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In light of the lockdown and social-distancing measures imposed by the UK government in reaction to the Covid-19 outbreak, many businesses have found themselves unable to fulfil some of their contractual obligations. As some businesses seek to find an exit strategy or defer performance, the often overlooked and generally boilerplate force majeure provisions included in many contracts may for some provide the key. They have recently hit the news, as Primark reportedly relied on such provisions to terminate their various supply agreements. In an infrastructure or manufacturing context, there may be a delay in delivering under the terms of the agreement. Here, we consider the background and application of force majeure in the present circumstances.
What is force majeure?
The term force majeure is derived from French law and has no recognised meaning in English law – the exact scope is therefore down to the drafting of the contract itself. It essentially operates as a shield limiting the liability of one or all of the parties that might otherwise arise. Typically, force majeure events are defined as acts, events or circumstances beyond the reasonable control of the party concerned. Caselaw suggests a force majeure provision drafted in this way can only be relied on if the party concerned has taken all reasonable steps to avoid or mitigate against it.
Longer form force majeure provisions will also typically include some or all of the following:
a) acts of God, flood, drought, earthquake or other natural disaster;
b) epidemic or pandemic;
c) terrorist attack, civil war, civil commotion or riots, war, threat of or preparation for war, armed conflict, imposition of sanctions, embargo, or breaking off of diplomatic relations;
d) nuclear, chemical or biological contamination or sonic boom;
e) any law or any action taken by a government or public authority, including without limitation imposing an export or import restriction, quota or prohibition;
f) collapse of buildings, fire, explosion or accident;
g) any labour or trade dispute, strikes, industrial action or lockouts;
h) non-performance by suppliers or subcontractors; and
i) interruption or failure of utility service.
In practice, the scope of the force majeure clause will very much depend on the nature of the contract in question and the obligations that are to be performed. In a supply or infrastructure contract, the customer will usually want to limit the scope of triggers as much as possible. For example, if a sub-contractor to the supplier is another of its group companies, then it is reasonable for this to be expressly carved out of a trigger along the lines in h) above.
A typical clause will seek to exclude or limit the liability of one or all of the parties to the contract for any delay or failure to perform its obligations which result from the circumstances in question. This is a critical point; there must be a causal link between the force majeure event and the performance of the contractual obligation and the party must be otherwise ready, willing and able to perform its contractual obligations. Any party alleging force majeure will also be under a duty to mitigate the effects of the event. The steps a party would need to take to mitigate will depend on the nature of the particular contractual relationship.
It must be noted that force majeure clauses often allow for the suspension of obligations for a set period of time. This could be, for example, as long as the force majeure event continues, or for a set period. This could be particularly useful in the present context where delivery of an infrastructure project is subject to often heavy penalties for missed timings, which may be avoided.
How might this apply in the present circumstances?
A pandemic or plague may or may not be specifically included in the list of force majeure events, so if not the parties will likely be looking to rely on national emergency, government intervention or disturbance as the applicable force majeure event, which from a timing perspective will vary from case to case according to the sector. In the UK, laws were enacted to limit the activities of a wide range of businesses (particularly those in the leisure and hospitality sector), which took effect on 21 March 2020. Guidance was issued by the government on 24 March imposing restrictions on the movement of individuals and then The Coronavirus Act 2020 became law on 25 March 2020. Each of these will have had a bearing on different business sectors and the extent to which the government imposes further restrictions may allow further businesses to claim that a force majeure event has arisen. The timings set out above may also be critical in determining when the relevant notice periods commence. If a party is looking to suspend performance of any contractual obligations, it is advisable to review the agreements as a priority to determine when notice must be given.
If, as seems likely, the effects of the Coronavirus pandemic are felt for a prolonged period and continue to hinder the parties’ performance it may be appropriate to look to terminate the contract. Many businesses owners, particularly in the hotel and leisure sector or operating from office premises, who have essentially mothballed their businesses will find themselves signed up to long term contracts for goods and services that they no longer require, in the short to medium term at least. In those circumstances, the contract as a whole should be reviewed; it is doubtful when the contract was drafted the present circumstances would have been envisaged! Nevertheless, the force majeure provisions may be drafted in a way that allows early termination but it must be noted they do not allow a party to terminate for their own economic convenience.
How should a business react if it is able to partially perform its obligations, for example under a manufacturing supply agreement. This is potentially the worst of all worlds and exposes a party to indemnities if the performance levels are not at the level agreed. In those circumstances, agreeing a variation agreement with customers is likely to be a better approach than an underperformance.
One important point to note is that force majeure clauses will often not be included within property contracts. They will not usually relieve a tenant of an obligation to pay its rent for example and those obligations will remain unless another provision applies. Also, changes in economic or market circumstances affecting the profitability of a contract or the ease with which the obligations can be performed are not force majeure events. Sadly, these provisions are therefore unlikely to assist a business suffering extreme cash flow difficulties.
A word of caution…
The only clear thing when it comes to force majeure is that the relevant provisions are often unclear and whether or not a matter really is outside of the reasonable control of the party concerned and really does have a direct bearing on the performance by a party under a contract can be highly contentious. Anyone seeking to rely on the force majeure provisions should be prepared for this to be hotly disputed, potentially through the courts. Other provisions of the agreement may cut-across the force majeure provisions and render them limited or entirely ineffectual. Whilst not covered extensively in this note, if a contract is impossible for all parties to perform it may be frustrated and legal advice should be sought.
In the current circumstances, commercial realities also come into play. Whilst a company with the vast buying power of Primark might be able to recover its supply chain relatively quickly, the same cannot be said across the board, particularly where there is a relatively small number of customers and/or suppliers in a particular market. It may be that mutually agreed variations are more effective than specific contractual remedies. Also, business interruption insurance may be in place and the policy terms should be checked to see if it applies. All of these factors should be carefully considered and relevant legal advice sought before any action is taken to delay performance or terminate a contract on the basis of force majeure provisions.
Christopher Spencer |Senior Associate
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