Coronavirus and commercial contracts: could resulting business disruption trigger force majeure?

The global spread of the new coronavirus (officially called COVID-19) has been declared by the World Health Organisation (WHO) as a “public health emergency of international concern”. With COVID-19 spreading throughout China and elsewhere, Governmental and non-Governmental organisations around the globe have attempted to contain the spread of the disease through the implementation of various measures, such as quarantines, port closures and travel restrictions/ bans. 

Business impact

COVID-19 and the measures taken to contain its spread may increase the risk of supply chain disruption in the UK in relation to supply chains which intersect with China and other affected countries. The provision of services and the movement of goods, for example, may be disrupted as a potential consequence of labour shortages, port closures and the lack of ability for labour to move in and out of affected regions. 

Such disruption may cause a business to breach its obligations under a commercial contract or suffer loss because others in the supply chain cannot meet their own contractual obligations. Where affected or potentially affected commercial contracts contain force majeure provisions, the parties should consider if and when these provisions might successfully be invoked as a result of the COVID-19 outbreak. 

What is force majeure and when can it be relied on?

A force majeure clause is designed to excuse one or both parties from performance of the contract following an unforeseen event which is beyond a party’s control. The invoking party must prove that the event in question falls within the clause and that non-performance was due to the event. Whether a force majeure clause is triggered by an event will depend on the exact wording used by the parties in the particular contract. 

Scope of clause/ triggering event

Since there is no standard legal meaning for the term ‘force majeure’, a force majeure clause will need to define what events are covered. This could be an exhaustive list (including, for example, natural disasters, civil war, civil commotion, riots etc), so that only those events specificically listed will count as force majeure events. A force majeure clause may also expressly exclude events that were in existence or in contemplation at the time the contract was entered into. It may also require that the force majeure event must be unforeseeable, meaning that it could not have been foreseen in light of the relevant issue. 

Prevent, hinder and delay

If a force majeure clause requires the force majeure event to “prevent” performance, this usually means that a party must demonstrate that performance is legally or physically impossible, not just difficult or unprofitable. If the clause states that the force majeure event must “hinder” or “delay” performance, this would mean that the party must demonstrate that performance is substantially more onerous (rather than legally or physically impossible). 

Cause of contractual breach

In order for a party to rely on a force majeure clause, the relevant event must not only cause the contractual breach, but it must be the only cause of the breach (Classic Maritime Inc v Limbungan Makmur SDN BHD [2019] EWCA Civ 1102). In other words, a party would not be excused from performance due to force majeure, if it wouldn’t have been able to perform the contract anyway (i.e. even if the event in question had not happened). 

Steps taken to avoid or mitigate force majeure effects

In order for a party to rely on a force majeure clause, it must show that it has taken all possible steps to prevent or mitigate the effect of the force majeure event: Channel Island Ferries Ltd v Sealink UK Ltd [1988] 1 Lloyd's Rep 323.

Notice requirements

The party seeking to rely on a force majeure clause must also show that it complied with any notice requirements set out in the relevant contract (such as a requirement that a party relying on force majeure must notify the other party of the force majeure event “without unjustified delays” as was the case in GPP  Big Field LLP v Solar EPC Solutions SL (Formerly Prosolia Siglio XXI) [2018] EWHC 2866 (Comm)).

Effect of a force majeure clause

The effect of a force majeure clause will depend on how the clause is drafted. A force majeure clause may suspend a party’s obligations under the contract and relieve a party from liability for the duration of the force majeure event. It may also allow either or both parties to terminate the contract if the force majeure event continues after a certain period of time. 

Can the COVID-19 outbreak trigger a force majeure clause?

This will depend on how the clause is interpreted based on the precise wording used by the parties in the particular contract. Some of the key things contractual parties will need to consider, based on the issues mentioned above, include:

How is the force majeure event defined? Whether the outbreak of COVID-19 falls within the scope of a force majeure clause depends on whether it can be covered by any of the events listed in the clause (for instance, some clauses may include diseases, epidemics or quarantines as triggering events). Depending on how the clause is drafted, the party seeking to rely on it will still likely need to prove that the relevant event wasn’t in existence or in contemplation when making the contract, and that the event is unforeseeable and beyond its control.

Did the COVID-19 outbreak cause the contractual breach? If a party wouldn’t have been able to perform the contract even in the absence of the outbreak, it is unlikely that it will be able to rely on the force majeure clause to be excused for non-peformance.

Can the effects of the outbreak be avoided or mitigated? The ability of the party seeking to rely on the force majeure clause to avoid or mitigate the results of the relevant event could have an impact on the whether the clause can be successfully invoked.  

Have any notice requirements contained in the contract been complied with? A party invoking a force majeure clause must show that it has complied with any notice requirements included in the contract. If it is not able to do so, it is unlikely that it will be able to successfully rely on the clause. 

Comment

Given the global reach of the COVID-19 outbreak, businesses should be looking at their contracts now in order to identify whether they may be impacted by any disruption resulting from the outbreak. If this is possible, then specific provisions dealing with the circumstances should be included in contracts. Businesses should also assess how any risks associated with the outbreak could be mitigated and seek legal advice if in doubt about whether a force majeure event applies to their contracts.

This publication is intended for general guidance and represents our understanding of the relevant law and practice as at February 2020. Specific advice should be sought for specific cases. For more information see our terms & conditions.