Is the COVID-19 pandemic a force majeure event?
It is important to note at the outset that there is no general doctrine of force majeure recognised in English law; it is a matter of contract. Whether or not the COVID-19 outbreak constitutes a force majeure event, therefore, will depend on the provisions of the contract and their interpretation.
Key considerations are as follows:
- Is a force majeure clause included in the
contract? Are there provisions that:
- anticipate an event beyond the parties' control that may affect performance of contractual obligations; and
- seek to relieve one or both parties from so performing the same?
- What is the definition of force majeure for the
purposes of such clause?
- Is it defined in broad terms, referring to 'any event beyond a party's reasonable control'?
- Is it defined by reference to an exhaustive list of specified events (and, if so, are pandemics included in such list? Is any other event, such as acts of government (ie lockdown restrictions)?
- Is it defined by reference to a non-exhaustive list of specified events (ie 'a force majeure event includes.' - and take careful note of any interpretation clause in the contract regarding the use of 'includes'/'including')
A clause that states that a force majeure event is 'any event beyond a party's reasonable control including [without limitation].' may still provide relief even if none of the events in the list appear to capture the COVID-19 pandemic directly.
- Does the definition of force majeure exclude foreseeable events? If so, it will be important to check the position when the contract was made. Foreseeability is a question of fact and, ultimately, may require expert evidence. It could be argued that at the time the contract was made, the events unfolding around the world and highly prominent media reporting made the event foreseeable, for example. The interpretation of this question could turn on the individual circumstances and timing of the contract in question.
Could the COVID-19 pandemic frustrate a contract?
The common law doctrine of frustration may apply, if, as a result of the coronavirus pandemic, performance of the contract has become legally or physically impossible through no fault of the parties. It is, however, a relatively high threshold and unusual for a contract to be frustrated; and frustration will not apply where:
- a valid contract term deals with the situation arising; or
- the parties foresaw, or should have foreseen, the frustrating event, when they entered into the contract.
In the event that a contract is frustrated, it ends automatically and immediately, without any action by the parties, who then have only limited rights to redress.
Can the parties vary the contract or renegotiate its terms?
In simple terms, yes it is always open to parties to agree variations to existing contracts. The COVID-19 pandemic and the government response are unprecedented, in the UK and globally, and are changing rapidly.
If parties do agree to renegotiate their contract terms, even temporarily, they should of course comply with the contract's requirements, such as recording any variation in writing.
Some other practical issues to consider include:
- The long-term impact of any agreed changes for the immediate situation. Should the agreed changes apply only for a limited period?
- Knock-on effects of the changes on related contracts. For example, should the changes be reflected elsewhere in the contract chain (down, to subcontractors and suppliers or up, to funders and customers), and will the changes affect the enforceability of any existing security arrangements, such as bonds and parent company guarantees?
- Knock-on effects of the changes on other terms of the contract. For example, the payment mechanism, insurance provisions, and termination provisions.
Various official guidance has urged businesses to treat the other contracting party fairly - is this a binding requirement?
There remains no overriding general duty of good faith in English contract law in business-to-business contracts (although various consumer legislation does enshrine the concept of treating consumers fairly). In short, businesses trading with each other are generally free to act in their own interests and insist on their strict contractual rights, subject to any limitations in the contract or otherwise at law.
It is not expected that the courts or legislature will to respond to the current pandemic (or any crisis) with such a radical change as introducing a general duty to act in good faith in contract performance or negotiations. However, to do justice between the parties, the courts already encourage fair commercial dealing where possible. For example, it may be possible to achieve a fair result in a dispute via contract interpretation, the imposition of implied terms and, in a limited number of specific circumstances, an implied duty of good faith and, potentially, a widening of the circumstances in which a duty to negotiate may be upheld. In certain circumstances, the doctrine of estoppel may apply, whereby a party may be estopped from invoking its strict legal rights, temporarily or permanently, if it has led the other party to believe it will not do so.
Various bodies have published non-binding guidance encouraging contracting parties to treat each other fairly, where the current crisis affects contract performance. This guidance includes statements from the Cabinet Office and from the British Institute of International and Comparative Law.
Departing from non-binding guidance is not in itself illegal. Official, published guidance, however, may influence the content of other statutory and common-law duties, such as a duty of care or duties imposed by the anti-coronavirus legislation. It would therefore be sensible to identify a reason, consistent with the duty in question, to depart from relevant guidance.
Can the provisions of notices clauses be deviated from if they are not well suited to the current situation?
The short answer is, no. Departing from the form or procedure specified in the contract for serving a notice could make the notice ineffective. It is, therefore, normally crucial to give notice as required by the contract:
- in the required form;
- to the correct person;
- using the correct method of delivery; and
- within the time specified.
Where most, if not all employees of a business are working from home, ensuring notices are received promptly may cause practical difficulties. Many businesses, however, have put in place arrangements for post to be picked up from the office from time-to-time. Consider notifying a different address, if more convenient, for the delivery of notices where the contract provides for alternative addresses to be notified to the other party.
If the destination point for receipt of notices is temporarily closed or inaccessible, it may be open to the parties to agree a new temporary method of service. However, even a temporary change, to be fully binding on both parties, should be supported by consideration and comply with any variation clause in the relevant contract. Regardless of the method of service used, it is prudent to keep records to verify this, especially where the strict notice provisions have been departed from by agreement.
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.