COVID-19 and your contracts: Navigating “Force Majeure”
With many businesses already reeling from the consequences of COVID-19 related disruption, we’re going to step you through a key clause in many commercial contracts which doesn’t normally attract much attention but is suddenly the talk of the town – the “Force Majeure” clause.
What’s force majeure?
Force majeure is a contractual concept that protects a party from the consequences of failing to perform part (or all) of a contract because certain circumstances arise.
Does my contract have a force majeure clause?
Not all contracts have them, but if yours does it’s probably hidden towards the back. It may be headed “Force Majeure”, have those words within it, or it may just talk about a party not being liable for “events beyond its reasonable control”.
How does it work then?
It depends. Each contract has to be analysed on its own merits and the precise language used in each individual case is crucial.
But we’ll work through two common approaches – a contract which contains a specific definition of “Force Majeure” and a contract which takes a more general approach.
(1) Specific definition of “Force Majeure”
Clause 18. Force Majeure
Neither party shall be liable for any breach of this Agreement caused by an event of Force Majeure.
Here ‘Force Majeure’ is capitalised, so it has a specific definition for this contract. There is no universal legal definition for force majeure, so how your particular contract defines it is critical. Each contract can differ slightly depending on how it was drafted and negotiated. The following is a common example format:
‘Force Majeure’ means one of the following types of event:
a) acts of God, flood, drought, earthquake or other natural disaster;
b) epidemic or pandemic;
c) terrorist attack, civil war, civil commotion;
d) any law or any action taken by a government or public authority.
This sets out the specific situations that count as Force Majeure in this contract – nothing else is relevant.
Does COVID-19 constitute a Force Majeure in this scenario? The World Health Organisation has declared COVID-19 a global pandemic, and the UK Government guidance, means that COVID-19 would be likely to fall within the scope of this particular definition of Force Majeure.
The next hurdle is whether the breach of the contract was “…caused by…” COVID-19.
It’s not enough for COVID-19 to simply be around at the same time as a breach of contract that was happening anyway; COVID-19 has to be the cause of that breach. A Force Majeure clause can only be relied upon where the party was ready and willing to perform the contract, if the Force Majeure never happened. Force majeure must be the cause of the failure to perform the contract, not an excuse if the underlying problem was something else.
As we enter a new ‘suppression’ phase of the Government’s Covid-19 response, this may be straightforward to show – for example, the Prime Minister’s strong advice to avoid large gatherings is likely to be a justifiable ‘cause’ for cancelling a hospitality, sporting or entertainment event and the person cancelling the contract should be not be liable for breach of contract by reason of Force Majeure.
But if, say, the real problem is that your workforce is working from home but cannot do their jobs properly because your IT infrastructure is not good enough, was Covid-19 really the cause of the failure, or was it your IT failure? If one of your competitors in the market would (hypothetically) have completed the contract on time because it had good IT systems, this would suggest that Covid-19 could not be used to avoid liability for breach of contract on the basis of a Force Majeure argument.
(2) General definition of force majeure
Clause 18. General
18.1 Neither party shall be liable for any breach of this Agreement caused by an event beyond the reasonable control of that party, including:
a) acts of God;
b) flood, drought, earthquake or other natural disaster;
c) terrorist attack, civil war, civil commotion.
In a victory for plain English, there’s no mention in this clause of force majeure, but instead an “event beyond the reasonable control” of a party – the underlying concept has the same effect.
And there’s a handy list – or not-so-handy list: COVID-19 isn’t expressly mentioned. On the face of it then, COVID-19 wouldn’t be relevant for this provision. The effect of this clause now hinges on the word ‘including’. Does an event beyond a party’s reasonable control include COVID-19?
On one level, COVID-19 is obviously beyond a party’s reasonable control. But that is not enough in itself.
Ordinarily in legal drafting, an event can only be regarded as ‘included’ if it is closely similar in nature to the specific items which are listed. Ultimately only a court could deliver a final verdict on this point, but in the example above Covid-19 would probably not be regarded as a force majeure event because it is too different in nature to the items which are specifically listed.
Sometimes, however, contracts contain within them their own rules about how provisions are to be interpreted and it is possible that these might give a wider meaning to the clause. In particular, if the listed items are expressed to be non-exhaustive and are just illustrative, a different type of event could be argued to fall within the clause.
So it might be possible to argue: “Well, we obviously didn’t mention COVID-19 specifically when we wrote the contract because we’d never heard of it. But now that is has reared its head, it is obvious that COVID-19 is exactly the sort of thing that the clause was meant to catch and therefore it should be treated as a force majeure”.
So what’s an event beyond “reasonable control”? Generally speaking, it’ll be something that a normal prudent business could not have prevented from happening.
So COVID-19 counts then, yes? It depends. COVID-19 is not in anybody’s control but that does not necessarily mean that everything can be laid at the door of COVID-19. If COVID-19 might cause some business disruption but you should have dealt with the disruption through t through good business planning – such as business continuity plans, contingency arrangements, adding additional capacity – then it may be hard to argue that clause should apply. The real problem would be the bad business management, rather than COVID-19 itself.
Well, that was straightforward… Anything else?
- There may be specific notice requirements that have to be given under your contract – for example, notifying the other party within days of the event arising. This may need to be in writing, and sent to a defined address.
- The effect of the clause depends on what has been expressly drafted – English law won’t grant any rights around force majeure that the parties haven’t included. For example:
- No obligation on the affected party to take mitigating actions to overcome the force majeure event, unless the clause says so.
- No right to terminate the contract for force majeure, unless the clause says so.
- No right to renegotiate pricing, unless the clause says so.
- Most force majeure clauses give the affected party some form of protection from the consequences of their breach of the contract, but this does not normally remove the underlying obligation. The contract must still be fulfilled when the force majeure event ends. Covid-19 is likely to endure for some time, and businesses will be expected to adapt and overcome – to control the impact of the event, to remove it as a cause.