The increasing disruption caused by the Covid-19 pandemic is forcing many companies to consider the viability of their contracts and where necessary seek to mitigate losses. One option may be rights or relief granted under a force majeure clause; these typically allow the cancellation or suspension of the contract, or excuse one party from failing to perform.
While COVID-19 may trigger these rights, parties must consider carefully whether the specific requirements of the clause are met before relying on it. In this article we explain the requirements necessary to rely on force majeure and whether or not COVID-19 and the government’s response will see these types of provisions being relied upon.
The term force majeure has no specific legal definition, but typical force majeure clauses have two key requirements before they are triggered, being: (a) an event outside the parties’ control; and (b) that the event prevents performance.
We examine these requirements below:
- An event outside parties’ control:
- Typically the event must be out of the parties’ control and not anticipated at the time of the contract.
- The contract may list kinds of events which meet the requirement: reference to epidemics, pandemics, quarantines or government intervention will be helpful. If there is a list but no such reference, then it will be necessary to argue that the list is non-exhaustive, which may be difficult unless the clause suggests otherwise. If there is no list, then the outbreak and spread of COVID-19, and the government action following thereafter may meet this requirement (this will depend on the wording, the nature of the contract, and the kinds of risks anticipated by the parties).
- The language may refer to an “Act of God,” an ambiguous term and the Courts have not held every natural event to meet this definition (e.g. a storm being more violent than usual), but it has been said to mean “an irresistible act of nature”. Reliance on such a term may risk a dispute, but still should be considered.
- An event preventing performance
- Typically, the event will need to completely prevent the supplier from performing their obligations for the clause to be triggered, or cause the supplier to fail to perform. While in some cases the fact of the COVID-19 pandemic itself may have this effect, it will be far more common that specific government intervention itself is the triggering event: e.g. quarantine of staff or goods, limitations on transportation, or forced closures.
- If there are alternative options available to perform the contract, notwithstanding the triggering event, then force majeure rights are unlikely to be available. For example, if specified materials were being sourced from a nation which is now quarantined, but similar materials can be sourced elsewhere, then even if the alternative is more expensive the Court will usually expect this option to be taken.
- It is worth noting that typically, force majeure should be the sole issue preventing or affecting performance: if the supplier would not have been ready to perform the contract in the absence of COVID-19, then they may not be able to use force majeure as an excuse.
- Where a force majeure right is only to excuse a failure to perform duties, it will be important to identify what obligations are excused (or are likely to be excused in the future) particularly on more complex contracts. As the COVID-19 situation and response continues to evolve, the inability to perform may only be temporary, and suppliers will have to stand ready to act when that inability is cured.
Seeking to take advantage of a force majeure clause when the above requirements are not met may put a party in breach of the contract, so this option should always be examined cautiously.
Prudent operators will rely on a defined “triggering event” that clearly caused the inability to perform. It is clear that in certain contracts directly affected by government actions to date, such as international travel, event bookings/planning and commercial leases of closed premises, force majeure clauses are likely to be triggered and frequently relied upon.
More uncertainty is likely to arise in relation to a variety of areas such as construction and development projects (which will usually be delayed, rather than completely prevented), other property transactions (e.g. where a purchaser is temporarily unable to take possession due to COVID-19 concerns), logistics (where a border closure or quarantine delays but does not prevent delivery, or where more expensive alternatives to complete the contract do exist).