the coronavirus is a force majeure event under your contract is to look at the words used in the applicable force majeure clause.

For example, the clause may define what constitutes a force majeure event, by listing out specific events.  Depending on how the clause is drafted, it may be that only those events listed will allow a party to rely on the force majeure clause.

Alternatively, the clause may define a force majeure event in a general way with reference to examples.  For instance, it may say that a force majeure event constitutes human acts such as war, strikes, machinery breakdowns, and natural disasters such as storms, earthquakes and floods. Where a clause gives examples, the effect is that those examples may 'guide' how the broader terminology (in this case "human acts" and "natural disasters") is to be construed. This may narrow the scope of what such a force majeure clause covers.

Finally, force majeure clauses may be drafted in more general terms with a more wide-ranging application.  For example, the clause may say that neither party will be liable to the other if a party is prevented or delayed from performing its obligations "as a result of unforeseen circumstances beyond the party's control", or words to similar effect. The relevant question here may be as simple as – was the unforeseen event beyond a party's control?

In the context of the coronavirus, if your force majeure clause refers to specific circumstances such as "pandemic", or to "acts of Government" and "changes in law" (relevant to the recent social distancing measures for example), the coronavirus may fall within the scope of what constitutes a force majeure event under that clause.

The coronavirus may also fall within the scope of a force majeure clause drafted in more general terms, depending on its specific wording, and how the coronavirus impacted the party's ability to perform its obligations.

Is there a causal link?

Even if a particular event is covered by a force majeure event, there must also be a causal connection between the event and the party being hindered or prevented from performing its contractual obligations.

That is, the occurrence of the event must be the cause of the party being unable to perform its obligations.

This issue may require careful consideration as it is sometimes not entirely clear whether an inability to perform is a direct result of the relevant event.  For example, if the coronavirus has impacted a party's cash flow which has in turn impacted a party's ability to perform its obligations (for example its payment obligations under a contract), rather than the coronavirus directly affecting a party's ability to perform, this may not be sufficient to establish the necessary causal link.  It will of course depend on the specific circumstances.

What to do to invoke a force majeure clause?

A force majeure clause will often require the party seeking to rely on it to provide notice to the other as soon as practicable setting out details of the event and the anticipated delay.

It will also often require the party to continue using all reasonable endeavours to perform is obligations to the extent possible, notwithstanding the occurrence of the force majeure event.

Once the relevant force majeure event has ceased to impact the party, the party must generally resume performance of its obligations as soon as practicable.

It is very important that a party seeking to rely on a force majeure clause strictly follows the requirements set out in the contract, to ensure the party does not expose itself to liability when ceasing to perform its obligations.

What if I don't have a force majeure clause in my contract?

As discussed in more detail in our firm's article Impact of COVID-19 on your contract: The Doctrine of Frustration, if a contract does not contain a force majeure clause, or the scope of the clause does not capture the coronavirus, it may be possible to rely on the common law doctrine of 'frustration'.

This doctrine does however have quite a high bar.

For a party to avail itself of the doctrine of frustration, it will need to show that without the fault of either party, it has become impossible to perform the contract, or that the contract is now radically different from what the parties contemplated when they entered into it, as a result of an event or series of events outside of the parties' control.

Careful consideration and legal advice will be required to assess whether the specific circumstances may allow a party to rely on the doctrine of frustration, to be discharged from future performance under the contract.

Some force majeure drafting tips

Whilst it may be too late to include 'viral outbreaks' in the force majeure clause of your existing contracts, the following are some tips to keep in mind when considering the terms of new contracts that your business may be entering into:
  1. clearly define what will constitute a force majeure event under the contract;
  2. ensure it is clear that a party affected by a force majeure event will not be held liable under the contract to the extent it renders them unable to perform their obligations;
  3. include an obligation on the party relying on the force majeure clause to use reasonable endeavours to continue performing its obligations;
  4. include a provision requiring the party relying on the force majeure clause to notify the other; consider the extent of these notice requirements, including that the notifying party outline the nature of the event and the estimated duration of the delay;
  5. clearly outline what will happen if a force majeure event occurs – for example, it may be preferable to allow a contract to be suspended for a certain period of time, after which the other party may terminate – otherwise, a contract could remain suspended indefinitely.
In drafting a force majeure clause, it is always best to avoid the cookie-cutter approach and to ensure the clause accurately reflects the objectives and intentions of the parties.

If you would like advice on your commercial contracts, including if you wish to rely on a force majeure clause (or need to respond to another party relying on such a clause) in the context of the coronavirus or otherwise, please don't hesitate to contact us – we would be pleased to help.

Contributors

Toby Carter Special Counsel
Michele Izzo Associate
Andrew Gouveia Law Graduate