In response to the COVID-19 pandemic, governments across the world have implemented certain global strategies to limit the spread of the outbreak. The effects of these strategies are impacting not only our day to day lives but also the international and domestic economies. The necessary restrictions on the movement of people has resulted in inevitable disruptions to supply chains and contracts for services with the consequence that commercial commitments must be re-examined.
The first step any business must take in examining their commercial commitments is to review all current contracts and assess why exactly they are unable to fulfil their obligations under the contract.
It is vital to identify the exact reason for being unable to meet or perform a contractual obligation regardless of whether the direct or indirect cause of the frustration is due to COVID-19. An example of a specific reason may be delay in the supply chain or an insufficient work force to meet demand due to business adherence with government guidelines.
The business should consider contacting the counterparty to the agreement by way of notice as soon as possible to inform the other party of any difficulties (or indeed impossibilities) they face in executing their obligations under the contract given the current situation. Both sides should look at possible solutions and steps which can be taken to ensure the contract will remain in force in the post-pandemic commercial environment including contemplating suspending the agreement for a time. Within a commercial agreement, there may be a specific clause governing the notice process itself. The clauses may stipulate when notice should be given, i.e. before or at the time of an actual impact to the agreement, the time frame in which it should be given and for how long force majeure relief will last.
Within the course of their discussions, the parties to the agreement may agree to formally renegotiate or vary the terms or to try to achieve a mutually acceptable solution.
If these negotiations fail, the business should direct its attention once again to their contract and examine the force majeure clause. It should be noted here that if a force majeure clause is invoked by either party to the agreement against the other, both parties must check their insurance policies and assess whether the losses suffered will be covered under their business interruption insurance.
Force Majeure is a standard clause in a commercial contract which frees all parties to an agreement from liability in the instance that an extraordinary event occurs. Such an event must be beyond all reasonable control of the party seeking to rely on the clause. A Force Majeure event does not cover events that could reasonably have been avoided or overcome by the party seeking to claim relief. If reliance on the force majeure clause is successful, the party’s liability under the agreement is only suspended for the duration of the extraordinary event i.e. force majeure operates only as a relief from delay or performance of contractual obligations.
To determine whether COVID-19 constitutes a force majeure event, the business must look at the precise language of the clause, at whether the restrictions resulting from the pandemic have hindered performance of the contract or made performance of the contract impossible, or whether the economic results of the outbreak were foreseeable at the time the contract was entered into.
The Force Majeure language of any agreement is rarely the same as another. The language varies from industry to industry and within each industry from agreement to agreement.
Generally, the force majeure clause will define and or list the events which both parties have agreed constitute an extraordinary event. If the list is intended to be a specific list, a new event not contemplated at the time of writing the agreement may fall outside of the protections contemplated under the clause.
If the list is intended to be an indicative list, it may give the parties leverage to argue that the COVID-19 outbreak for example is similar enough to a listed event, and thereby constitute a force majeure event. Even where disease, pandemics and epidemics are not specifically listed, the definition of force majeure may be broad enough to capture events such as the Covid-19 outbreak. This will depend on the language used in the clause.
If the Force Majeure clause does not specifically define a force majeure event and refers instead to ‘any event outside the reasonable control of the party’, it allows the affected party to argue that the impact of an external event like the Covid-19 outbreak is not something within its reasonable control.
The issue is more clear-cut if the force majeure clause specifically lists pandemics and epidemics as a type of force majeure event that excuse performance. Even where pandemics and epidemics are not specifically listed, the definition of force majeure may be broad enough to capture events such as the Covid-19 outbreak for example if the clause includes “Acts of God” or “Acts of Government”. Again, this will depend on the language used within the clause itself and within the agreement as a whole.
The business seeking to rely on the Force Majeure clause must show that they have taken all reasonable steps to avoid or mitigate the risk to their business associated with the event.
Under the current circumstances resulting from the Covid-19 pandemic, the business will have to show that it has implemented its business continuity procedures or demonstrate it has followed its serious incident planning, as appropriate. For example, where delays to fulfilling the contract have been the result of a reduced workforce, the business will have to demonstrate that the reduction in workforce is due to its adherence with government guidelines. If the business has been unable to fulfil its orders due to a breakdown in its current supply chain, it would have to show that it has exhausted all other options in attempting to source a replacement supply of goods or services regardless of cost or difficulty in securing the products.
In order to claim relief, a Force Majeure clause requires that performance of the affected business’s obligations is made legally or physically impossible by the force majeure event. Additional expenses in performing its obligations, and the fact that performance under the contract has become more difficult and or less profitable will not allow for the affected party to claim that the frustrating event was outside of their reasonable control.
A Force Majeure event must not have been foreseeable by the parties. For example, if the business seeking to rely on widely drafted and non-specific force majeure clause entered into the agreement after the outbreak in China came to light, it may find it difficult to prove that parties did not foresee the risk of COVID-19 impacting the contract. Equally it may be difficult to argue that a risk was unforeseeable given recent epidemics such as Foot and Mouth, SARS and MERS.
There must be a genuine failure or likely failure to perform and it must be established that the response to the COVID-19 pandemic actually caused the failure to fulfil the contractual obligations. The simple fact that the pandemic exists will not be enough to be able to rely upon the force majeure provision. To rely on this clause, it must be very clear that if the outbreak of COVID-19 had not happened, the contract would not have been breached. It must be shown that the outbreak not only caused the contractual breach, but that it is the only cause of the contractual breach. It will always lie with the business seeking the relief offered by this clause, to prove that the event prevented them from fulfilling their obligations under the agreement.
If the business is successful in claiming under a force majeure clause, its obligations will generally be suspended for a period and it may receive extra time to fulfil its orders.
Language permitting, if the force majeure event continues for a specified time, one or both of the parties may have a right to terminate the contract without penalty.
A Force Majeure clause may have a variety of consequences, including excusing the affected party from performing the contract in whole or in part, excusing that party from delay in performance, entitling them to suspend or claim an extension of time for performance, or giving that party a right to terminate.
If a Force Majeure clause is not incorporated into the contract, the business seeking to rely on it may resort to common law. In Ireland, there is no legal presumption of force majeure and so the affected party may rely on the concept of frustration of purpose or doctrine of frustration. This means that if either party are unable to fulfil their obligations under the contract, the affected party may make a claim for non-performance of obligations resulting from a breach of contract. Here, the threshold for the frustration of a contract is very high. The application of the doctrine can be limited and narrow, with no scope for partial frustration of a contract. Frustration may also be commercially undesirable in some circumstances, since its effect, regardless of the wishes of the parties, is to bring all parties’ obligations under the contract to an end immediately.
The contract may set out other termination provisions within the contract but again this is dependent on how the original agreement was drafted.
Before seeking to rely on the Force Majeure clause, it is recommended that the business seeking to rely on the clause review its current contracts to assess the likelihood of being unable to fulfil the contract due to the impact of COVID-19 restrictions.
The business should explore all options with the other party to the agreement and seek to renegotiate or vary the terms of their agreement where possible.
The business seeking to rely on the Force Majeure clause should engage their legal advisers to examine the language of the clause carefully and discuss the processes and procedures which must be followed to maximise the chance of successfully invoking the protections afforded by the clause.
Even if a business does not seek to rely on the Force Majeure clause at this time, it would be prudent to ensure a force majeure clause is incorporated into the contract if it has not been already. Where a Force Majeure clause is contained within the agreement, it would be prudent for a business to review the current language of the clause and examine whether it needs to be amended. It may also be prudent to examine whether supporting or overlapping clauses, for example business continuity clauses or termination clauses, ought to be inserted into the agreement or updated.
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