Coronavirus and Force Majeure

In this post, we review how specific Force Majeure provisions in business contracts could be engaged within the context of the COVID-19 epidemic under English law and consider safeguarding steps that can be taken in light of the evolving COVID-19 situation.

A Force Majeure event specifically relates to an event that is outside the reasonable control of an entity and is such an event that prohibits or prevents the entity from performing its contractual obligations.

What to do if you have a Force Majeure provision in your contract

If a party wishes to try and claim relief for a Force Majeure event, then the terms of the contract, specifically the Force Majeure provision, will need to be considered. Any party that is affected by a Force Majeure event will usually be relieved from their obligations to perform a service or obligation, and to the extent, they are affected, they may be entitled to receive compensation. While each event will need to be considered in relation to any contractual terms, there are some common features of Force Majeure provisions that we will expand on below.

What type of event constitutes Force Majeure?

Usually, the test of whether or not an event constitutes Force Majeure will come down to whether or not the following points can be satisfied or not.

  • The affected entity must be able to demonstrate they have taken all possible reasonable steps to mitigate or avoid the event or its potential consequences.
  • The event must be deemed to be beyond any reasonable control of the affected entity.
  • The affected entity’s ability to undertake its contractual obligations must have been impeded, prevented, or hindered by the event.

In the case of a valid Force Majeure event, the consequences for all parties will usually depend on the contractual obligations, along with the points expressly outlined by the Force Majeure provision in the contract. In some cases, this will allow a time extension for the purpose of carrying out any obligations or a suspension of contractual performance for the duration of the event. If the Force Majeure event is extended over a long period of time, there may also be such provisions that entitle the parties to undertake a termination of the contract.

What to do if you DO NOT have a Force Majeure provision in your contract?

If you do not have a provision in your contract for Force Majeure, but find yourself in a situation where either yourself or a contractor is unable to fulfil obligations due to such an event, then this section aims to offer some initial guidance.

The Doctrine of Frustration is something that parties can potentially rely upon in the absence of a provision for Force Majeure in an English Law Contract. It will typically be applicable if:

  • The circumstance or event takes place following the contract formation and was not foreseen by either party
  • The ‘event’ is no fault of either entity
  • It is either commercial or physically impossible to fulfil the contract, or where the obligation would need to radically be transformed compared to the initially outlined obligation.

The end-result under the Doctrine of Frustration being that contract will automatically come to an end, and each party will be relieved of their obligations to perform any future work under the contract. The threshold for proving frustration is higher than many Force Majeure provisions, and this is typically due to the fact that it must be proved that any impacted obligations are fundamental to the contract.

There could also be a ‘change in law’ provision in a contract that specifically addresses situations that involve a change in law and whereby such changes make it impossible for the party to carry out any contractual obligations. If this occurs, then parties may incur costs associated with the reimbursement for any affected parties, and in certain situations, there will also be a right to terminate the contract.

Practical Steps for Clients

To help your business prepare for different scenarios that could occur, review the following steps, and try to be as proactive as you can.

  • Review any contracts to see whether or not there is a Force Majeure Provision
  • Review your insurance coverage documents to determine whether or not your insurance will cover any such losses; this could be either a Business Interruption or Force Majeure Insurance policy.
  • Review your financial documentation to consider whether or not there are any notice periods that will need to be complied with relative to any perceived claims for Force Majeure.

If a clause for Force Majeure is present:

  • Review the Force Majeure definition to try and determine if there is are any express events that include a pandemic or epidemic such as COVID-19. If not, try and ascertain whether or not the generic language is adequate enough to reasonably include COVID-19 as a potential Force Majeure event.
  • Consider which elements of the contract you will not be able to perform as a direct or indirect result of COVID-19.
  • Think about any steps your company will take to try and reduce or avoid the effects of COVID-19 on your staff and your business. This is key as you will need to demonstrate that you have taken all and any reasonable steps while following the government guidance.
  • Review the potential consequences for a successful Force Majeure claim

Getting legal advice about Force Majeure claims as early as possible in the process is key.

Force Majeure under PRC Law

 There are many businesses in the UK and, indeed, the rest of the world who deal with goods imported from China. As such, understanding how Force Majeure events are regulated under the People’s Republic of China (PRC) is relevant.

As expected, the best place to start is with the contract and any relevant provisions that are made for Force Majeure events. As COVID-19 is a relatively new ‘event’, it’s possible but unlikely that any specific clauses will relate to COVID-19; however, there is the potential for a pandemic or disease-related clause to be present. In addition to pandemic, plagues, and disease clauses, work stoppages or actions by governments and authorities could also cover this type of event.

Where there are no such provisions, the consideration of whether or not an event could be considered to be a Force Majeure event will rely on any relevant PRC laws or regulations; for instance, the General Principals of Civil Law and the PRC Contract law. In both instances, a Force Majeure event is defined as something that ‘objectively unforeseeable, insurmountable, and unavoidable. This means that any party who is prevented from fulfilling a contractual obligation due to a Force Majeure event could be either fully or partially exempted from their subsequent liabilities, proportional to the given circumstances only. Additionally, it is down to the invoking party of the defence to prove the impact of the Force Majeure event.

There are some high courts; for instance, the High People’s Court in the provinces of Guangxi, Zhejiang, and Shanghai have already taken steps to release guidance documents that directly relate to COVID-19. These confirm that the present-day epidemic could be a Force Majeure event. In addition, the China Council for the Promotion of International Trade has already started to provide Force Majeure certificates to companies in China who are experiencing challenging times with their overseas partners as a direct result of the COVID-19 epidemic.

Regardless of the jurisdiction, Force Majeure’s applicability should always be decided on an individual case-by-case basis.

Drafting Contracts During COVID-19

As a final consideration, going forward, and in any future contracts, it would be wise to address the implications of the COVID-19 epidemic. Some of the key points to include could be defining a ‘triggering event’ to either include to exclude events such as public health crisis, epidemic, state of emergency, etc. It would also be pertinent to review whether disruptions to labour and/or supply chains should be addressed in advance and form part of the contract.

To help mitigate any potential losses or problems, our Company and Commercial team at OGR Stock Denton can help you with any contractual preparations.

If you have any questions about your contractual obligations or would like help with a potential claim for Force Majeure, our dispute resolution solicitors at North London firm OGR Stock Denton  can give you the guidance needed to know exactly where you stand.

If you’d like to know more about the enforceability of Commercial Contracts during the COVID-19 epidemic, our linked article provides more information on this topic

New Coronavirus insolvency legislation proposed

The Corporate Governance and Insolvency Bill (the Bill) has been introduced in Parliament to support businesses that are struggling as a result of the Coronavirus pandemic.

The Bill includes six new insolvency and two corporate governance measures that seek to address the challenges that businesses are facing.

The Bill includes:

  • A new moratorium to give companies breathing space from their creditors while they seek a rescue.
  • A law that prohibits termination clauses that engage on insolvency, preventing suppliers from ceasing their supply or asking for additional payments while a company is going through a rescue process.
  • A new restructuring plan that will bind creditors to it.
  • A temporary suspension of personal liability for wrongful trading from directors who try to keep their companies afloat through the emergency.
  • A ban on creditors filing statutory demands and winding up petitions for Coronavirus related debts in certain circumstances.
  • Rules that ease the burdens on businesses by enabling them to hold closed Annual General Meetings (AGMs), conduct business and communicate with members electronically, and by extending filing deadlines for:

– confirmation statements

– annual accounts

– registrations of charges (mortgage)

– event-driven filings, such as a change to your company’s directors or people with significant control.

These measures will be applied retrospectively so as to be as effective as possible. It is hoped that the Bill and its measures will enable the insolvency regime to flex to meet the demands of the current emergency.

The Bill, introduced on 20 May, will now make its way through Parliament. Many of the measures in the Bill will need secondary legislation before they come into force, and this will be introduced in due course. Nothing will change until legislation is formally introduced.

Are you owed money? Some tips that may help

In these difficult times cash is king! However many individuals, sole traders, firms and companies are using these difficult times as an excuse not to pay outstanding debts; including invoices, loans and contractual payments.

So what can you do when faced with, or to avoid, this situation?

  1. Act quickly. The older an invoice becomes the harder it invariably is to recover. The initial satisfaction and appreciation the customer had of the effort and work undertaken will have worn off within a matter of weeks …if not days. The reality of making payment is a different matter entirely. Chase a debt promptly with an initial polite letter and a strict time period for payment. A solicitor’s letter demanding payment within 7 days often forces a debtor to respond but much will depend on how old the debt is and how willing the debtor is to engage.
  2. Ensure you have as much information about the debtor as possible. It is imperative that you know your customer. You may know the individual you deal with but in what capacity? Are they acting as an individual, a sole trader, a partner in a firm or a director of a company. Are they authorised to act on behalf of the organisation (entity) they represent? The type of entity that you contracted with, whether individual, firm, company or otherwise will determine the best way of pursuing and recovering payment.
  3. Make sure that for individuals you have their full name, including all forenames that are often needed when undertaking bankruptcy searches or ascertaining what property they own.
  4. Take up financial or personal references where appropriate. Consider requesting references from suppliers to see if they have encountered any problems with payment.
  5. You may wish to limit exposure by setting internal credit limits. Many individuals and organisations fall into the trap of giving customers extended credit, particularly if they are relatively new customers who have promptly paid some earlier invoices ( often for far smaller sums) and the first substantial invoice is then not paid.
  6. Do you have terms of business? These can be extremely useful particularly if containing retention of title clauses in respect of goods supplied and not subsequently paid for.
  7. Keep records of all invoices. A solicitor will promptly require these when demanding payment from the debtor and commencing appropriate enforcement methods.
  8. A solicitor can advise on the various enforcement methods that can be taken prior to issue of court proceedings in an attempt to recover payment, or to reach a negotiated payment settlement by instalments with or without security. Statutory Demands are an effective way of placing sufficient pressure on an individual or company who would rather pay a debt than face bankruptcy or winding up. These however need to be dealt with carefully, and served properly, in order to comply with strict regulations and to be valid.
  9. Where necessary court proceedings should be issued, judgment obtained and then enforced. This is particularly so if there is a risk of an individual being made bankrupt by other creditors or a company being placed into liquidation. A judgment is only a piece of paper, and worthless until enforced, but a solicitor can advise on the appropriate enforcement methods that are likely to be most effective in the circumstances of any given case.

We recognise the difficulties faced by many in these extraordinary times in recovering outstanding debts. We are here to help and  always willing to have an initial no charge discussion as to how we may be able to assist, particularly where your debtors are taking an unfair advantage of the current circumstances.

Enforceability of Commercial Contracts (COVID-19)

Many businesses today are struggling to cope with the pressures of the COVID-19 outbreak. As well as causing unprecedented health difficulties it is also giving rise to huge economic problems around the world.  These will in turn give rise to many legal disputes.

The outbreak will have caused huge problems for supply chains being unable to manufacture or produce goods, due to a lack of workers as staff adhere to the strict quarantine measures imposed by government to contain the virus. This inevitably will result in businesses being unable fulfil contracts to supply goods or services.

The question arises as to whether a party is able to cancel the contract and whether damages would be available as a result.

Under English law, there are two potential contractual methods of escaping liability for breach of contract. These are Force Majeure and Frustration. It is important to understand that these two concepts are completely different and operate independently.

Force Majeure operates as a specific express term in the contract, which tends to identify events and circumstances, which if they occur, would entitle the party to serve notice that the event is one which is beyond their control.

The Force Majeure clause in the contract will outline what has been agreed between both parties, such as:

– the events which will entitle either party to declare a Force Majeure

– how a party should notify the other of a Force Majeure event

– how to deal with the consequences which flow from declaring a Force Majeure.

However, as in all legal issues, the devil will be in the details

It is highly likely that government will issue Force Majeure certificates to assist businesses seeking to rely on the clause. However, contracting parties will still need to agree, as if not the courts will have to determine whether a Force Majeure event has occurred and also, very importantly, whether a party has effectively taken the necessary steps to mitigate the loss.

It is important to note that when agreeing a Force Majeure clause, parties can also agree the consequences which might follow such an event, including whether contractual obligations are suspended, whether liability accrues or is capped and rights on termination.

Frustration is entirely different to Force Majeure. Frustration relies on a party to prove that, as a result of the outbreak, it has become simply impossible to fulfil the contract. This will of course give rise to examination of the particular facts of each situation which is bound to centre on the argument of what was possible as opposed what was impossible.

Businesses seeking to rely on these contractual methods of escaping liability during this current pandemic, will still find it is going to be quite difficult to prove. If a business does seek to rely one of these methods incorrectly, then the other party may argue that assertion has of itself has given rise to a breach of the contract. This could give the other party a right to claim damages or even treat the contract as terminated.

The government has taken and is continuing to take significant steps, in offering financial support across the economy to assist in these difficult times. It seems that there is a likelihood that businesses may be forced into delaying payment for goods or services. Companies should be aware that this might attract interest under the terms of the contract, as well as a statutory right to interest under The Late Payment of Commercial Debts (Interest) Act 1998. However, businesses will be acutely aware that if a company is put into some form of insolvency, there more often than not, very little dividend. It therefore seems that businesses are going to have to be realistic in this difficult time and renegotiate terms.

It would be advisable, where you have contracts of any significant size, for any extensions or variation of terms to be expressly agreed in writing between both parties, so that there is clear evidence as to what terms have been altered and what has actually been agreed.

In terms of court proceedings, whilst there may be some latitude on the deadline for issuing proceedings, where a limitation deadline is in place, there will have to be clear evidence that a representative was unable comply with the relevant timetimes. Once proceedings begin, there is likely to be a delay to comply with any directions but again this will require evidence. The high court in particular is encouraging parties to communicate by telephone or potentially by video link where possible.