Without wanting to state the obvious, the outbreak of the Coronavirus, in addition to the obvious health issues, is impacting the financial markets, trade and commerce generally. As a result, we are seeing an increasing number of enquiries about commercial contract terms and the effect of Force Majeure clauses.
What is a Force Majeure Clause?
A Force Majeure clause is commonly included in standard commercial contracts – part of the “boilerplate” clauses that we don’t often have to consider in detail.
A Force Majeure clause covers the situation when certain conditions apply which are generally unforeseen and which prevent a contract being performed. This could include natural disasters such as Earthquakes (Acts of God) or human made disruption such as industrial action or war.
The effect of the clause is to define what happens if such an event occurs. It may allow for one party informing the other party that they are claiming Force Majeure and the effect of that, for example, no party can be liable for losses caused as a result of the Force Majeure event.
Using the Force Majeure clause
The first thing to check is whether the clause covers Covid-19. As the virus is relatively new, it is highly unlikely that it will be referred to specifically, but the clause may refer to Epidemic or Pandemic. It may also refer to actions by government.
Assuming that it is covered, it is for the party wanting to rely on the cause to prove its case, i.e. that the Force Majeure event has impacted the performance of the contract for example an event being cancelled due to the Coronavirus.
There could be a dispute over the cause – was it the virus itself or was it action taken following the virus outbreak e.g. emergency legislation brought in due to the outbreak. In short, it will come down to the wording of the clause.
If the clause covers the event, this may suspend the contract or define that it is terminated and the net effect of that suspension or termination such as payments which have already been made under the contract.
Advisory Steps
As with all these things, it’s worth checking whether any of your contracts may be impacted by the outbreak of Covid-19 and then to consider the wording of those contracts and specifically the wording of a Force Majeure Clause (if there is one). If there isn’t, then it’s likely that you would be considering the doctrine of frustration – which may apply if contractual obligations are impossible to perform but when there is any doubt, you should take legal advice.
Simon Smith | 360 Law Services Litigator