A ”typical” force majeure clause requires a party invoking force majeure to take reasonable steps to mitigate the consequences of a force majeure event. Depending on the wording and circumstances, this may include an obligation for a party to take steps to end force majeure and may also include seeking deliveries elsewhere or other means of performance. This second link is essential and will probably be the main battleground in disputes over the validity or otherwise of a force majeure exercise. It is one thing to say that COVID-19 and/or government measures fall within the scope of the clause in general. It is quite another to say that they caused the loss of performance.15 The party relying on the clause must prove causation. We will look at the two most common degrees of impairment one by one. Therefore, it is imperative that companies determine whether there is a basis for a party to key contracts to declare a case of force majeure based on COVID-19 and the measures taken by governments in response to it. Despite the severity and impact of the COVID-19 outbreak, it is not a foregone conclusion that a contractual provision on force majeure applies in English law. The exact requirements depend on the text of the contract, but all clauses require the party invoking force majeure to prove a causal link between the event and its inability to perform the contract. For softer contracts, the event may only have hindered a party and not completely prevented it. If the force majeure clause does not cover an event such as the COVID-19 outbreak (or if there is no force majeure clause at all), you should consider whether the contract has been frustrated. A contract ends automatically when a frustrating event occurs, that is, one that: (1) is unexpected; (2) outside the control of the parties; and (3) renders performance impossible or fundamentally different from that contemplated by the parties at the time of conclusion of the contract.
The frustrating event must ”significantly change the nature of the outstanding contractual rights or obligations.” After the 2003 SARS outbreak, the Hong Kong District Court ruled that a 10-day period during which a property was uninhabited does not frustrate the lease, which had a duration of two years.3 A force majeure clause generally covers events that prevent a party from fulfilling its obligations. With such clauses, performance must be physically or legally impossible; it is not enough that performance is simply more difficult or unprofitable. [6] The question is in fact whether other means of enforcement are available to a party who claims that enforcement has been rendered impossible. [7] Following the publication of our checklist and 4-step flowchart for the review and assessment of force majeure clauses related to the COVID-19 pandemic, Gibson Dunn`s London office has produced a checklist and 4-step flowchart to support the analysis of force majeure clauses in English law. On the other hand, the Court of Appeal ruled in The Eugenia case in 1964 that a contract to charter a ship to sail from Italy to India, a voyage that everyone assumed was made via the Suez Canal, was not thwarted when the canal was blocked by the 1956 crisis that forced the ship to bypass the South African Cape of Good Hope. The court noted that while the trip was undoubtedly much longer and more expensive, it was not a fundamentally different business. The contract therefore remained binding. The event in question must fall within the contractual definition of the circumstances or events likely to trigger the force majeure clause. The list of events in the contract is exhaustive and the court will consider the natural meaning of the words used and whether the current circumstances should fall within the scope of the terms.
The courts assume that the parties only wanted to remedy the situation if the event was out of their control, as anything else can lead to an unfair outcome. In any case, the event must be the only cause of the error/performance in question. Another possible alternative is a request for a change of circumstances or a price renegotiation clause if such a clause is included in the respective contract. These clauses are less frequently used in contracts governed by English law, as the general principle in English law is that an agreement is unenforceable. However, if such a clause is included in a contract, it will certainly be reviewed by both parties due to COVID-19. However, the general ”sweeping” provisions in force majeure clauses that attempt to remedy possible drafting deficiencies will be interpreted strictly. Therefore, they will not assist a party wishing to invoke such provisions if the event in question is not related to the provisions expressly listed. Some contracts contain explicit provisions that may excuse performance in certain circumstances, sometimes referred to as ”force majeure”. These clauses may be short and simple, such as: ”Neither party shall be liable for breach of duty if such breach is due to events, circumstances or causes beyond its reasonable control.” Or they can be much longer by defining exactly what circumstances bring relief and defining the affirmation procedure and the consequences of it. Some clauses explicitly refer to the occurrence of an epidemic or pandemic. `This conclusion [that the total cannot be based on the force majeure clause] is consistent with a number of cases, both as regards force majeure clauses and frustration … to the effect that the fact that the performance of a contract has become costly, or even dramatically more expensive, is not a reason to exonerate a party because of a case of force majeure or frustration.
21 Recently, much thought has been given to the legal doctrine of frustration and its applicability to COVID-19, as frustration has the potential to release the parties from their additional obligations. A contract may be rejected out of frustration if, after the conclusion of the contract, something happens that makes the performance of the contract physically or economically impossible or transforms the obligation of performance into an obligation substantially different from that concluded at the time of conclusion of the contract. How COVID-19 could affect contractual obligations Restrictions and restrictions arising from the outbreak of COVID-19 could allow a party to a contract under English law to circumvent its obligations by applying a force majeure clause and/or invoking the common law doctrine of frustration. However, both routes have a high bar for success and parties should seek careful advice before pursuing either route. A force majeure clause is generally only interpreted as applicable if the specified trigger event is beyond the control of the party concerned and cannot be overcome.22 However, it is not an immutable rule and depends on the exact wording of the clause in question. Demanding business customers in many industries are reluctant to declare force majeure for good reason. However, given the dynamic nature of responses to the COVID-19 pandemic, it is inevitable that the number of reports will increase, and companies should review key contracts now to minimize this risk. The Incoterms rules explicitly do not deal with force majeure, so each tailor-made clause should be considered on its own terms. The force majeure clause may expressly require the party to mitigate the circumstances or effects of force majeure. [11] While there is no such express provision in the force majeure clause, there is an implied obligation for the party to demonstrate that it has taken reasonable steps to avoid or mitigate the effects of the force majeure event. [12] If a contract provides that a party`s obligation can be fulfilled in a variety of ways and that party attempts to invoke a force majeure clause (or other exclusion) that prohibits a method of performance, the party is required to perform its obligation in one of the other permitted ways.
[13] The fact that a measure to avoid or circumvent the force majeure event may not be cost-effective does not necessarily mean that it is considered inappropriate. [14] Force majeure clauses are quite common in commercial contracts, but there is no separate concept of ”force majeure” in the laws of England and Wales. .