It’s hard to believe that just a few short weeks ago we were looking forward to Spring 2020 and all that this usually entails. We wouldn’t have thought it possible that our normal working and social patterns would be so entirely disrupted and the normal freedoms we enjoyed not only curtailed but done so with our approval.
COVID-19 may cause a business to breach its contractual obligations or suffer loss because it cannot meet its contractual obligations. Clearly, the outbreak will have substantial business impact. Where contracts are not fulfilled, the affected party could bring a potential claim (for damages for breach of contract). However, such a claim may be defeated by the inclusion of an appropriate “Force Majeure Clause” (FMC).
With COVID-19, there is more confusion than ever around what a FMC is and when a party can rely on it to suspend or otherwise remove its contractual obligations (otherwise commonly known as an “Event Outside Our Control” found mostly in B2C contracts)
What effect does a Force Majeure clause have?
A FMC generally suspends or removes contractual obligations during the subsistence of the force majeure event. For example, a supplier will not be expected to deliver the goods or services. It is generally something/ an occurrence that is outside of a party’s control.
Can you rely on a Force Majeure clause in the face of COVID-19?
If you do not have a FMC clause in your contract, you will not be able to rely on it. If you have it, it needs to be reasonable as per s.3(2) Unfair Contract Terms Act 1977 (and in the case of standard terms for contracts for consumers under B2C contracts, under the Consumer Rights Act 2015, it needs to satisfy the fairness and transparency principles).
Even if your contract does contain a FMC, there’s no guarantee that you will be able to rely on it as they tend to be interpreted strictly and whether it covers the coronavirus outbreak will depend on the wording.
How detailed must a Force Majeure clause be?
Like anything, the more detailed and prescriptive your clause is, the less likely that it will be subjected to subjective scrutiny for lack of clarity. A FMC can be very specific and list all force majeure type events but this can be quite restrictive (if your specific event is not included) but it will be easier to prove if your event is included e.g. pandemic!. If you rely on an open-ended list using the words like “including but not limited to x, y and z”, this is still strong but it will be open to interpretation.
Under the current circumstances, if you have included “pandemic” in there, then you may easily seek to rely on this. Just referring to a FMC without stating what it is is pointless as there is no legal definition in English law. If you do not have a FMC in your contract, then you cannot rely on it in its absence. However, you may be able to rely on a common law doctrine known as “Frustration” (and termination by repudiation) as mentioned below.
On top of this there is a duty to mitigate losses by a supplier. This may include rescheduling events, doing things differently etc. This is important because a FMC is typically something that cannot be performed at all i.e. it does not for example, include anything that can still be performed but may be performed less profitably. According to settled case law, a contract becoming expensive or uneconomical does not constitute a force majeure. So, it will be important to establish whether the party seeking to rely on it has (or could have) taken any reasonable steps to avoid the effects of the force majeure event and if they did (or could have) complied with any requirements of the clause e.g. giving notice. The FMC needs to prescribe how ‘notice’ of a force majeure event must be served on the customer by the supplier to assert the supplier’s right to rely on it. It is worth remembering that the burden of proving the viability of a FMC lies with the Supplier (which is usually the party seeking to rely on it in order to escape certain contractual obligations during the force majeure event.
Further, non-performance of obligations only lasts for the duration of the force majeure event (unless the clause includes a prescriptive timeframe which they often do).
Another avenue to consider is the Frustrated Contracts Act which may find that a contract can be suspended where an unforeseen event makes the contractual obligations impossible, or radically changes the intended purpose for entering into the contract. However, there is a higher threshold to meet than that required for seeking to rely on a FMC but it may be very useful especially for high value contracts. There is no fault of either party.
Termination for Convenience i.e. no breach:
You may have this in your contract which is a saving grace for the party seeking to rely on it. Be sure to follow the notice period in the contract. It is possible in exceptional circumstances that this could be implied in to a contract in its express absence where it is obvious or necessary to give business efficacy to the contract in question provided reasonable notice is given.
This clause is unlikely to be implied if there is a fixed term contract in place or where the contract already provides terms expressly set out to deal with termination.
Termination for breach of contract:
You may rely on the fact that the other party has breached the terms of the agreement. This may only be in relation to some breaches which are often defined as being “material”. Often the opportunity to remedy the breach is provided for and it will be important to provide this which can also serve as evidence of attempts to mitigate too. A court will appreciate this.
Common-Law and Repudiatory Breach:
If you cannot apply any of the above because you have no terms dealing with termination or cancellation in your terms of agreement, then you may be able to rely on claiming that a “Repudiatory Breach” has occurred which is the most serious breach of the contract (known as a ‘condition’ (which should be mostly asserted expressly to be a condition, failing which, an ‘intermediary term’ may constitute a repudiatory breach…but not a ‘warranty’). Note there is no option for the defaulting party to remedy.
Termination for Insolvency:
No common law duty or implied term to terminate for insolvency. Seek the advice of an Insolvency Practitioner.
Key Takeaways – What will help to minimise the risk to my business?
- Make sure that your supplier terms/ agreements have a professionally drafted FMC. Get your contracts reviewed to check and/ or improve/ or include your FMC.
- Make commercial adjustments to your contracts around timing of payments and refunds as may be required.
- Be clear on what your ‘legal ground’ is for terminating because it could back-fire and the other party could sue the party terminating. Seek legal advice.
- As a supplier, you would be only be relieved of your contractual obligations whilst the force majeure event is continuing.
- Regarding the issue of events and covid-19 and contractual terms, it seems that in these exceptional circumstances, suppliers/ event organisers are trying to be as flexible and pragmatic as possible and are offering to roll-over deposits/ fees paid and reschedule the events with a view to retaining goodwill and emphasising the hygiene rules that will be in place. Rather than approaching this by the ‘letter of the law’, most are thinking of PR and retaining the business. See if there is scope for you to reschedule.
- If you are a limited liability company, the company will be liable, not you personally, whereas, where you are a sole trader, you will be liable personally.
- If no provisions around cancellation/ termination or a FMC exist in your terms, then you will remain liable to your suppliers unless you can rely on “Frustration”.
- FMCs are often narrowly interpreted by the courts. If the clause does not specifically contemplate the related event, then the courts may not allow a party to rely on it. Now that COVID-19 has been determined to be a “pandemic” by the World Health Organization, the use of “pandemic” or a synonym thereof within the FMC may be helpful for a party that wishes to rely on a FMC under the current circumstances.
- Reliance on a FMC may require complying with certain other obligations within an agreement, such as notice obligations and taking steps to mitigate the foreseeable or actual impacts of the force majeure event. Be sure that you follow the notice procedure and any other obligations.
- If the non-performance could have reasonably been avoided, then it is possible that a party may NOT be able to rely on the FMC. Similarly, a non-breaching party should be ensuring that the other party has taken steps to avoid the FMC as this may affect the amount of damages that it will be able to claim in the event of a breach. Parties are expected to mitigate loss.
If you are a supplier in a contract and require legal support around this to ensure your interests are protected in your terms of agreement (at least going forwards), get in touch, we’d love to help.