Harrison Drury’s commercial property team, discusses force majeure clauses in existing contractual agreements in the wake of the current coronavirus COVID-19 outbreak.
The ongoing coronavirus COVID-19 outbreak is having a huge impact on trade and supply chains.
Under these circumstances, some businesses may seek to rely on force majeure clauses or other contractual rights for relief from the performance of certain obligations due to the impact of the outbreak.
A force majeure clause (which is French for ‘superior force’) is a contract provision that allows a party to suspend or terminate its role and obligations if an unexpected event outside its reasonable control occurs and makes its performance commercially unachievable.
The provision may state that the contract is temporarily suspended or terminated, if the event of force majeure continues for a prescribed period of time.
As the coronavirus has now been classified as a pandemic, such clauses are likely to be debated intensely.
Below are several points for consideration regarding contract agreements in these current circumstances.
Contractual clauses and English law
Unless there is an explicit contractual clause in place, English law does not protect a party from liability due to events outside their reasonable control.
A doctrine of ‘frustration’ in contractual law can be used as an exception to this main rule in cases where it is likely to completely terminate a contract. This is used in cases where the performance of a contract has been frustrated and has become impossible to perform due to unavoidable reason or situation.
In addition to this, a contractual agreement that has simply become increasingly troublesome or too costly to perform, is probably not going to constitute an adequate argument to cite a force majeure claim.
Wrongly citing coronavirus
Contractual force majeure protection cannot be used by a party seeking to avoid being liable for a breach of contract which would have happened anyway.
Increasingly vigorous force majeure clauses normally require the party looking to profit from protection to follow a specific procedure, usually requiring formal notice to be served as soon as that party finds out that a force majeure event is likely to happen.
For a party seeking to be protected, following such procedure is crucial to legally establish where a contractual agreement determines a process to be followed under specific circumstances. The English courts will then require that exact procedure to be followed by the parties.
In specific cases, parties are tempted to only seek to rely on explicit legally binding arrangements. Be that as it may, a contractual agreement which is quiet or unhelpful on force majeure can prove to be inclusive of other accommodating general arrangements.
Genuine instances of this include an option to terminate for convenience on notice, to avoid an argument about whether coronavirus constitutes or not a force majeure event.
Claiming protection
Seeking protection under force majeure clauses will unavoidably lead to the creation of rights and remedies for the other party. These usually lie with the alternative to terminate in case of continuous non-performance because of the unforeseeable event.
These dangers ought to always be taken into account with respect to whether to claim protection under force majeure.
It is important to note a momentary advantage of seeking protection under force majeure might not exceed the danger of longer-term results.
When an event affects more than one party
Cases citing force majeure clauses usually arise from events which affected only one contractual party. (i.e. failure of electrical service, fire incident).
Coronavirus on the other hand, is having a huge effect on businesses globally.
Under these circumstances, it therefore may be more effective for everyone to work together when looking for solutions and compromises to maintain business continuity.
The emerging landscape for business
The UK government is releasing daily updates regarding coronavirus and its guidance to protect people and support businesses in the UK, therefore its current directives may change.
If force majeure clauses have been included in your commercial contracts, consider whether these clauses might be triggered by or against you. It may also be necessary to review commercial contracts you have with industries or countries affected by coronavirus.
For further guidance on force majeure and contractual agreements or to seek specialist advice from Harrison Drury’s commercial property and commercial law teams, please contact 01772 258321.