In light of the ongoing Covid-19 outbreak, a number of businesses ranging from sole-traders and SMEs to larger publicly listed companies are already seeing an impact in their ability to fulfil their contractual arrangements.
In this article we discuss when and how a Force Majeure (FM) clause may be triggered and whether it covers a business in the event of an epidemic/pandemic.
What is a Force Majeure Clause?
Under English law, a contract requiring ongoing performance by a party is an absolute principle, meaning that where a party is affected by an event making it difficult or impossible for them to comply with their obligations; they may be liable to the counterparty if they fail to meet those obligations.
A Force Majeure clause allows the contracting party to suspend (or possibly end) performance of obligations where a party is prevented from performing by events outside its control.
Force Majeure in itself is a French term that has been imparted into English law and many other jurisdictions around the world. In its simplest form it means "superior force" or unforeseeable circumstances.
Many jurisdictions have a definition of what constitutes a FM event such as in France where it is codified in the Civil Code as:
"An event outside the control of the fulfilling party, which could not reasonably have been foreseen at the conclusion of the contract and of which the effects cannot be avoided by taking appropriate measures. The effect of which impedes the party's ability to fulfil its obligation under the contract."
However, under English law, there is no such definition of what constitutes an FM event neither in legislation nor under case law. As such, the only way in which a FM provision can be protected against is if it is expressly drafted into a contract.
The Default Position – What Does Force Majeure Cover?
As discussed above, a FM clause will only have effect if it is incorporated into a contract or your standard business terms. The scope of that effect will depend entirely on the drafting of the clause.
As an often overlooked 'boilerplate' clause, the definition and scope of what does and does not constitute a FM event can have a huge impact on the performance of a contract. The position under English law is that parties are relatively free to agree the definition of a force majeure event under the terms of the contract. Most commercial agreements, will make reference to FM in some form or another.
Typical examples of those events that would be covered by FM clauses include:
- Acts of God, flood, drought or other natural disaster;
- Terrorism, civil war, civil commotion and unrest;
- Nuclear, chemical or biological contamination;
- Fire, explosion, or building collapse etc.
Does a Force Majeure Clause Apply to Covid-19?
Because of the serious nature of FM clauses and their ability to greatly affect a party's rights and obligations in respect of performance under a contract, they are interpreted strictly by the courts. This means, that where a FM clause is included in a contract, the courts will only consider the precise triggering events detailed in the clause.
Essentially, if the FM clause does not specifically mention the event in question, it is highly unlikely that the party would be able to rely on it as a ground to avoid non-performance of the contract.
Relating this back to Covid-19, if the FM clause in question does not specifically mention an epidemic/pandemic, then it is highly unlikely that a party would be able to rely on this as a reason for non-performance of its obligations. The party may wish to rely on another FM event such as an "Act of God" or another catch-all provision; however this is far from certain.
Even in the event that the FM clause does specifically reference an epidemic/pandemic or something similar such as disease, it is not an automatic assumption that the clause will apply.
In order for the FM event to apply the party seeking to rely on it will have to demonstrate that:
- An event has occurred which was unforeseeable and beyond its control;
- The event has seriously impacted the ability of the party to perform its obligations under the contract; and
- The party has taken all reasonable steps to mitigate the impact of the event and its consequences.
If the party cannot clearly demonstrate all of the above, it is unlikely that the use of the FM clause will be effective.
Practical Steps and Considerations
What is important when looking at FM clauses is the way in which they are drafted and the scope of what they cover, but also the way in which your business has taken necessary preventive steps.
It is important to identify, locate and review all key customer and supplier contracts to ensure that your business is adequately covered and that provisions are put in place to mitigate the effects of Covid-19 to your business.
Whilst FM clauses may play a key role in the coming weeks and months of the Covid-19 outbreak, they are not the only clauses that should be considered when reviewing key contracts. Other key clauses that may be called upon include change of control clauses and the provisions within the contract for varying the terms.
A full contract review is invaluable in these circumstances to provide your business with the security that key contracts have the adequate safeguards to protect against business disruption. If you'd like a full contract review for peace of mind, our Commercial Solicitors are here to help. To find out more or discuss your requirements in further detail, contact us today on 01603 693500 or email us using the 'Make an enquiry' form on our website. Appointments available at our Norwich, North Walsham and Sheringham offices.
For more information, please visit our dedicated Corporate and Commercial Services webpage.
*This article is provided for general information purposes only and does not constitute legal advice or other professional advice.