By Admin | 25th April 2020
On 11 March 2020, the Director-General of the World Health Organisation had declared the outbreak of COVID-19 as a pandemic. Governments around the world are taking several contingency measures to mitigate the resulting global health crisis, including the imposition of lockdowns and curfews to varying degrees. The effects of the pandemic have sent shockwaves throughout the world and have severely disrupted global markets, trade, and commerce.
The rapid onset of such an unforeseen event has brought into focus a multiplicity of issues regarding the performance of contracts. Against this backdrop, the question of reliance on force majeure clauses to excuse non-performance of contractual obligations arises.
What is a Force Majeure Clause?
Force majeure is a creature of contract. The effect of a force majeure clause is to excuse a party from liability for non-performance or a delay in performing their contractual obligations, provided that certain requirements are satisfied. This is applicable typically in a situation where obligations cannot be performed due to circumstances beyond the control of a party to a contract, and where the party concerned has taken all reasonable efforts in that regard.
What does a typical Force Majeure Clause include?
Application of force majeure will depend on the precise wording of the clause, the allocation of risk between the parties in the contract, the circumstances in which the parties entered into the contract, and the situation that has arisen.
While the comprehensiveness of such clause may vary depending on the nature of the commercial arrangement, it is important that the clause is drafted with sufficient clarity.
Well drafted force majeure clauses will typically address the following aspects;
Defining Force Majeure Circumstances
It is important to identify the circumstances that would fall within the definition of force majeure in a contract. This is because as standard practise such clauses usually list out the circumstances that are covered by a clause of this nature. The typical circumstances include natural disasters such as acts of God, floods, earthquakes, tsunamis, and events of similar nature. Other political circumstances such as war, terrorism, revolution, labour strikes, and change of Government policies are also often included. In addition to these, medical situations such as epidemics or pandemics can also be sometimes covered.
Due consideration should also be paid to the ambit of a force majeure definition, at contract formation. This is because the foreseeability of certain circumstances can vary with location. For example, considering an event such as a tsunami, if a certain area is known to experience more tsunamis, then it cannot be said that this was an unforeseen event that prevented the performance of the contract.
While the definition of force majeure can be exhaustive, it is also not uncommon for clauses to refer to wider unspecified circumstances that are beyond the reasonable control of the parties. Ultimately reliance on such a provision will be a matter for contractual interpretation.
Use of Force Majeure Clause in the Covid-19 Pandemic
Consider the scenario where a business is based in Country X and the supplier for this business is based in Country Y. Country Y has been placed under lockdown with no businesses operating currently. The supplier may also be facing supply chain disruption and labour supply issues in Country Y. In such an instance the supplier would obviously be unable to perform their contractual duties in accordance with the terms (and timelines) provided for in the contract. The supplier may be able to rely on an existing force majeure clause in the contract excusing the non-performance of its obligations.
Reliance on such a clause depends on the specific wording of the clause. For instance, the definition of force majeure may include pandemics, and/or related contingency measures taken by governments such as curfews or lockdowns, that affect the performance of the contract. Alternatively, the pandemics and/or related contingency measures may fall within the ambit of a boiler plate force majeure clause that does not exhaustively list out specific events, but refers to circumstances beyond the control of the parties.
The clause will then usually prescribe the next steps required, e.g. a party claiming force majeure may have to notify its counterparty and take reasonable steps to mitigate the effect of the event impacting performance. Additionally, if the circumstance prevails for a defined period, the clause may suspend obligations for such period. The clause may even go further and entitle the affected (or either party) to terminate the contract upon conclusion of such period. In any case, the extent to which an affected party wishes to rely on rights available in the contract would ultimately be a commercial decision.
It is imperative that a party relying on a force majeure clause does so with care. This is because wrongful reliance could have serious implications, including a breach and/or repudiation of the contract. In such circumstances, the other party may be entitled to claim damages or to terminate the contract.
What would happen if there was a specific force majeure clause or no force majeure clause included in the contract?
In the absence of a force majeure clause in a contract, or if the circumstance does not fall within the ambit of an existing clause, then an affected party may have to pursue other means of avoiding liability.
In these circumstances, an affected party may be able to rely on frustration under English Common Law in relation to maritime and commercial matters, or in relation to civil matters vis major under Roman Dutch Law to set aside the contract based on supervening impossibility. The law applicable to the particular contract will determine the application of the relevant doctrine. According to C. G. Weeramantry whilst the differences in approach under English Common Law and Roman Dutch Law was of great importance in the early stages of legal development, they have since then lost significance.
Broadly, both frustration and vis major require the act resulting in supervening impossibility to be; unforeseen and unpredictable, beyond the control of the parties with mitigation being not possible; and it must not be self-induced to evade contractual obligations. Owing to the serious implications that follow, the threshold for proving frustrations and vis major may be high compared against reliance on contractual force majeure provisions.
Alternatively, and in relevant circumstances, an affected party may approach the counterparty to obtain a waiver or consent, excusing the non-performance of obligations for circumstances beyond control. The counterparty is under no obligation to accede to such a request and may do so at its absolute discretion.
This publication is solely for the purposes of general information of our clients and other interested persons. The aim is to provide a general overview of the topic and this should not be construed as legal advice.
© 2020 Varners.
Alert: COVID-19 : Situational Update
Insight: Force Majeure And Frustration In The Face Of COVID-19
Insight: Protecting Minority Interests
Insight: Traditional Construction Contract Or Design & Build: Making The Right Choice.
Article: The Impact Of Ouster Clauses In Modern Sri Lankan Jurisprudence