Has COVID-19 affected your ability to fulfill business contracts? Learn how the Force Majeure clause can help you.

Here's an understatement: it's a tough time to be in business.

If a complete revision of how you operate thanks to COVID-19 restrictions wasn't enough, meeting your ongoing commitments adds another layer of complexity entirely.

Feeling overwhelmed by the challenges of meeting existing contractual obligations - or how to negotiate new ones - is completely understandable right now. However, there is a legal clause that may offer assistance in times like these.

It's called the Force Majeure clause, and we're here to tell you all about it.

What is a Force Majeure Clause?

You can thank the French for Force Majeure.This phrase describes an event or effect that can't be reasonably anticipated or controlled.

In a contract, Force Majeure clauses involve terms agreed upon by everyone, aiming to relieve parties from the obligation to perform when it's impossible to do so - like in the event of a natural disaster, war, government intervention or Worldwide Viral Lockdown.

What does it include?

Generally speaking, a force majeure clause includes:

(a) a definition of what a force majeure event is

(b) what obligation a party is relieved from as a result of this event

(c) any obligations of a party that intends to rely on a force majeure event to relieve them of their obligations

(d) any exceptions to relief

How do you invoke the Force Majeure clause?

When facing a Force Majeure event, you can discharge or vary your obligations if they satisfy the following conditions:

  1. The event must be beyond your reasonable control
  2. Your ability to perform the contract must have been prevented, impeded or hindered by the event
  3. You must have taken all reasonable steps to avoid or mitigate the event or its consequences
    Let's dig a little deeper into what these conditions look like in practice.

Events beyond reasonable control

Usually, these events fall under one of two categories: political force majeure (relating to risks arising from the political or legal environment), and natural force majeure (encompassing physical and environmental risks).

Of course, you can craft your own 'beyond reasonable control' conditions and specify them in your contract - so long as all parties agree. These might include things like technological or third-party-supplier failures.

Conventionally, Force Majeure clauses list a series of events deemed unforeseeable, for example, "pandemics, disease, epidemics..." and so on. In the case of COVID-19, a specific reference to "pandemics" makes it easier to rely on the Force Majeure clause, but failing that, catch-all terms like "An Act Of God" or "Action By Government" may still cover it the present situation that we are in.

2. Performance was prevented, impeded or hindered by the event

Here's where you need to demonstrate: a causal link between the Force Majeure event and the failure to meet obligations. In the case of COVID-19, it's not hard to make that connection in light of the restrictions, self-isolation and social distancing rules put in place by the Government.

3. Reasonable steps taken to mitigate

If you're looking to invoke Force Majeure, you generally must show that you've taken all reasonable steps to avoid or mitigate the event and its consequences. These might include alternative measures or workarounds - even if they lead to reduced profits.

In the Canadian case Atcor Ltd v Continental Energy Marketing Ltd 28 Alta LR (3d) 299, it was found that a supplier couldn't cancel a contract simply because its profits would suffer as a result of an unforeseen event. The show must go on... to a point. The case also emphasised that costs borne by the affected party shouldn't move beyond what's reasonable.

With the widespread and pervasive nature of COVID-19, it's likely that 'mitigation measures' will be looked upon with a touch more compassion than in other Force Majeure cases. However, if your business is affected, be sure to consider all possible mitigation methods (like moving services online) to honour your obligations, just in case.

Can you form a contract at the time of a Force Majeure event?

Now that we're in the midst of a grade-A Force Majeure event, can you still contract during the pandemic and still rely on a Force Majeur clause to relieve you of impossible obligations?

Good news: you can.

In Reardon Smith Line Ltd v Ministry of Agriculture, Fisheries and Food [1962] 1 QB 42, Sellers LJ stated:

"There is no settled rule of construction that a specific exception, such as strikes or war, cannot be relied upon if the strike or war was operative at the time when the contract was made or the ship ordered to the affected port. It must depend on the proper construction of the contract."

"Proper construction of the contract" means that the event must be set clearly in the clause, making it clear to the Courts that the parties intended the contract to operate, despite the circumstances.

As with most things, there's a limit.

In Trade and Transport Incorporated v Iino Kaiun Kaisha Ltd The Angelia [1973] 1 WLR 210, it was found that if a party enters into a contract where he/she knows or ought to have reasonably known that performance was impossible, that party cannot rely on a Force Majeure clause to discharge his/her obligations.

Creating contracts with COVID-19 in mind

Circling back to COVID-19, if you're thinking about entering into a new contract, be sure that:

  1. You include events specific to COVID-19 in your clauses. For example, "epidemics, pandemics, diseases, exit and entry restrictions", etc.
  2. You perform due diligence to ensure that it's not impossible to perform the obligations set out in your new contract to begin with.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.