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