Coronavirus has had the effect of making some contracts impossible to perform, whether, for example, as a result of the Government’s new policies and guidelines or the pandemic’s impact on a supply chain. In these circumstances, both parties will need to have regard to their legal position. If the contract contains an express force majeure clause (which many contracts do) then that clause will set out the parties’ rights and obligations.
However, not all contracts are written, and even those which are written do not always contain a force majeure clause. No such clause is implied by law, and if there is no clause, the parties will need to rely upon the law of frustration.
Business disruption is also insurable, and businesses should check on the exact terms of their cover.
Force Majeure clauses in contracts may offer some degree of protection, although this is entirely dependent on how (if at all) it has been drafted into the contract. It is important to note that each Force Majeure clause will be different and will be interpreted strictly by reference to the words used.
It is likely that a Force Majeure clause will refer to a “Force Majeure Event”, being a supervening event beyond the reasonable control of the parties, and be followed (usually) by a list of examples. The effect of the event must be to prevent, hinder or delay the performance of a party’s obligations under the contract. The Force Majeure Event must also be the sole (or dominant) cause of the prevention, hindrance or delay.
A common Force Majeure Event seen in the drafting of the clause is an epidemic or a pandemic. Coronavirus (having been classified as a pandemic by the World Health Organisation) will certainly fall into that definition. However, a Force Majeure Event will not always prevent, hinder or delay the performance of a party’s obligations, for example:
- where a business can continue to function by its employees working from home (as with Spratt Endicott); and
- where the contract relates to an event and it can be postponed.
The effect of a Force Majeure clause is dependent on how it has been drafted but a party who successfully relies upon it will not be liable for its failure to perform its obligations under the contract. It is common to see a Force Majeure clause temporarily suspend the parties’ obligations under the contract or relieve the parties from any obligation for future performance. The clause may also terminate the contract entirely.
However, it is important to note that unless the Force Majeure clause provides otherwise, the cost of work done on the contract (but not invoiced), will not be payable to the supplier. In addition, if money has been paid in advance to a party, then that money is not repayable unless it is specifically referred to in the clause.
The Force Majeure clause may also contain provisions regarding certain formalities which must be followed on the occurrence of a Force Majeure Event, such as notice from one party to another. It should also be noted that each party remains under a duty to mitigate its losses.
Where the contract contains no Force Majeure clause, or is unwritten, and the contract cannot be performed, the principle of frustration may apply. Frustration requires there to be a supervening event, beyond the control of either party, which renders performance under the contract impossible.
The Law Reform (Frustration of Contracts) Act 1943 can:
- bring the contract to an end;
- have the effect of relieving the parties from future performance;
- allow repayment to a service recipient of monies it has paid out for no consideration; and
- allow a service provider to recover such proportion of his expenses incurred in performance of the contract, as the Court considers just.
Each policy of insurance again is different, and businesses should liaise closely with their insurance brokers and underwriters to ensure that full advantage is taken of any cover which exists.
The above is a brief summary of the issues in the area of Force Majeure and Frustration. This article should not be considered as legal advice, but rather an indication of the areas that should be explored and upon which advice should be taken. Each case will depend upon its own facts and the summary above is not intended to constitute advice.
John Spratt is Head of Company & Commercial Law at Spratt Endicott. For advice in this area please contact John Spratt on 01295 204112