Viral force - Is COVID-19 a Force Majeure event?

Many of us are by necessity becoming acquainted with home working and on 24 March 2020, the nation woke up to its first day of a national lockdown, with people risking fines if they leave home for anything other than specified reasons.

At times like these, you would be forgiven for being distracted from the detailed terms of contracts with suppliers who have obligations to you and your contracts with customers which you are obliged to perform but wondering whether performance can be suspended or the contract brought to an end. 

Many contracts contain what are often called “boilerplate” clauses, some of which receive scant attention during negotiations. These may include a so-called “Force Majeure” clause. We are receiving many questions on whether or not the COVID19 pandemic is a ‘force majeure’ event and what is its impact on the obligations of contracting parties. 

So is the pandemic an event of force majeure , and what does that mean for your contracts?

What is Force Majeure?

In many civil law systems, force majeure is neatly set out in some legislation as a term of art. This is not the case in England and Wales, where contracting parties are left on their own to define what events will amount to a ‘force majeure’ within the contract. The contract will need to identify those circumstances. 

They may range from classics such as fire, flood and other natural disasters; labour disputes, industrial action or lockouts to acts of God; pandemic or epidemic and even extend to any other event beyond the reasonable control of the party affected preventing performance of the contract. In recent times one has seen the list extended to include such things as failure of the internet network or other key public infrastructure. 

Most likely, the effect of a force majeure clause will be to excuse a party from further performance of a contract, either in part or in full, for the duration of the period of force majeure: potentially placing the contractual obligations in a form of ‘suspended animation’.

The wording may provide that if the particular Force Majeure event lasts for a stated period then the contract may be brought to an end without penalty. In other words it is up to the parties to a contract to agree what circumstances will excuse performance which would otherwise lead to the non-performing party being liable to a claim for breach of contract. That period may vary considerably and will often be as short as 30 days but sometimes the parties will have agreed three months or longer: this will depend on the subject matter of the contract and, for example if it contains a provision for termination for convenience.

Does COVID19 trigger Force Majeure?

Very simply, it depends on the wording of the force majeure clause in your contract. Force majeure clauses will typically specify “events which are beyond the reasonable control of the parties”(or one of them) and/or will list a series of events that would be included or excluded in the definition (such as the above). COVID19 was declared by the World Health Organisation to be a pandemic on 12 March 2020, and even under the simpler formulation referring to reasonable control, there is a strong argument that newly discovered viruses causing the shutdown of large parts of the economy is beyond a contracting party’s control.

Great, so I can back away from my contract?

Not necessarily. It is almost never enough to simply cite the occurrence of a force majeure event and declare yourself to be freed from the contract. A clause will typically specify that in addition to happening, the event must also hinder, prevent or delay a party’s ability to perform their contractual obligations.

By way of example, suppose you are contracted to make a delivery from London to Kent. As a way of containing the virus, London is placed under quarantine, with no traffic permitted in or out of the city. This would prevent you from fulfilling your contract. However, if the restriction contained an exemption for commercial traffic, there would be no prevention, even if leaving London takes slightly longer due to, say, having to verify your business purpose as you exit London.

Generally it is for the party seeking to rely on a force majeure event to show that the event falls within the scope of the relevant clause. Most clauses also require the party claiming force majeure to take reasonable steps to reduce the effect of the event, and to keep the other party informed of their efforts.

Further, most force majeure clauses do not simply end the contract. They typically suspend obligations. Termination may become available after a defined period, if it remains impossible to overcome the force majeure event.
In these uncertain times when it is currently an unknown how long the lock down will last there is a tactical question to address: should I invoke the force majeure provisions now and start the clock ticking towards a possible termination? Depending on the circumstances, that may not be in my best interests and could expose me to a contractual renegotiation on unfavourable ground.

The alternative would involve the same step as would be the case in the absence of a force majeure clause in the contract: to discuss with the counterparty short-term measures to relieve the parties of some or all their obligations or modify/vary them either for a determined duration (either a set time in the future or upon the happening of a specific event). It is important in these circumstances that such modifications are clearly agreed in accordance with any provisions of the contract that govern how variations are to be made.

What about frustration?

Frustration is a common law concept which acts to automatically end a contract and release the parties from their obligations where an unforeseen event occurs and, due to the event:

• The contract becomes impossible or illegal to perform; or
• Performance of the contract is transformed into something radically different from that contemplated at the time of contracting.

Due to its quite severe effect, the doctrine is applied very narrowly and will not be available where it was clear the parties had considered the relevant event at formation of the contract (often by way of a force majeure clause), or if the event was caused by the conduct of one of the parties.

The national lockdown conditions announced on 23 March have been followed by the Coronavirus Act 2020 which contains many enabling provisions for Ministers to declare how the population should behave, e.g. making it unlawful to leave home unless for specified reasons, and compelling the closure of all “non-essential” shops.

Although these are wide ranging and unprecedented measures, there will still only be a few situations where frustration will become relevant. If your obligations become more difficult or more expensive to perform due to COVID19 related events, that is not enough.

The case of Canary Wharf v European Medicines Agency [2019] EWHC 335 (Ch) provides an up-to-the-minute example of the restricted scope of the doctrine. The European Medicines Agency (‘EMA’) had taken a 25 year lease for a new HQ at Canary Wharf in London in 2014. The lease did not contain any break clause, so was a surprisingly long term in the commercial property market. In 2016, the UK voted to leave the European Union (‘EU’). The net effect was that the EMA’s HQ function would be transferred to a location within the EU. 

In the ensuing proceedings the EMA’s argued that their lease was frustrated by this event: but their argument failed. The court’s view was that in a lease that long, the EMA was expected to have considered that some change may occur over the course of the term, and their obligations, simply to pay rent and maintain the building, would not change merely because of Brexit, the issue of the UK’s continued membership of the European Union being well up the political agenda at the time.

The EMA also argued that the UK’s departure from the European Union made it unlawful for the EMA to continue to operate from their HQ in London, being outside the EU. This was also held by the court not to be enough to frustrate the lease, and in fact the EMA’s subsequent subletting of the space was illustrative of the fact the contract was merely more difficult to perform rather than impossible or illegal to perform.

If your contract contains a force majeure clause, especially if it refers to pandemics, epidemics, or governmental action you will likely be seen to have foreseen the event in the course of negotiations, so precluding you from reliance on the doctrine of frustration .

Unlike force majeure, which generally suspends the contract while the parties work out if and how they might proceed under the new conditions, frustration automatically brings the contract to an end. This may not necessarily be in one or other of the parties’ interests. For example, there is a growing list of ‘postponed’ sporting and entertainment events, which contracting parties will want to be held because of the financial impact of cancellation, if the events can be held at a later date.

Summary

The COVID19 pandemic can constitute a force majeure event, but whether you can or wish to rely on it will depend on the specific wording of the clause in your contract and whether in taking a view on the possible ramifications such as subsequent automatic termination, it is a prudent step to take; or whether negotiation of a variation (albeit temporary) is a preferable step. In any event, it will not be as simple as trying to rely on the declaration of a pandemic as providing sufficient grounds for non-performance. As for frustration, this is only going to be available (and desirable) in quite limited circumstances.