Force Majeure Clauses: Covid-19 & Termination of Business Contracts (contract rights)

Force majeure event clauses in terms and conditions of contract prepare business to get out of the contract as a good first resort or a bad last resort.

When done properly, they set up a clean escape to avoid damages claims. That is, where the specified intervening events outside the control of the parties prevent, hinder or delay performance of legally binding obligations.

 

Meaning of Force Majeure 

Force majeure events are circumstances defined in a contract that will interrupt a party’s ability to deliver on a business agreement.

The circumstances are usually called a 'force majeure event', 'a force majeure' or just 'force majeure'.

The clause allows extra time to perform the contract: due to the force majeure event.

When the event ends, the parties resume the contract normally.

That's the idea of them.

So, force majeure clauses operate to suspend the time for performance of contracts during the intervening period, while it's not possible to perform. It's a legal contract that's binding, after all.

Some force majeure clauses allow termination of the contract if the intervening event continues for a specified period of time.

Why does that matter?

Force majeure event clauses in contracts avoid the consequences of a breach of contract caused by events outside the parties' (or a party's, depending how it's drafted) control which delays, hinder or prevent performance.

Done poorly, they'll let you down. It's a harsh and unforgiving legal environment.

 

Coronavirus 

All sorts of businesses are affected by Coronavirus: contractors, IT professionals, manufacturers,  management consultants, business agents, recruitment consultants and service providers.  

Is the reason for force majeure a valid one? Does it fall within the legal meaning of the force majeure clause?

These questions are central to whether performance of a contract is covered by force majeure, and whether a business can wiggle out of their legal obligations.  

When it comes to Coronavirus and force majeure clauses, there are at least 3 moving parts in play:

1. the type of legal obligations contract the contract provides for - what are the precise performance requirements under the contract of each of the parties? 
   1. Does the contract contemplate a high level of personal interaction between the parties: aka a relational contract?
   2. Is a manufacturer simply required to deliver manufactured goods? 
2. The precise terms of the force majeure clause that appear in the contract, such as the length of delay permitted in the contract
3. Alternative methods available to perform the contract, if any 

You may be able to imagine how the rise and adoption of tools such as Zoom and Skype and remote working come into play when a party says that a force majeure clause comes into operation in a contract for services of an individual.  

 

Force Majeure Defined

Force majeure are events with:

natural causes directly and exclusively without human intervention and that could not have been prevented by any amount of foresight and pains and care reasonably to have been expected

Force majeure events are unusual and unforeseeable circumstances. They're beyond the business’s control.

The consequences of the circumstances couldn't have been avoided: even if all due care had been exercised.

 

Force Majeure Meaning: Expanded meaning in Business Contracts

When used in legal documents, the meaning of force majeure can be defined and expanded. It's a good idea to do that.

That's because they protect from unknown and unforeseen hazards.

The expansion of force majeure events is designed to include further events which:

1. don’t amount to only to acts of God (ie those without human intervention); and
2. could have been prevented or avoided, to some extent.

Example: Force Majeure clause in a Contract

The force majeure events are usually listed before or after words such as:

“any cause beyond [the parties’ | party’s name] control”.

You can extend the legal terms to allow for events which will hinder, delay, prevent performance of the contract that wouldn’t fallen into the meaning of “beyond the control of the parties”.

That's because businesses are perfectly entitled to provide for what will happen in the event of difficulties arising in the performance of their contracts.

They can be for their own convenience, even if they don’t render performance impossible.

That has to be a good thing.

It better protects the parties that will come to rely on them if it comes to pass.

 

Force majeure clauses in contracts

Contracts are legally binding agreements to perform legal obligations.

When a contract says you to do something, the business has to do it: ie perform the contract in accordance with its terms and subject to its terms, such as its warranties, times and dates for performance, conditions precedent and conditions subsequent.

It might be for the delivery of goods, services or some other obligation. 

When there's only a short time to perform, any delay can be detrimental and cause a breach of contract: due to the inability to perform the contract.

The contracting party is bound to perform the legal contract despite any accident or unforeseen event.

Avoiding consequences of breach of contract

When you don't perform as required by the contract, it a breach of contract.

Then we have force majeure clauses.

When they're used in contracts, they relieve a party from the consequences of breach of contract.

If the event is within the contract’s defined force majeure event, the party that would be in breach gets forgiveness from performance. But it has to be said in the contract clause.

Without a Force majeure clause

Without force majeure clauses you're left to handle:

1. claims for breach of contract
2. termination of the contract, or
3. working out if the law of frustration applies to frustrate the contract, because the contract has become impossible to perform. The doctrine of frustration applies automatically to terminate contracts which have become impossible to complete.
   That isn't an easy ask.

They're pretty limited options. And undesirable. There is no fall back to liability other than the law of frustration. Showing that a business agreement has been frustrated is tough, other than in really clear cases. I'll return to this in a moment.

When done properly though, force majeure clauses make a better range of options available in business to business contracts.

So, what does a force majeure clause look like?

 

Business Contracts

There is no fixed or usual form of force majeure clauses (read that again).

This means the triggers for force majeure clauses and its consequences must always be set out in the contract. If you don't define the meaning of force majeure events in the clause, you lose without the firing gun going off.

Force majeure clauses are made up 2 essential parts.

They commonly include a third: an obligation to tell the other party that a qualifying force majeure event has arisen. 

Example: Force Majeure Event Clause

This sample contains each of the 3 parts:

13.1 Neither the Seller nor the Buyer shall be held liable for failure or delay in the performance of its obligations under this Contract, if such performance is delayed or hindered by the occurrence of an unforeseeable act or event which is beyond the reasonable control of either party ("Force Majeure Events").

13.2 Acts or events constituting Force Majeure Events shall include, but not limited to Act of God, government intervention, directives or policies.

13.3 The party affected by a Force Majeure Event shall notify the other as soon as soon as reasonably practicable after commencement of a Force Majeure Event.

Force majeure clauses can be worded differently, depending on the circumstances when entering the contract.

Let’s break the example force majeure clause down into its parts:

1. Triggers or qualifying events: these are the type of events that bring the force majeure clause in operation.
   They are the excuses for non-performance.
   Clause 13.1 sets the baseline with, "delayed or hindered...", but then they're expanded in clause 13.2.
   This can’t be understated. The words that the parties are used in the contract that count. Not some larger concept of “force majeure” or the general intention of the parties.
   For legal purposes there are major differences between:
   1. events outside the control of a party
   2. foreseeable events: events which could have been planned for (a storm, yes. But an unseasonally harsh storm, no)
   3. events which reduce profitability of the contract
   4. events which could have been overcome or worked around.

I'll take these in turn in a moment.

2. Avoiding consequences of the breach
   In the example, the avoidance of consequences is contained in the phrase:

   Neither the Seller nor the Buyer shall be held liable for failure or delay in the performance of its obligations under this Contract

   So, there is no liability for “failures” or “delays” by either the seller or the buyer if a trigger is true.
   These could include one or more of the following:

   1. suspension of obligations to perform the contract for the duration of the event.
      These primarily involve suspension of the primary obligations. That is delivery of goods or supply of services
   2. avoidance of liability in damages for the failure while the trigger event continues
   3. ability to terminate the contract after a specified period

3. Notice to other parties: clause 13.3 contains a requirement for the party delayed or prevented from delivering to tell the other party of the delaying event.

Contracting parties may also specify types of force majeure events, and the consequences of a qualifying event taking place.

Doing so expands limitations of the general law, and gives better protection for businesses which would be affected. That's because the circumstances of the force majeure event are in black and white in the agreement.   

You're also less likely to find yourself in a position where a judge has to decide the matter for the parties.

So it can make a significant difference.

 

Getting the benefit of Force Majeure Clauses

To rely on a force majeure event, you need to show 4 things:

1. You qualify under a Trigger Event: The actual event fits within the force majeure meaning in the contract. The event relied on falls within the meaning specific words used in the trigger of the force majeure clause
2. You lack control: The events were genuinely beyond the control of the party, unless the contract says otherwise
3. Causation: The delay was caused by the event relied on. You were prevented, delayed or hindered by reason – ie caused directly – by the force majeure event
4. You took steps to mitigate or avoid the effect: There were no reasonable steps that could have been taken to avoid or mitigate the event and its consequences (that you didn't take).

 

1. Qualifying under a Trigger Event

“Qualifying” or “trigger” events are the events which render the contract impossible to perform.

When you write them into your contract, the sorts of event may be followed by “or any other causes beyond our control”, or “any event occurrence or circumstance reasonably beyond the control of [specified party]”. It captures more types of events.

The phrase “any cause beyond your control” is a trigger event in its own right.

Sometimes the trigger event list is omitted altogether.  It applies to “any cause beyond the parties’ [or a party’s] control”, and no others.

“Beyond a party’s control" is a high standard to reach.  It also doesn’t cater for specific sorts of events that affect businesses delivering on contracts.

Common types of events included in a list include:

1. Acts of God
2. government requests brought about for political reasons or not
3. changes of law, including deleted legislation and executive orders
4. strikes, industrial disputes
5. riots, rebellion and wars
6. refusals of a grant of licence, such as a licence to import goods

What the contracts uses depends on how the goods or services are delivered.

Acts of God and government requests and interference are common, and can be improved on.

Acts of God is probably the most important one for most businesses.

Changes of Law; Government Requests

A change in the law is legislative or administrative interference by governments imposed by government authorities.

The government "requests" relied upon under force majeure clause:

• are not governmental in nature when they are made for a party to avoid its contractual obligations
• must be for the public good, as opposed to a private purpose.

Acts of God

Acts of God satisfy these criteria:

1. involve no human involvement
2. are not realistically possible for a human to guard against
3. happen by natural causes, directly and exclusively, and
4. could not have been prevented by any amount of foresight, planning or care.

It includes earthquakes. Storms can usually be predicted and planned for. They don't usually qualify. Abnormal storms do.

Inevitable accidents don't qualify. Floods and fires need to qualify as Acts of God using the 4 criteria above.

Acts of God are really pretty limited events and circumstances.

Everyone knows there will be storms. It needs to be a harsh storm to be an Act of God. That's pretty limited.

If the contract is to be performed in an area that there is regular flooding, the parties are going to be expected to have known that it just might flood. It won't be a force majeure event unless it is a severe flood.

Acts of God: Simple Example Cases

1. A rat gnawing a hole in a wooden gutter box counted as an Act of God
2. An exceptionally heavy rainstorm can qualify as an Act of God.
3. An escape of the water owing to an Act of God which results in a flood may be so great that it could not have been anticipated.
4. A flood caused by a vandal blocking a washbasin and turned on the tap has been held to be an Act of God.

What might be an Act of God in one case may not be an Act of God in another.

If storms are known to take place in the area where a contract is to be performed, it can't be credibly said by a party that a storm wasn't expected to play a factor in the performance of the contract - unless it was an exceptionally harsh storm. It all depends on the facts of the case.

Now let’s get on to lack of control and how force majeure event clauses make businesses safer if disaster strikes.

While the original event of Coronavirus might be considered an Act of God in it's creation, the consequences of the outbreak are not likely to be. Sometimes, it's the consequences of the event itself that cause the force majeure. 

 

2. Lack of control: Beyond the control of the party

Businesses are taken to know their own trade, and the obstacles which may prevent performance of their contracts.

Businesses also have a good measure of control over how business will be done, and delivered.

As a consequence, businesses are taken to have provided for the circumstances which are beyond their control in contracts they sign. If it wasn't that way, then it would be be easy to escape liability.

Unless the contract says otherwise, the words “force majeure event” or “force majeure” will be restricted:

• to supervening events which arise without the fault of either party,
• for which neither of them has undertaken responsibility.

For these reasons, force majeure clauses like these excuse performance only to the extent that the circumstances are genuinely outside of the control of the party relying on them.

It needs to be impossible to perform.

The impediment must make it:

1. legally impossible: performance is rendered impossible brought about by a change of the law; or
2. physically impossible: such as materials to make the goods to be delivered are not available, and there are no other options available, and could not have been foreseen.

 

Example: Insufficiency of Supply of Goods

The promise of supply of a product which depends on seasonal production of a natural product is not necessarily excused by a force majeure event.

A supplier was required to supply canned salmon.

The supplier promised to send the customer the first 2,500 cans of ½ lb salmon packed during the season.

There two different canneries that could supply. The ½ lb cans used by one cannery were found to be defective at the beginning of the season. They couldn’t be used. The other cannery used 1 lb cans.

Neither of the canneries produced any ½ lb cans of salmon during the season.

By the time replacement cans could be obtained, there was no more salmon available.

The failure to supply was not due to any failure of the fish crop. The catch was larger than usual.

The cause of the failure was the failure of the first cannery to have good tins. The second cannery chose to pack 1 lb cans in priority.

By reason of these events the sellers were unable to fulfil the two contracts.

The force majeure clause was not available to the supplier to avoid liability for breach of contract.

It was their own defective supply chain that caused the failure to deliver.

Not an event outside the supplier's control.

 

Control: Changes in Market Conditions & Economic Factors

Economic downturns, changes in market circumstances, inability to obtain the financing affecting the profitability of a contract, or the ease with which the parties' obligations can be performed, are not force majeure events.

Force majeure events are not events which cause:

1. commercial impracticability or impossibility, short of breaking the law or physical impossibility to do what is required under the business agreement
2. inadequate financial resources of the party required to perform
3. greater expense to perform the contract.

It’s immaterial whether it is caused by an increase in costs or expenses.

4. less profitability.

If a business is to be relieved as a result of a events which have this result, they must be specified in the contract, other than by way of a force majeure clause.

It calls for what is known as a "condition subsequent". An express contractual clause entitling a party to terminate the contract when a specified condition or set of conditions are satisfied.

 

Unprofitable / Uneconomical performance

Example:

A supplier sold gas on a wholesale basis.

The customer purchased the gas at a price fixed by a formula. After the contract of sale was agreed, the price of gas went up phenomenally – before the supplier bought the gas to supply to the customer.

It made the contract of supply of the gas … unprofitable. The supplier was not able to get out of the contract for force majeure for economic reasons.

There was nothing standing in the way of the supplier buying the gas (at a higher than expected price) and deliver it to the customer. In addition, as the supplier was a wholesaler in the gas industry, it knew prices could fluctuate.

The price could have gone down as well, which would have made them a windfall that it wouldn't have complained about. The supplier had failed to deal with the contingency in the contract (as a force majeure event or otherwise).

It could not save itself by relying on an event that they had not provided for in the force majeure clause.

 

When is the correct time to assess force majeure events?

Force majeure clauses are interpreted at a particular point in time.

That time is the date of the contract. This means that:

1. clauses are interpreted using the precise words that are used in the contract, within the context of the background of the contract
2. the words used in the clause as assessed as at the date of the contract: not at some time after the contract was signed
3. the clause will be interpreted to include matters with which the parties would be concerned as at the date of the contract.

This means that if there is ambiguity about whether an event falls within the trigger or not, it will probably go against the affected party.

These strict requirements imposed by courts can be lessened with clear terms of contract in the force majeure clause.

 

3. Causation

Once you show a lack of control, you must show causation: that the failure to perform the agreement was caused by the event, and not some other event that happened at the same time.

It’s not as easy as it first seems.

The force majeure event must be sole cause of the failure to perform an obligation.

Reasonable steps must be taken to avoid or mitigate the intervening events and its consequences: all reasonable steps to avoid its operation or mitigate its results.

Cause of the failure to deliver

Example:

A seller wanted an extension of time for a delivery prevented by strikes.

The court had to decide whether the seller was entitled an extension of time for delivery.

The shipment was prevented from leaving for 28 days by strikes.

The sellers could only rely on the clause if they showed that one or more of the defined force majeure events prevented delivery during the contractual shipment period from the intended loading port. .

Once you show causation, need to show that you did everything you reasonably could of the steps available to you to avoid the effects of the event.

That's next.

 

4. Steps to Mitigate or avoid the effect

The words 'beyond the control of the relevant party' can only be relied on if the affected party had taken all reasonable steps to avoid its operation or mitigate its impact.

If you can by reasonable means take the delivery, within the proper time, a labour strike doesn't give you a defence to a claim under a force majeure clause.

So you can't fold its arms, do nothing, and think that a court will help you out. An attempt needs to be made to overcome the adverse effect and avoid or overcome the contingency that has materialised.

Some reasonable effort needs to be made to accept delivery, if the option is reasonably available.

This may call for:

1. getting in alternative staff
2. finding an alternative supplier
3. devising different available transport or shipping methods
4. steps to obtain a licence which you knew was required to perform the contract
5. delivery of goods or services which are not banned by the trade embargo. There may be exceptions to the embargo which would permit partial performance of the contract.

Alternatively, there may be no reasonable steps which could have been taken to avoid or mitigate the event or its consequences.  You’d want to think this through quite closely before reaching that conclusion.

You might even ask what the other contracting party has to say about it.

 

What about Notice Provisions?

You may encounter a notice provision which applies as a condition precedent to the operation of the force majeure clause.

There may also be more than one force majeure event available to be relied on in the circumstances.

Some force majeure event clauses state that a party affected by an expected circumstance need to give notice to the other party. If they don’t, the provision might say that the benefit of the clause is not available.

If there is a requirement to give notice, it is only the causes notified that are available to forgive non-performance.

But failure to comply with time bars like this does not necessarily mean relief will unavailable for force majeure.

Where the notice provision appears in the contract it may be a:

1. condition precedent. The other party must be told before they can rely on the clause for the performance delay. The time bar prevents obtaining the benefit of the force majeure event.
2. warranty. Here, the situation is different.

The affected party is not disentitled from obtaining the relief made available by the clause, despite not complying with the time provision.

Whether it is a condition precedent depends on 3 factors.
They include:

a. The form of the clause itself:

- whether the clause said that notice was a condition precedent or that reliance on force majeure was only available provided such notice was give (it is easy to include such a clause)

- it can be said that the parties thought that the failure by one party to inform the other immediately of the cause of its failure to perform, or a failure to give all possible details as to the expected duration of the cause, should disentitle the affected party from any reliance on the force majeure event

b. The relationship between the force majeure clause and the contract as a whole:

- clear implication that the condition must have been intended for the benefit of the clause

- whether the contract includes other cut off points or time bars

c. General considerations of law: The considerations will depend upon the circumstances of the case. The relevant background might include:

- delay giving notice

- the information that the party had at the time

- what the party did next.

Another avenue to Escape Liability

The Unfair Contract Terms Act only applies in limited situations when contract duties are suspended, postponed or cancelled. In business contracts it is a hard ask for a properly drafted force majeure clause to be successfully challenged.

 

No Force Majeure Clause? Frustration of Contracts

The fall back to escape liability when there is no force majeure clause in a contract is the law of frustration of contract.

Contract frustration doesn’t allow a party to end a contract where circumstances just take a turn for the worse.

Unexpected Events

The unexpected event needs to significantly change in circumstances in which the contract is performed.  It is only available when an outside event is not provided for in the contract, and is completely out of the control of either party.

That’s a tough standard to satisfy if things go badly.

Standard to Meet

Things need to go so badly that performance of the contract is a completely different proposition to what the parties had in mind when they entered the contract. The event must change the deal between the parties, significantly.

That supervening event must change the nature of the contract so much, that it would be unjust for the parties to be held to the contract.

An increase of expense or onerousness of the contract doesn’t frustrate a contract.

Consequences of Frustration

The law of contractual frustration means that:

1. the contract ends automatically
2. the parties are discharged from further obligations to perform.

It doesn’t operate where an act or decision of the party seeking to rely on it has caused the frustration.

The party relying on it must be without blame or fault on the side of the party seeking to rely on it.

Force majeure clauses have a place in practically every contract. It pays to manage the risk properly and think through what events would get in the way of performing contractual obligations.

The law of frustration is not an easy let-off to squeeze into.

 

Risk Management

Provide for precursors which need to be in place for lawful delivery under the contract.

It does not make commercial sense to agree to accept a risk where it is not a risk under your control. This may mean expanding the definition of force majeure events and the effect of the affected party’s contractual obligations.

 

Force Majeure and Covid-19

The case law brings to bear a legal policy that:

1. Courts can’t be too easy on parties to succeed in claims. The cases show that. For example, if economic grounds were adequate to not perform a contract, courts would be overwhelmed with cases. They couldn’t handle the volume of litigation and disputes.
2. Parties are expected to take care of themselves and protect their own interests in contracts they agree to.
3. Contracting parties can’t be let off performance requirements lightly. Events are limited to events genuinely outside control in the absence of clear words extending the reach of the trigger events
4. Also force majeure clauses won’t be interpreted to give a discretion whether to deliver or not.
   To do so would render the contract of no legal effect.

 

Epidemics

In the context of Covid-19, epidemics and pandemics:

1. The definition of "force majeure events" in a contract would ideally include words including government intervention, a change in the law, epidemic and/or pandemic, or some other type of supervening event over which the parties don't have control
2. If the contract was entered after the date the World Health Organisation announced the status of Covid-19 as a pandemic, it's less likely to be a force majeure event. The contracting parties knew it was coming. But not precisely what was coming.
3. The law of the contract would ideally be the law of a specific country, rather than "the UK", "the European Union" or "the US".
   The United States, United Kingdom and European Union don’t have their own contract law.
   It is each State of the US (a separate law for each of the 50 States), the member countries of the United Kingdom (England, Scotland, Northern Ireland) and each of the other Member States of the European Union (Ireland, France, Spain, Germany, etc) that do.

 

Conclusion

Is a contracting party entitled to terminate the contract as they say, or are they trying to squeeze an excuse into the contract to get out of it?

The reasons of the force majeure effect different contracts in different ways.

Whether cancellation of a contract is due to force majeure is a question of law which depends on the terms of the contract and the facts that have arisen in the context of the case that mater. 

The circumstances of each contract need to be assessed on their own terms: with contractors, IT professionals, suppliers, customers, event contracts. A force majeure event may qualify as a termination event for one contract and allow cancellation of a contract, but not another.

Need to assess terms and conditions or business contract for force majeure?  Contract cancellation due to force majeure is not always an available option. There are always other options and different approaches available to address hardship in the performance of contract.

 

Force Majeure Solicitors London

Force majeure clauses are one of those types of clauses that when you need them, you really need them.

Businesses need them to work properly to terminate when disruption takes place.

Concerned that a cyber-attack might affect the performance of a contract you're going to be party to and concerned about how your business would handle it? Force majeure provisions can help. We've put together contract clauses to provide layered protection for businesses in IT contract problems caused by factors outside party's control, and advised on how to improve them so that they're fit for purpose.

Effects of Coronavirus

What about Coronavirus? Does COVID-19 come into play as an event force majeure to prevent performance? What are the options available? It can be difficult to know whether it will or whether it won't.

• Do the precise terms of a force majeure clause in a business contract actually qualify as a force majeure event?  
• Who owns the property delivered under the contract?
• What if the goods have been part delivered? What about services completed in between payment milestones?
• Where do the rights to get paid lie? And when? Do you have to go unpaid, or do you need to refuse to accept further goods or services under the contract?
• What if your counterpart says that the contract has terminated for force majeure, but it actually hasn't?
• Is the situation different for professional services by a consultant under a contract for supply of services?
• What rights arise and when? 

Making assumptions about parties rights, obligations can make a bad situation worse, or maybe worse still, by giving away legal rights that you think have been lost - when they haven't. 

We know more than most that simple and clear words in a contract doesn't mean that the legal position is as clear as the contract - or in the self-expressed best interests of your counterpart - may have you believe. There's a lot of law that operates behind every contract, that you won't see or read in the contract.  The legal effect of the contract - particularly in times of extreme stress - can be hard to fathom. 

Tied up in a force majeure dispute over whether a contract can be cancelled or terminated as a result of force majeure? 

In the end, it depends on whether you’re prepared to do something about it. Sometimes, it’s difficult to get a fast outcome without depth of knowledge a contract solicitor has to offer, after dealing with hundreds of contract disputes.

Our solicitors can help you assess your legal position, options and handle difficult situations arising from Coronavirus and the contracts your business relies on.

Speak to one of our business solicitors on force majeure in London on +44 20 7036 9282 and at contact@hallellis.co.uk for advice on how force majeure event clauses fit into business contracts.