Coronavirus: Force Majeure or not Force Majeure, that is the question…
Novel Coronavirus, now termed officially as “COVID-19” (“COVID”), was on 30 January 2020 declared a “Public Health Emergency of International Concern” by the World Health Organisation. Over the past few weeks, COVID has spread on a global scale, causing the lockdown of major cities, travel bans being put in place and the cancellation of major public events (including the Rugby Six Nations fixture between Italy and Ireland).
It is clear, despite the small number of cases currently confirmed in the UK, that COVID is having serious repercussions for British businesses both locally and overseas, including those who rely upon overseas suppliers for goods, and companies within the entertainment and sporting sector which bring together large numbers of people.
The press is full of stories about the closing of schools and offices with the potential for wider impacts to be felt if the numbers of those with the virus in the UK increases. However, does COVID constitute a force majeure event?
The purpose of force majeure clauses
Force majeure clauses are commonly used in contracts to excuse temporarily or permanently one (or more) contracting party from performing the contract in certain extreme circumstances that are outside the reasonable control of that party. The excused party will, if the extreme circumstance falls within the remit of the force majeure clause, be able to avoid liability for its failure to perform the contract, with the contract being suspended or, in some circumstances terminated, and the contract is prevented from becoming frustrated.
Force majeure clauses in the context of COVID
The precise wording of the force majeure clause in the contract will be a key factor in determining whether COVID is a force majeure event and whether the clause can be relied upon to excuse further performance of the contract.
Does force majeure apply?
- First, it is important to consider whether COVID falls within the definition of a force majeure event. There will typically be specified events within the contract which are considered to be force majeure events and therefore fall within the scope of the clause. These events can range from the more general, such as acts of God and events outside the reasonable control of the parties, to the more specific, such as disease, epidemics and a global health emergency.
- It may also be possible for something related to the virus (for example government restrictions designed to control the outbreak) to fall within the scope of a force majeure clause. The affected party will need to consider whether COVID can properly be construed within the scope of the defined force majeure event, taking into account the parties’ intentions at the time the contract was entered into.
Has COVID caused the failure to perform?
- Alongside considering whether COVID falls within the definition of a force majeure event, it will also be necessary to consider whether COVID has caused the failure to perform the contract. In circumstances where COVID is not a key contributing factor to the failure to perform, it is unlikely that reliance can be placed upon the force majeure clause to suspend performance.
- Careful consideration will be required as to whether the force majeure clause has been triggered where, for example, COVID has driven up the cost of goods or services, meaning that a contract is no longer profitable.
Was COVID reasonably foreseeable?
- Finally, if “reasonably foreseeable” events are expressly excluded from the force majeure clause, it will need to be considered whether COVID was reasonably foreseeable. There may be arguments that COVID was reasonably foreseeable in light of the SARS outbreak in 2002 and parties may need to demonstrate what steps they have taken since then to mitigate the risk of a similar outbreak.
Are companies relying upon force majeure clauses in relation to COVID?
Whilst currently the Far East and, now parts of Europe, are dealing with the effects of the outbreak, it may be some weeks or months before the effect of the virus and the shutdown of offices and business in certain areas of the world is really felt in the UK.
As reported in the press, China’s biggest buyer of liquefied natural gas, China National Offshore Oil Corp., has already confirmed that it is treating COVID as a force majeure event. In contrast, however, and to illustrate the differences in interpretation of force majeure clauses, Total (the French oil company) has rejected a force majeure notice from a separate liquefied natural gas buyer based in China.
Whilst Chinese importers, in particular, now appear to be seeking to rely upon force majeure clauses to suspend their performance of contracts, it remains to be seen whether British companies are following suit.
Why careful review of the force majeure clause is essential
It is important to consider carefully whether COVID would properly fall within the force majeure clause, as wrongly declaring a force majeure event could be construed by the other party to the contract as a repudiatory breach, providing the other party with a right to claim damages arising from the breach. Such declarations can also have significant impacts upon commercial relationships and ongoing business between parties.
If you are considering whether force majeure as a result of COVID applies to a contract, there are a variety of practical steps:
- review the force majeure clause, and in particular the definition of force majeure events, to determine whether COVID is likely to be construed as a force majeure event, entitling you (or the other party) to be excused from further performance of the contract;
- take reasonable steps, as appropriate, to avoid or mitigate the effects of COVID – you will be expected to have taken any reasonable steps and a failure to do so may undermine your ability to rely upon the clause;
- check whether the relevant contract contains any specific requirements as to how the other party to the contract should be notified of the force majeure event – these notification requirements should be followed to the letter;
- consider whether to engage the other party to work constructively in dealing with the disruption caused by the force majeure event;
- monitor developments which may affect the interpretation of the force majeure clause, such as redesignation of COVID as a pandemic by the World Health Organisation or specific designations by the British Government in relation to COVID; and
- consider whether sufficient insurance cover is in place in respect of losses arising from COVID.
The content of this page is a summary of the law in force at the present time and is not exhaustive, nor does it contain definitive advice. Specialist legal advice should be sought in relation to any queries that may arise.
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