As Covid-19 continues to take its hold on the world, the measures taken by governments in response to the pandemic have led to a clampdown on global economic activity. Unsurprisingly, many parties across a wide variety of sectors are now finding that it is becoming increasingly problematic, if not impossible, to carry out their obligations under contracts pre-dating this unprecedented era.
There is much discussion of parties being released from performance under contracts as a result of “Force Majeure” but what does this mean?
The meaning of Force Majeure
References to “Force Majeure” usually mean unexpected and extraordinary events or circumstances outside of a contracting party’s reasonable control that, having arisen, prevent the party from performing its contractual obligations.
Force Majeure does not refer to a legal doctrine – rather, the expression is used to a describe a contractual term between the parties. A Force Majeure clause in a commercial contract may operate to relieve one or both parties from their obligations under the contract, without incurring liability for non-performance.
Is Covid-19 a trigger event for Force Majeure?
As a creature of contract, the scope and impact of any Force Majeure clause is dependent on its construction and drafting. Generally, Force Majeure clauses are drafted with the intention of covering an event which:
- is beyond the reasonable control of the affected party;
- causes default or delay in the affected party’s performance of its contractual obligations;
- is without the fault or negligence of the affected party; and
- the affected party could not reasonably have been expected to prevent, avoid or overcome by exercising a standard of skill, care and diligence.
Force Majeure clauses typically make express reference to qualifying events such as earthquakes, hurricanes, terrorism, war or acts of government. Such clauses can also, depending on how they are worded, cover pandemics. Certainly, specific reference to a “pandemic” will make it easier to rely upon Force Majeure in respect of difficulties caused by Covid-19.
However, even if a Force Majeure clause does not include such exact wording, it is possible that Covid-19 will be covered by a different concept, such as an act of God, measures taken by a government, or a general catch-all provision. It is commonplace for Force Majeure clauses to simply cover any event which is “outside the reasonable control of the party affected.” Given the unparalleled nature and impact of Covid-19, it would likely be covered by this, provided of course that the commercial contract was entered into before Covid-19 began to attract significant media coverage.
Although, even if a party considers that Covid-19 is a Force Majeure event, it is important to check what the trigger is for that clause to come into effect. The drafting of the clause will dictate whether a Force Majeure arises upon a party’s performance of its obligations being prevented, hindered or delayed. For instance, case law from the 21st century has shown that where a party is seeking to rely on a Force Majeure clause when performance of its obligations has been prevented, it will not be able to benefit from the clause when performance of its obligations is simply more troublesome and/or costly.
How to rely on a Force Majeure clause
If an affected party wishes to rely on a Force Majeure clause then it must comply with any procedural requirements under the contract. This commonly involves providing formal notice of that party’s intention to all other parties within a particular timescale and using a specific method of communication.
Of particular importance is whether the Force Majeure clause requires the affected party to mitigate the impact that the Force Majeure has had. If this applies, yet the affected party has not attempted to find alternate ways of performing the contract, attempting to rely upon Force Majeure is likely to be unsuccessful.
Effect of a Force Majeure clause
The consequences for the parties where a valid Force Majeure event has occurred will depend on the nature of the affected party’s obligations as stipulated under the contract, alongside the consequences and remedies expressly contemplated by the Force Majeure provision.
Typically, on the happening of a Force Majeure event, one (or perhaps even both of the parties) may exercise the following:
- entitlement to cancel the contract (or it may be cancelled automatically);
- excusal from performance, either in whole or in part; or
- entitlement to suspend performance or to claim an extension of time for performance.
Clearly, careful consideration of a Force Majeure clause is required, as a “one size fits all” approach cannot be taken here. It is not correct to presume that an affected party may simply terminate a contract due to difficulties caused by Covid-19, whereby there is a possibility that the obligation to perform the contract may only be suspended or delayed. As explained above, because Force Majeure is a contractually defined right, the options available upon the occurrence of a Force Majeure event will be specified within the contract.
At Swinburne Maddison, we appreciate the challenges which businesses are facing as a result of Covid-19 and the complexities involved in negotiating any contractual disputes that may arise during this time. Our experienced Dispute Resolution team is well placed to assist businesses in the review of any existing Force Majeure clauses and to provide clear, tailored advice on the options which are available going forward.
Please don’t presume that you are entitled to rely upon a Force Majeure clause just because you are struggling to perform your contractual obligations in the current climate. If a party to a contract ceases to perform their obligations by incorrectly claiming that a Force Majeure event has occurred, they are likely to be in repudiatory breach of contract and may find that they are pursued for damages.