In our article “COVID-19: understanding how coronavirus can impact commercial contracts” we drew attention to the importance of examining the terms and conditions of your commercial contracts, including any force majeure provisions.
In this article, we will consider more closely what a force majeure clause is, how it operates and some typical force majeure provisions to be alert to.
What is a force majeure clause and how does it operate?
There is no statutory definition of a what force majeure clause is in English law, or how it should operate. Consequently, its meaning and operation within a contract depends entirely on the wording of the contract itself. Indeed, statute will not imply a force majeure clause into a contract and it cannot be relied upon unless expressly included.
The principle behind a force majeure clause is that a party will be excused from, or entitled to suspend performance of, all or part of its obligations on the occurrence of certain events. That party will then not be liable for its failure to perform its contractual obligations if the force majeure clause applies.
Although its operation will depend on the contractual wording of the clause, its effects will typically include some or all of the following:
- Suspension – while the force majeure event continues, a party’s contractual obligations are suspended. Once the event comes to an end, the contract is re-activated.
- Non-Liability – once the force majeure clause is triggered, the non-performing party’s liability for non-performance or delay in performance is removed for the duration of the event.
- Obligation to mitigate – the parties may have agreed wording requiring that the non-performing party must have taken all possible steps to avoid the event or impact of its consequences.
- Right to Terminate – the wording may allow either or both parties to the contract to serve notice to terminate the agreement after a specified period.
Force majeure provisions – what to look out for:
The interpretation of a force majeure clause will be based on the actual wording of the clause, rather than any intention of the parties at the time of writing the contract. Consequently, careful attention must be paid to the wording.
1. Does the event sought to be relied upon qualify as an event under the clause?
A force majeure clause will typically designate certain events which will trigger it, usually via an exhaustive or non-exhaustive list. If non-exhaustive, there will likely be greater room for arguing that Covid-19 is covered by the clause.
In either case, a party should ascertain whether the clause refers to a “virus”, “pandemic” (COVID-19 was declared a pandemic by WHO on 11 March 2020), “government measures”, “restrictions” or “quarantines”.
It is important to note that in the event of a dispute, courts will require the event to be the only effective cause of a party failing to complete its contractual obligations.
If a combination of circumstances cause a party to default, but one of these circumstances is not an event as defined by the force majeure clause, then the force majeure provisions will not apply.
2. Is the effect of the event an effect which is covered by the clause?
For a the force majeure clause to be triggered, in addition to the event being covered by the clause, the effect of the event on the party must also come under the wording of the clause. Some key terms to be alert to are:
- “Prevent” or “unable to complete” performance – if this wording is used, the impact of the event must be to make performance legally or physically impossible. The event making performance more difficult or unprofitable will not be sufficient to trigger the clause.
- “Hinder” or “delay” performance – this wording is wider, and will be satisfied if the impact of the event is to make performance significantly more onerous.
Whatever wording is used, however, it is unlikely that the clause will be triggered if the only effect of the event is to make performance more expensive.
3. Is the event beyond a party’s reasonable control?
A force majeure clause will typically require the defaulting party to use its reasonable endeavours to prevent or mitigate the effects of the event.
Where this is the case, a party must ensure that it meets this requirement before seeking to rely on the force majeure clause. Furthermore, “reasonable control” may include the reasonable control of not only a party to the contract, but also any other party to whom contractual performance has been delegated, that is, an agent. The principal party must therefore ensure that its agents are also meeting the requirement to use all reasonable endeavours to prevent or mitigate the effects of the event. If a party to whom it has delegated this responsibility fails to meet this obligation, the principal party itself will not be able to rely on the force majeure clause.
4. Does the contract specify giving notice?
One should check the contract carefully for provisions relating to the service of a notice on the other party to the contract. These provisions may require service of a notice in a particular format or within a particular time frame. Failure to keep to these service provisions will preclude the ability to rely on the force majeure clause.
Burden of proof:
The party seeking to rely on a force majeure clause has the burden of proving that:
- The event on which it is seeking to rely qualifies as an event defined under the force majeure clause;
- The event had an effect on the party which comes under the clause; and
- The party (and its agents) used all reasonable endeavours to prevent or mitigate the effects of the event.
Furthermore, the party will have to prove that the event on which they are seeking to rely is the only effective cause of the party’s inability to fulfil its contractual obligations. Consequently, parties should keep a careful record of the event, the effect of the event on the party’s inability to meet its contractual obligations and everything done by that party (and its agents) to mitigate the impact of the event.
There are two imperatives when considering force majeure clauses:
- Pay careful attention to the wording of the clause; and
- Keep a careful record of the event, its effects and your response to them.
Contracting parties should therefore satisfy themselves that they have the right to rely on a force majeure clause, before purporting to do so. If the right does not arise, the party seeking to rely on the clause would be exposed to a claim for breach of contract and the other party may be entitled to claim damages as a consequence.
If you need assistance with a force majeure claim or understanding the force majeure provisions in your contract, please do not hesitate to contact our team of expert lawyers.