The World Health Organization has on March 11, 2020 declared the novel coronavirus (Covid-19) outbreak a worldwide pandemic, causing a catastrophic impact not only on countries’ health systems, but also on the global economy bringing supply chains, workforces and many global markets to an almost standstill.
Covid-19 has also had a significant impact on local businesses and their ability to perform under commercial contracts (mostly due to governmental restrictions on trade and social distancing requirements), causing some to breach their contractual obligations or suffer loss because other parties were unable to perform their contractual duties.
Where a contract is breached as a result of a party’s inability to perform, albeit through no fault of its own and due to unforeseen circumstances (e.g. due to lack of delivery or staff shortages as is the case with Covid-19 restrictions), the affected party could bring a potential claim for damages for breach of contract. When faced with such claim, the non-performing party may in return find relief by relying on a legal concept thought to be no more than “contractual small print” or boilerplate in normal times included as a matter of course in a contract, but which may now be critical to business survival, the force majeure clause.
We have seen businesses re-evaluate their options as to whether they need to or can rely on force majeure clauses in an attempt to mitigate the risk of a breach of contract. This is a highly encouraged pro-active approach for any business concerned about its ability to maintain continuity of service delivery and performance under contracts which could be affected by Covid-19. However, this is not a straightforward exercise.
This briefing note focuses on Guernsey law governed contracts containing force majeure clauses.
What is a force majeure clause?
There is no single standard force majeure clause used in commercial contracts as it is usually industry specific with parties having freedom to negotiate what constitutes a force majeure event for the purpose of their contract and what the consequences will be if such an event materialises. There does not exist a universal definition for force majeure under Guernsey or English law but reliance on a force majeure clause is generally used to excuse a party from its contractual obligations where it breaches a contract by failing to perform its contractual obligation(s) due to events outside its reasonable control. Such an “affected obligation” will usually be suspended for as long as the force majeure event exists. A force majeure clause may also provide for a party to terminate the contract should the force majeure event persist past a certain period of time.
The most commonly used force majeure clauses will either contain:
- a closed list of specified events which the parties agreed shall constitute force majeure events (e.g. acts of war or terrorism, civil or military disturbances, nuclear or natural catastrophes, pandemics or acts of God) (Scenario A); or
- a more generic provision that qualifies what could constitute a force majeure (e.g. “no party shall be liable for any failure or delay in performance of its obligations under this Agreement arising out of or caused, directly or indirectly, by circumstances beyond its reasonable control”) (Scenario B).
(Hybrid force majeure clauses containing a combination of Scenario A and B can also exist.)
When considering the application of specific force majeure clause, there are several key factors to consider:
Governing law and interpretation
Whether a party can rely on a force majeure clause for relief, should it be unable to perform a contractual obligation as result of Covid-19 lies not in a “one size fits all” approach, but needs to be evaluated on a case-by-case basis, assessing the particular situation, reasons for the breach and the relevant contractual provisions applicable.
The first step in such an assessment will be to establish what the governing law of the contract is, as this shall determine how the force majeure clause will be interpreted as well as which type of relief a party will be entitled to. For example, with regards to contracts governed by Guernsey law, specific performance cannot generally be claimed for breach of contract as it is not a readily recognised remedy in our jurisdiction.
As force majeure is not a common law concept under English law, but contract specific, it seems to be the general consensus that where a closed list of events are specified in a force majeure clause (as set out in Scenario A), it shall be interpreted in a stricter manner by only relying on the specific words used in the clause in order to interpret and evaluate whether a specific event falls under the force majeure clause. For example, should the term ‘natural disaster’ be omitted from the force majeure clause, a party will not be able to rely on the clause for relief from its obligations should a tsunami prevent it from performing its duties under the contract. Such a party will have to pursue alternative means to find relief for its breach of contract.
Due to the declaration of Covid-19 as a pandemic, the inclusion of the term “pandemic” in a ‘Scenario A force majeure clause’ would thus support the argument that Covid-19 falls under a force majeure event, however despite previous pandemics such as swine flu and Ebola, there has been no reported case law in Guernsey or England directly on the operation of force majeure clauses in the context of epidemics or pandemics.
In instances where force majeure clauses do not contain a closed list of events but refer to “events that cause disruptions in performance beyond a party’s reasonable control” (Scenario B), unforeseen disruption to lives and businesses that we are now seeing as a result of Covid-19 is exactly what one would envisage such a force majeure clause was constructed to address. This does not take away from the fact that, in order to determine whether a force majeure clause had been triggered, one will need to consider the contractual wording (interpretation) and the impact of the relevant circumstances on the parties.
Impossibility, mitigating factors and other aspects to consider
Establishing whether an event occurred which triggers a force majeure clause is not the only element a party needs to prove in order to claim relief thereunder. It is common practice that the following questions will also need to addressed in order to claim relief under a force majeure clause, namely whether:
- the force majeure event was the cause of the inability to perform or delayed performance;
- performance is truly impossible and due to circumstances beyond a party’s control; and
- the risk of non-performance was foreseeable and able to be mitigated.
The fact that a party finds its contractual obligation more difficult, more expensive or less profitable to perform as a result of Covid-19 would not be sufficient to trigger a force majeure clause. In this context, Covid-19 would have had to result in such obligation been made physically or legally impossible to perform in order to be sufficient to absolve the party in question of its duty to perform. As a result, where a party anticipates falling into difficulty with meeting its contractual obligations (e.g. experiencing staff shortages or issues with delivery due to Covid-19), it will not be able to rely on force majeure where alternatives to such problems may be available, even if it is as a higher cost. Furthermore, a party would only be able to claim relief under the clause in respect of that specific obligation which has been made impossible to perform, with its outstanding obligations remaining unaffected.
A further critical factor to consider before a party relies on force majeure for relief, is whether it has done everything reasonably expected of it to mitigate its losses, as failure to do so could affect its recoverable damages. In this specific Covid-19 situation, mitigating steps might include, considering alternative suppliers or alternative methods of delivery, being pro-active by assessing current and future impacts of Covid-19 on a party’s obligations and taking pre-emptive steps to avoid or mitigate any future non-compliance, renegotiations (or attempted renegotiations) of the terms of the contract that causes issues (since most contracts can be amended by agreement between parties) and filing loss of business or interruption claims (if insured).
Proper record keeping
It is imperative that detailed records be kept in respect of the situation that caused performance to be made impossible as well as all attempts and steps taken to find alternatives or to mitigate such interruptions. Such detailed record keeping may be a party’s saving grace when claiming absolution of a contractual obligation based on force majeure.
A party wishing to rely on a force majeure clause should follow the procedural requirements set out in the contract. Not doing so in a timely manner can result in a party relinquishing its right to claim relief under the clause. This includes notification requirements in respect of a party’s intention to rely on the force majeure clause to the other party within a specific timeframe as well as any general formalities required for the service of notices. Careful consideration must be paid to which event or circumstance a party alleges constitutes the force majeure event, taking into account the wording of the clause and the timeframe required for service of notices.
Force majeure could potentially be a contractually and legally beneficial resolution that provides a real possibility for businesses to deal with the current Covid-19 situation, provided necessary requirements are met to trigger such a clause. A case by case assessment is however essential before implementation of these options as determining whether performance is excused by a force majeure clause can be a difficult and highly fact-sensitive exercise. Consequently, it is vital that businesses which might be affected by Covid-19, carefully review all material commercial agreements and evaluate their risk profiles in connection with Covid-19.