When the boiler plate matters: force majeure and COVID-19 (Coronavirus)

Published: 3/3/2020

The recent outbreak of the coronavirus known as COVID-19 has in a relatively short period of time morphed from a local crisis to a tangible global threat with a potential human impact which has not been seen on this scale for years.

On 30 January 2020, the WHO declared the coronavirus outbreak a public health emergency of international concern (PHEIC) but no-one can predict the full extent of its spread or how long it will last. The fear this engenders is inevitably seeping into the core of the economic structures underpinning global markets, with stock markets proving just as vulnerable to being taken down by infection.

Inevitably, the impact of the virus on business is many faceted as governments across the globe have taken measures to try to contain it. Worker shortages have occurred, supply chains have been disrupted, production has been delayed or suspended and travel has been curtailed. The impact continues to be felt most acutely by cross border industries which rely on global supply chains, particularly, but not limited to, those trading with Asia. Manufacturing, construction, shipping, aviation and finance and energy sectors have all been hit particularly hard, but few are unscathed.

As a result of both the epidemic and the reactive and proactive measures taken by governments, businesses are focusing on aspects of their contractual arrangements that they hoped they would never need to rely on. Some companies are asserting that COVID-19 amounts to a force majeure event or gives rise to another basis to excuse non-performance under a commercial agreement. Doing so demands careful legal analysis and a full strategic review of the legal and commercial consequences of such a step. On a practical level, exerting a force majeure provision may require a timely issuance of notice to a contractual counterpart as well as other disclosures, and insurance coverage may be available which must be claimed promptly. Even if businesses are not seeking to rely on such provisions themselves, or being faced with counterparties wishing to do so, the outbreak serves as a pertinent reminder to those negotiating new agreements to consider how risk should be allocated in the event of any impact from the outbreak and to pay closer attention than they may previously have done to force majeure and similar provisions.

The operation of a force majeure clause

The concept of force majeure is rooted in the civil law tradition, dating back to Roman Law. It means "superior force" and has often been referred to as an "Act of God" – an event beyond the control of the parties which prevents a party from fulfilling its contractual obligations. In civil law systems, the substantive governing law of an agreement may allow for implication of force majeure mechanisms and also, through a doctrine of hardship – for the variation and/or suspension of contractual obligations where performance becomes more difficult as a result of events that fall outside the control or influence of either party. Parties who may not be able to benefit from such a doctrine derived from the governing law of an agreement, may seek to deploy arguments as to the mandatory application of local law.

Force Majeure is not however a term of art in common law jurisdictions, such as England & Wales or the United States, and everything depends on the precise language drafted by the parties, interpreted according to the agreed governing law, taking account, in certain circumstances, of industry or trade practice. Such clauses typically go to some length to describe the threshold requirements for a force majeure event. These often include an event that is not within the reasonable contemplation of the parties, is outside of their control, the effects of which cannot be avoided through reasonable effort and that materially impacts a party's ability to perform the contract. It is usually the case that performance must be rendered impossible as opposed to more difficult, although delays in performance are sometimes expressly excused.

Clauses might then also impose certain additional obligations, such as a requirement to mitigate loss and to provide timely notice to the counterparty both on the occurrence of the event and on a regular basis thereafter depending on whether performance is likely to be delayed or rendered impossible. English law typically requires parties to take reasonable steps to mitigate their loss from a force majeure event, even if the contract does not expressly require it.

Critically in the case of COVID-19, it is common for the parties to give specific examples of what would amount to a force majeure event, such as earthquakes, tsunamis, hurricanes, sometimes extending to political events such as war. These lists may be exhaustive or non-exhaustive. Epidemics may be included, but this has to date been relatively rare. Some clauses may include a list of events that do not constitute force majeure. If an epidemic is not included within an itemised list of force majeure events, it may nevertheless fall within a generic sentence sometimes included, along the lines of "any other events or circumstances beyond the reasonable control of the parties." The governing law of the contract may also affect whether requirements outside those expressly detailed may be taken into account in determining whether an event triggering reliance on a force majeure provision has occurred.

Again of direct relevance to the current crisis is the fact that some clauses specifically exclude government measures taken in response to a particular event: here, it will be important for businesses carefully to analyse whether the event that they or their counterparty are seeking to rely on is the virus itself, or a government measure taken in response to it. Under English law, the force majeure event must also be the primary cause of the inability to perform. If an additional cause prevented performance, the force majeure clause cannot be relied upon (Classic Maritime Inc. v (1) Limbungan Makmur SDN BHD and (2) Lion Diversified Holdings BHD [2019] EWCA Civ 1102).

If a party is able to prove that COVID-19 falls within its particular contractual definition, it would typically then be able to excuse its performance, usually with consequences provided for in the agreement. This may be time limited for the duration of the event, or even permit termination in particular circumstances. Again, the precise wording of the clause will be key.

Mitigation of risk

As is clear from the above, relying on a force majeure clause is a significant step which requires careful legal analysis. Under English law, force majeure provisions are interpreted strictly with no doctrine excusing performance applying outside of the contractual framework. Getting it wrong could be costly, with parties having done so erroneously facing allegations of anticipatory breach, leading to the aggrieved party claiming damages or even to terminate the contract.

Any legal advice sought should include a careful analysis of both the nature of the event relied upon as force majeure (is it the coronavirus itself or a government measure taken in response to it?) and whether that event falls within the contractual framework relied upon. It will be for the party seeking to rely on the clause to prove that it does. If legal advice is positive, then it must form part of an urgent overall strategic and commercial review of the consequences of triggering the clause (both legally and commercially), an analysis of whether contractual performance can be achieved by alternative means and how counterparties might react. Force majeure clauses can be specifically worded as to the effect of invoking the clause, including as to whether the contract as a whole is discharged or only a particular obligation and as to how long a suspension of obligations remains in effect if the agreement does not come to an end. Sometimes, the parties may be required to renegotiate or amend the agreement to take account of the altered circumstances but ensure the commercial relationship survives. Generally, communication with counterparties and open discussions as to how risk can be mitigated and performance achieved is the preferred starting point, but this may not always be realistic. Any communications should be entered into with the benefit of legal advice and a clear strategic overview.

Notification and Disclosure

If taking account of the above and with the benefit of legal advice a force majeure clause is triggered, close attention should be paid to any notification procedures in the immediate contract as well as any related or financing agreements where disclosures may be required. Many financial agreements include representations or covenants requiring notice of material litigation or events or losses outside the normal course of business. An interruption of business may constitute an event of default under certain agreements or impact financial or other covenants.

Failure to provide notice or give disclosure on a timely basis in accordance with the relevant contracts may lead to arguments that the force majeure defence has been waived or have other negative consequences.

Parties should also be aware that insurance may cover losses arising from the coronavirus outbreak, either by way of specialised insurance products or more general business interruption relief. In all such cases coverage will be determined by the specific wording of the relevant policy, on which legal advice should be taken and any claim under a policy made promptly and in accordance with its notice provisions.

Other clauses under English law

As noted above, a clause may be labelled as something other than force majeure but have a similar intended effect, so it is important carefully to review agreements fully to assess a party's rights under them.

Where a force majeure provision does not provide a route to excuse performance, COVID-19 may trigger a party's right to claim an agreement has been frustrated. Frustration is related to the historical doctrine of impossibility and occurs where a supervening event occurs which is both unexpected (so is not anticipated by force majeure provisions) and beyond the control of the parties, which renders it physically or commercially impossible to perform the contract or transforms the obligation to perform into something radically different to that undertaken when the contract was entered into. The doctrine is not engaged where performance is merely delayed. Frustration cases under English law are unfortunately rarely successful with the Courts construing such clauses extremely narrowly.

Action Plan

The impact of coronavirus or COVID-19 is not sector specific and will be felt at some level across most industries across the globe. Even those who have no intention of invoking contractual protection may be faced with counterparties who feel they have no alternative but to do so. Business must carry on, and immediate action plans implemented to anticipate a worst case scenario that it is hoped will not in fact materialise. Such plans would be well placed to include some if not all of the following:

  • A thorough legal review of all material contracts that could be affected; note that a force majeure clause might be labelled differently (see Classic Maritime decision referred to above); look to identify all key provisions that could be relevant including representations and warranties, covenants, termination rights and change in law clauses.
  • Consider two questions in relation to any force majeure or equivalent provisions:
  1. What is the event relied upon (the coronavirus outbreak itself or any governmental response)?
  2. Does it meet the threshold in the applicable agreement(s)?
  • Assess the impact of invoking any contractual provisions legally and commercially and consider the impact from a strategic perspective for the business as a whole both in the immediate and longer term:

          - Is there any alternative means of achieving performance?

          - How might suppliers and/or other counterparties be impacted?

          - Can any proactive steps be taken to anticipate potential worsening effects of the outbreak?

          - What are the potential consequences of invoking a clause (or not doing so)?

          - What if the decision to invoke is challenged?

  • Invite communication from counterparties to understand how they are impacted and facilitate preparation for the situation deteriorating if the virus continues to spread at an alarming rate; consider workarounds
  • Coordinate local and global relationships to ensure consistency of approach; ensure all relevant personnel are educated on local regulatory actions and restrictions
  • Seek legal advice before sending any communications relating to the outbreak, whether internally or externally
  • Ensure adherence to notice provisions, obligations to mitigate damage and any obligations to disclose, which may be particularly pertinent for public companies. In doing so, look beyond the immediate contract at hand and consider the wider business, particularly financing agreements
  • Review dispute resolution provisions in affected agreements to anticipate likely steps in the event that parties cannot agree the efficacy of the force majeure provision or any workarounds. Is immediate interim relief required from any court? Is such recourse permitted by the agreement in question? If the parties have agreed on arbitration as the appropriate dispute resolution mechanism, consider whether it may be necessary to call upon emergency arbitrator provisions, if available. If so, ensure any resulting order is enforceable or consider alternatives if necessary
  • Review insurance policies to see whether they might cover any losses or damages for flow on breaches to downstream contracts
  • Consider how risks associated with this outbreak or similar outbreaks can be mitigated in future contracts
  • Lessons learnt – consider how other unforeseen events may impact commercial relationships and how provisions such as force majeure provisions can be drafted in the future to afford the best protection.
Concluding remarks

It must be hoped by everyone that COVID-19 does not evolve to be the global pandemic that many fear. Nevertheless, its impact to date is having and will for some time continue to have a tangible effect not just on human lives and social structures around the world, but on commerce and international trade. Businesses must act now to ensure they are protected and can anticipate and deal appropriately with any eventuality.

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