Will COVID-19 trigger a force majeure clause in a contract?

The coronavirus pandemic and the resultant policy consequences are unprecedented.  The UK Government has ordered the closure of much of the economy: transport, travel, retail and entertainment have been particularly hit and other sectors which continue to trade must find new ways of operating. All this has a huge impact on both demand and supply.  Customers may wish to vary the level of goods or services they ordered and suppliers may have difficulty in providing what they promised.

In these circumstances, many businesses will wish to review the terms on which they are operating in order to establish their legal position.  This will depend on the specific wording and terms of their contracts and also whether those terms have been properly incorporated into the orders upon which they are working.

Among the first things to consider will be whether the contract contains any force majeure clauses and whether there are any procedures within the contracts for changes to be agreed. 

“Force majeure” is not a term of art and has no specific meaning. Therefore in many contracts there will be a non-exhaustive list of examples of what is meant by “force majeure”. This might include “pandemic” or “disease” or “acts of government”. An “act of god” is another term which is often included and this has been held to mean an “act of nature which could not have been foreseen or provided for”. The specific definition applied of “force majeure” should be checked first to establish whether the situation resulting from the coronavirus pandemic may be specifically covered.

In cases where “force majeure” is left undefined (for example in construction contracts) or is defined as “any event which is beyond the reasonable control of the parties”, a wider interpretation will apply.

Assuming a force majeure provision does apply, it is important to check whether the provisions are mutual or just for the benefit of one party, usually the supplier. Further matters to be considered include whether the force majeure event makes performance of the contract impossible or merely hinders or delays its performance, and whether there are any steps that the parties can or are required to take to mitigate the effects of the force majeure event.  Again, this will depend on the precise wording of a clause but the purpose of force majeure clauses is generally to apply where it is impossible rather than merely inconvenient to perform the contract as originally agreed. The clause will often provide for suspension of the obligations to perform the contract for a period of time and may allow for the contract to be terminated if the event continues for longer than an agreed period, perhaps after a specified further notice period.

With the current situation, it will be important to identify what is the actual event of “force majeure”. For example is it the disease itself or the laws introduced by the Government to restrict business activity? The laws may be reversed, sooner than the disease is brought fully under control, and the effects on contracts may well not be for the full period while the disease affects the population.

A party seeking to rely on a force majeure clause does so at some risk. If it gets it wrong and the clause is later held not to apply, then a court may treat the failure to continue to perform the contract as a repudiatory breach of contract, which would entitle the other party to terminate it and claim damages.

Some long term contracts have procedures set out within them so that changes can be requested and made and these will clearly be relevant, where they exist.

A further check necessary will be to ascertain what terms actually apply to the work being done. If there is a signed contract, this will be easy to establish and in such a case the terms of the contract will apply. If a business is working on its own standard terms of business, it will need to be satisfied that the other party accepted those terms, which is not always an easy task. Ideally there will be some form of signed acceptance from the counterparty and the business will be able to establish that its terms were provided to the counterparty when or immediately before it signed the acceptance.  At the very least, it will need to establish that its standard terms of business were sent to or drawn to the attention of the counterparty before it signed the acceptance.  Alternatively if there is no signed acceptance but there is an established course of dealing, this may be enough. Problems can arise if the other party has sent its own terms of business in response or if it proposed terms for the contract before the order was accepted. In such a situation the supplier may find that its terms of business do not apply or only partially apply to the order that it accepted, and care must be taken to avoid unnecessary disputes.

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Although correct at the time of publication, the contents of this article are intended for general information purposes only and shall not be deemed to be, or constitute legal advice. We cannot accept responsibility for any loss as a result of acts or omissions taken in respect of this article. Please contact us for the latest legal position.