Fri, 27 Mar 2020
With the recent outbreak of COVID-19, a common consideration is being raised by businesses: to what extent does a force majeure clause entitle a party to cancel a contract or be excused from the performance of a contract?
‘Force majeure’ is not a term of art in English law. Accordingly, the bearing it has on contracts governed by the law of England and Wales depends upon a number of factors. McCardie J in Lebeaupin v Richard Crispin and Company [1920] 2 K.B. 714 said:
“… a “force majeure” clause should be construed in each case with a close attention to the words which precede or follow it, and with a due regard to the nature and general terms of the contract. The effect of the clause may vary with each instrument”.
A litigator faced with a force majeure scenario ought to bear in mind certain key points.
Who has the burden of proof?
It is for a party relying upon a force majeure clause to prove the facts bringing the case within the clause.
What must be proved?
Subject to the particular wording of the clause and the facts of each case, it is generally required to prove the following elements:
- The occurrence of an ‘event’ referred to in the clause.
- That the party’s performance of the contract has been ‘prevented’, ‘hindered’ ‘delayed’ (as the case may be depending upon the wording of the clause) as a result of the event.
- That the party’s non-performance was due to circumstances beyond his or her control.
- That there were no reasonable steps he or she could have taken to avoid or mitigate the event or its consequences.
The Event
It is common for force majeure clauses to either set out a list of force majeure events and follow the list with general sweep-up language (i.e. “or any other causes beyond our control”) to avoid the list being treated as exhaustive.
It will be a matter of interpretation whether the outbreak of COVID-19 constitutes an ‘event’ within the meaning of the force majeure clause. An analysis of the natural and ordinary meaning of the words used ought to be undertaken.
In the context of COVID-19, the primary consideration will be to consider whether the word ‘pandemic’ (or a synonymous word or description) is used. If not, consideration ought to be given as to whether COVID-19 falls within any general sweep-up language used in the clause.
The Impact on Performance
The next consideration will be whether the party invoking the protection of the clause has been “prevented”, “hindered” or “delayed” (or such other wording used in the clause) from performing contractual obligations. The exact wording in the clause ought to be checked.
In relation to the common words used, the courts have referred to the following meanings:
- Prevented: performance has become a physical or legal impossibility and not merely more difficult or unprofitable (see Dunavant Enterprises Incorporated v Olympia Spinning & Weaving Mills Ltd [2011] EWHC 2028 (Comm))
- Hindered: to place a party in the position of being unable to deliver unless he dislocates his business and breaks his contracts (see Tennants (Lancashire),Limited v C. S. Wilson [1917] A.C. 495).
- Delayed: The word delayed will generally be given its natural and ordinary meaning. However, the word delayed is not necessarily to be treated as equivalent to prevented (see Fairclough, Dodd & Jones Ltd. v J. H. Vantol Ltd. [1957] 1 W.L.R. 136.).
Further Considerations
Further, bearing in mind the third and fourth elements set out above, it would be prudent for a party relying upon a force majeure clause to be in a position to evidence that their non-performance was due to circumstances beyond their control and that there were no reasonable steps that they could have taken to avoid or mitigate the event or its consequences.
Moreover, it is important for the contract to be reviewed in full to consider whether there are certain procedures to be followed or notices required to be given before reliance can be put on a clause. If so, such requirements may constitute condition precedents on which the availability of the protection afforded by the force majeure clause depends.
All in all, with COVID-19 causing significant disruption to businesses worldwide, there is merit in analysing contracts and in particular force majeure clauses at an early stage to assess how businesses may utilise their contractual rights and obligations to minimise the disruption to their interests.
If this is a matter on which you require assistance, please feel free to contact me or my clerks on jpe@no5.com or BP@no5.com respectively.
