Force majeure clauses: drafting in a time of Coronavirus
The existence of the pandemic will not prevent businesses from entering into new contracts, but it should make us all think carefully about the…
The existence of the pandemic will not prevent businesses from entering into new contracts, but it should make us all think carefully about the wording of force majeure clauses.
COVID-19 has made it abundantly clear that businesses should take care when entering into contracts or issuing terms of business to ensure they are protected in situations where they (or the other party) cannot fulfil their obligations through no fault of their own.
Force majeure, at its simplest, can be described as matters that are outside the control of the parties, which could not reasonably have been foreseen at the time of the contract being entered into and the effects of which prevent performance of the contract. A force majeure clause will also determine whether the contract continues, is suspended or is terminated and as force majeure has no established defined meaning or consequences in English law, a contract must define this and set out the consequences.
There are a number of elements of a force majeure clause which must be carefully considered when drafting a new contract, some of which have been highlighted by the COVID-19 pandemic.
Force majeure events
Particular attention should be paid to the list of non-exhaustive events which are often included in the definition of force majeure events. Wording should be included such as “pandemic”, “epidemic”, “outbreak”, “crisis” or “governmental action”. How a virus reaches the stage of “pandemic” or “epidemic” may be disputable; should the Oxford dictionary definition be used or should it be when declared by the World Health Organisation? To avoid doubt you should make this clear within a contract, including appropriate definitions. “Governmental action” needs consideration – many of our clients are facing a situation where guidance has been given by the Government which affects their business, but there has been no regulation. We do not yet know how the courts will interpret wording such as this.
If a contract does not include a list but includes wording such as “events beyond a party's reasonable control” this may be sufficient but will not be guaranteed to succeed. The facts of every single contract will need to be considered to ascertain whether the event actually was beyond a party’s reasonable control. Without any legislative clarity as to what it means, force majeure could be interpreted by a party, tribunal or court, widely or narrowly. A lot will turn on what was, or could have been, anticipated at the time the contract was entered into.
Wording in a contract that requires that the event of force majeure is “unforeseeable” should be treated with extreme care, in particular in current times. COVID-19 has now spread globally and for those contracts being negotiated now, it is arguably foreseeable that it will have an effect on that contract. An argument that it is “unforeseeable” that the virus could affect a party’s performance of an agreement is likely to be questionable and unrealistic at best, and unenforceable at worst.
“Prevent” or “hinder” performance
If a contract is drafted to the effect that the relevant triggering event must "prevent" performance, the relevant party must demonstrate that performance is legally or physically impossible, not just difficult or unprofitable. However, "hinder" and "delay" have a wider scope, and will generally be satisfied if performance is substantially more onerous, such as the case may be during the COVID-19 outbreak.
Our recommendation is therefore that for contracts currently under negotiation the parties discuss and agree how this risk is to be dealt with under the contract and ensure that the drafting is clear and reflects that agreement.
We experienced a similar approach to bespoke drafting dealing with the changes in law provisions around Brexit – we knew things would change but not quite how and to what extent.
At its simplest parties may agree to refer to the Coronavirus COVID-19 outbreak as being a force majeure event or agree to exclude it entirely depending entirely upon what the contract is for. However, more complex drafting would be required depending on the agreed allocation of risk as to time and money.
For those contracts currently in place, now is the time to take appropriate legal advice and urgently review your contractual rights and obligations. Understanding this is key to navigating a path through the current and future consequences of the COVID-19 outbreak and to ‘future proof’ your contracts.