Force Majeure
The French phrase translates literally as ‘superior strength’. The purpose of a force majeure clause is to release a party from their contractual obligations upon the occurrence of an unforeseeable event or an event outside of the parties’ control, the obvious example being an ‘act of God’. If such a clause exists within a contract, then it is a question of interpretation as to whether the current COVID-19 pandemic is covered as one of these events. There may or may not be an exact reference in the clause to a pandemic or disease or it may refer simply to “unforeseeable events”, which will likely result in ambiguity. If the contract was entered into after the outbreak of COVID-19 (and determining the date of the outbreak could also be ambiguous), then it could be argued that the pandemic was not “unforeseeable”.
In relation to any new contracts, it is advisable to include specific reference to COVID-19 and whether that is included or excluded from the force majeure clause.
Some contracts could instead include a material adverse change (MAC) clause, which may allow a party to terminate or vary a contract, where the circumstances have become materially different to the original circumstances from when the contract was formed. Again, it will be a matter of interpretation as to whether the COVID-19 pandemic will be covered by such a clause.
Parties are still under an obligation to try to avoid or mitigate the effects of the pandemic and for the force majeure clause to apply, there must be no alternative solution. You should not rely on these contractual clauses to discharge all of your obligations under the contract without seeking legal advice; time limits and notice requirements included in the contract will still apply. If the other party to your contract seeks to rely on these clauses, you should seek legal advice as you may have a legitimate challenge.
Frustration
This common law doctrine, in short, enables a contract to be discharged when something occurs that makes it physically or commercially impossible for the obligations under the contract to be fulfilled or changes a party’s obligation to be something radically different. The “something” that occurs must occur after the contract is formed and must not be the fault of either party.
If the contract is frustrated then the contract will be deemed as ended and the parties will not have to perform their contractual obligations. However, the issue is complex. The terms of the contract will be important and there is a vast amount of case law as the court is generally quite reluctant to determine that a contract has been frustrated but will consider all of the circumstances of the case. It is not enough for performance to just be more difficult or more expensive for either party. There could be terms in the contract that provide for events that cause delay or stop performance and this could prevent the contract being frustrated.
If (in these circumstances) the COVID-19 pandemic does not actually cause frustration of the contract and the performing party has not performed their contractual obligations, then that party is likely to be in breach of contract. The issue in dispute between the parties will be whether the contract was frustrated by the event of the COVID-19 pandemic or not?
It is likely that there will be many contractual disputes arising from parties being unable to perform their contractual obligations due to the COVID-19 pandemic. The circumstances of each case will need to be carefully considered. It is important to seek advice early and our Dispute Resolution team can assist by taking a pragmatic approach and commencing commercial discussions with your opponent as soon as possible, minimising the risk to your business.
Contact us now to arrange to speak to one of our specialist lawyers on 0800 294 4410 or by email at info@marsdenrawsthorn.com
Katy Rider is a Dispute Resolution Solicitor with experience of dealing with contract disputes and can be contacted on 01772 799614 or by email KRider@marsdenrawsthorn.com
