Force Majeure – But For How Long?
Nick Ashcroft, partner at Addleshaw Goddard
As the impact of coronavirus – officially named Covid-19 – becomes more far reaching than many of us could have ever imagined, many businesses have now taken the step to rely on Force Majeure clauses in their contracts.
However, with the UK government saying it is too early to consider an exit strategy and with predictions that the pandemic could last until spring 2021 when will business be expected to return to performing their obligations?
As a general rule, should a business fail to perform its contractual obligations it is at risk of being pursued for breach of contract.
Force majeure clauses are intended to protect against such claims where performance is prevented due to matters arising outside the control of the parties.
Most often, force majeure clauses are suspensory in nature meaning that the obligations affected by the force majeure event do not necessarily fall away and when the event is considered to have ‘ended’ the contractual obligations re-activate.
To consider how long the protection afforded by a force majeure clause will last, there is a need to consider the particular wording in the force majeure clause.
In particular, does the contractual wording require the event to have ‘prevented’, ‘hindered’ or ‘delayed’ performance? Should the force majeure clause require the event to have prevented performance, the party relying on the clause is likely to need to demonstrate that performance is impossible, not merely difficult or unprofitable (although this will depend on the exact wording of the clause).
The position in relation to delay is less strict and will focus on whether, because of the event, it is impossible to render timely performance. A hindrance clause is far less common in practice but has the potential for a much wider scope of applicability, generally thought to apply to events which make performance considerably more onerous in a way that is not purely financial.
The force majeure event also needs to operate as the sole cause of the failure to perform the obligation.
A change in economic or market circumstances increasing the cost of performance is unlikely to constitute a force majeure event.
This will be particularly significant as the current pandemic eventually reduces and is likely replaced with substantial economic challenges for many businesses.
Whilst there are some helpful starting points, there is a notable absence of case-law discussing force majeure in pandemic events and therefore knowing what standard to apply is difficult.
There are however some practical steps that can be taken to help. A party claiming the benefit of the force majeure clause should, throughout the pandemic, regularly evidence why performance maintains prevented. They should also demonstrate that reasonable steps are being taken to avoid, or otherwise reduce, the adverse effects of the pandemic and remain alive to mitigation responsibilities.
These may include exploring alternative means of performing or perhaps attempting different methods to reduce delay.
Finally in many contracts there will be an option for termination of the contract (rather than purely suspension) where the force majeure event continues for a certain period of time. Given that COVID-19 may be around for a while, understanding all the options available under any affected contract will become increasingly important.