Wednesday, May 13, 2020
Whilst lawyers and their clients invest significant time in refining and negotiating legal contracts, it is often in the hope that the need to rely on the protections contained therein does not arise. In a similar vein, the first time we consult our insurance policy is only likely to occur when we have suffered financial loss.
The vast spread of COVID-19 has resulted in a position where contracts containing terms often viewed as being “standard” or immaterial (the boiler plate clauses), now potentially hold the keys to remedies which may enable parties to mitigate the losses induced by this global pandemic. This is particularly so where parties are predominantly seeking to renegotiate terms, avoid liability for breaches, delay performance of obligations, obtain moratoriums and in certain circumstances, terminate contracts entirely.
So, how does one access these remedies? In the current climate, it may be a prudent starting point to engage in meaningful negotiations with the other contracting party to find an amicable and practical solution before delving into contractual options. Given the indiscriminate nature of the pandemic, there is a probability that all parties stand to gain from a compromise arrangement.
If the parties are unable to reach a negotiated resolution, the agreement should be consulted to ascertain if it contains a force majeure (“super force”) clause. A force majeure clause may provide a solution by relieving a party from strict compliance with its contractual obligations in the wake of a force majeure event. Such clauses are included in all manner of commercial contracts, particularly those governing the supply of goods and services.
In both English and Irish legal systems, force majeure of itself has no inherent meaning in statute or common law but instead its application is determined by the contours of the wording agreed between the parties to the contract. Interpreting the clause is critical and advice should be sought from your lawyer before any stance is assumed with regards to applicability.
2. Is COVID-19 a force majeure event?
A force majeure event may be constituted by an occurrence which is unanticipated, unforeseeable, beyond a party’s control, and preventative in terms of allowing a party to perform its obligations. In both England and Ireland however, it is the specific wording of the clause which will determine whether the parties’ circumstances constitute a force majeure event.
Whilst many force majeure clauses cater for trigger events, the number and type of events specified will vary amongst agreements. COVID-19 may be captured by the following non-exhaustive list of trigger events:
Since the World Health Organisation’s characterisation of COVID-19 as a pandemic on 11 March 2020, the most accessible route to declaring force majeure would logically be via explicit reference to “pandemic”, “Act of God” or “Act of Government”. Less unequivocal distinctions may arise however where the trigger events have been drafted with specific industries or the subject matter of the contract in mind; it is particularly pertinent in these circumstances to consult your lawyer as it is likely that the clause will become subject to interpretation and subsequent negotiation amongst the parties.
3. The force majeure clause references pandemic – does this mean I am covered?
In short – no. The simple existence of a force majeure clause and an applicable trigger event does not necessarily relieve a party of its contractual responsibilities. A party seeking to avail of the force majeure clause must be capable of establishing a direct causal link between COVID-19 and an inability to perform its obligations. Therefore, any attempt by a party to rely on force majeure in circumstances where it has merely become inconvenienced is likely to be unsuccessful.
As all parties navigate through these unprecedented conditions and the landscape continues to adjust to facilitate the changing tide, parties should revisit the scope of the force majeure clause regularly to reassess the implications of any developments on its performance ability and trigger events.
4. There is a force majeure clause in the contract, it contains a relevant trigger event and I am confident COVID-19 is the reason I am unable to perform my obligations – what does this mean for me?
In the first instance, it is imperative that all of the requirements and time periods prescribed by the clause for invocation are complied with. The party seeking to rely on a force majeure clause should also take all reasonable steps to mitigate the effects of the occurrence of the event.
Subject to the mechanics of the clause, a party declaring force majeure successfully may be entitled to suspend performance of its obligations affected by COVID-19 in full or in part until the event passes. Alternatively, it may be excused from certain obligations or from the contract entirely. Where the recipient of the force majeure notice disputes the that a force majeure event has occurred, force majeure may provide the declaring party with a defence to an allegation that it is in breach of contract by not performing its obligations.
5. What if there is no force majeure clause in the contract?
The doctrine of frustration is available to parties in both England and Ireland where performance is rendered impossible. In both jurisdictions, the threshold for frustration of a contract is high and occurrences such as delays in performance or higher costs associated with fulfilling contractual obligations would ordinarily be insufficient to give cause for a frustrated contract claim.
Whilst force majeure clauses have the capability to provide relief only to the extent necessary through suspension of certain obligations – there is no scope for this accommodation with frustration. Frustration will terminate the entirety of the contract.
6. Lessons Learned
COVID-19 is the latest in a series of events occurring throughout the last decade which has taught us the importance of preparing for the unexpected. Often when drafting contracts, it is those clauses focusing on payment obligations, intellectual property, restrictive covenants, warranties and termination clauses which garner the most discussion and prove most contentious. However, the disruptive events currently being experienced globally reiterate the importance of ensuring that all clauses are in contemplation when considering the parties’ needs both now and, in the future, including the often-overlooked force majeure clause.
Please note that this is not intended to be legal advice and a legal review of specific provisions in your contractual arrangements should be sought on such matters.