30 March 2020 - Post by:Jason Rix
In the light of COVID-19, below is a road map to help you when assessing whether or not a force majeure clause has been triggered in an English law agreement.
But first, an apology: you are probably overwhelmed with lists like this. I originally put it together on Friday 13 March (a lifetime ago) with my colleague Karen Birch, based on an internal checklist that I and Helen Biggin had prepared for Brexit (remember that?). I hope, nonetheless, you find it useful.
For recent force majeure cases covered by Compact Contract click here.
1. EVENT: Is COVID-19 (or, more likely, a measure put in place to deal with it) an event that is covered by the clause?
- This is a question of interpretation so the usual rules apply.
- Most force majeure clauses contain a list of events which will constitute a force majeure under the contract. The ejusdem generis principle (lit. “of the same kind”) may mean that COVID-19 (and/or any measure to deal with it) will be held to be within the scope of a force majeure clause only if it is of the same “type” as the events listed in the clause. However, this will ultimately be a matter of interpretation (eg the list may or may not be exhaustive) and the principle can relatively easily be disapplied. For an example of the types of difficulties that can arise see Tandrin Aviation where the court held, “Whilst there is no requirement to construe the phrase “any other cause beyond the Seller’s reasonable control” ejusdem generis with those earlier specific examples, it is telling that there is nothing in any of those specific examples of force majeure in [the clause] which is even remotely connected with economic downturn, market circumstances or the financing of the deal”.
- An “act of God” has been held to include “… something overwhelming such as storms, lightning, and tempests, which could not happen by the intervention of man” and “an extraordinary circumstance which could not be foreseen, and which could not be guarded against”.
- If the clause simply refers to “force majeure” without further elaboration, although it is not a term of art under English law there is quite a long and detailed exposition of what it may mean in Lebeaupin v Richard Crispin: “This phrase “force majeure” has been introduced into many English commercial contracts within recent years. It is employed not only with increasing frequency, but without any attempt to define its meaning or any effort to co-ordinate the phrase to the other provisions of documents. It is a phrase employed in the Code de Commerce of France. [The judge then quotes from a French textbook] “This term is used with reference to all circumstances independent of the will of man, and which it is not in his power to control, and such force majeure is sufficient to justify the non-execution of a contract. Thus, war, inundations, and epidemics, are cases of force majeure; it has even been decided that a strike of workmen constitutes a case of force majeure.” This is a wide definition, but I think that it usefully though loosely suggests not only the meaning of the phrase as used on the Continent, but also the meaning of the phrase as often employed in English contracts. … the phrase “force majeure” [is] not interchangeable with “vis major” or “the act of God.” It goes beyond the latter phrases. Any direct legislative or administrative interference would of course come within the term: for example, an embargo.”
- It may be more difficult to establish that an event is force majeure if it was foreseeable (which may be relevant for contracts entered into very recently), but this is not necessarily determinative. Trade and Transport v Iino Kaiun Kaisha suggests that if an event is foreseeable it should not fall within a force majeure clause but in Channel Island Ferries v Sealink the court came to the opposite conclusion.
2. CAUSATION: Has COVID-19 (or have measures put in place to deal with it) affected the ability to perform in a way that triggers the clause?
- For a force majeure clause to be triggered, it is generally necessary to show that, as a result of the event, performance has become physically or legally impossible, and not just more difficult or unprofitable. This is a high bar. A change in the market conditions that renders performance more expensive is not likely to be a force majeure event.
- However some clauses may have a different express triggers (eg that performance has become “impracticable”).
- The devil will be in the detail. It may be difficult to say whether or not performance has been rendered truly impossible as a result of the force majeure event.
3. What are the mechanics of the clause?
It is important to consider the mechanics of the force majeure clause, both when considering invoking the clause and when responding to steps taken by another party to invoke the clause. For example: are there any general reporting obligations? is there a formal process for notifying a force majeure event? and, in either case, are they conditions precedent, so that failure to comply would prevent reliance on the clause?
Generally you should comply, strictly, with any notice provisions.
4. What are the consequences of triggering the clause?
Understanding the consequences of triggering the clause is also key.
For example: does it allow you to terminate the contract or suspend obligations? and, does the clause explain how the relationship is unwound (if indeed it is)?
Insured parties may find their insurers requesting that they invoke force majeure clauses if that would result in any loss being mitigated.
5. What are the consequences if the clause is improperly triggered?
Unless it is absolutely clear that a force majeure clause can be triggered (which in many cases it will not be) you should consider the consequences of invoking the clause where there may have been no entitlement to do so.
6. Will a force majeure clause apply if it can be shown that a party would not have performed its contractual obligations regardless of COVID-19?
In Seadrill Ghana v Tullow Ghana the court held that the force majeure event must be the “only effective cause” of default by the party under a contract seeking to rely on a force majeure clause.
In Classic Maritime Inc v Limbungan, the Court of Appeal, in overruling the trial judge’s award of nominal damages, held that a charterer could not rely on the “exceptions” clause in the contract as it would not have been ready and willing to provide cargo for shipment even if the exceptions event (the bursting of a dam) had not occurred.
7. What impact will other clauses (or the position as a matter of law) have on the analysis?
It is important to check provisions other than the force majeure clause since: they may inform the interpretation of the force majeure clause; and they may also be triggered eg MAC, illegality, change of law, obligation to perform on “business days” etc.
It is also necessary to consider matters outside the contract, for example whether the contract has been frustrated. However, if your force majeure clause deals fully and completely with an event that would otherwise frustrate the contract, the doctrine of frustration will generally be excluded.
8. Is there an obligation to mitigate losses if you are unable to perform?
Even if it there is a force majeure event, a force majeure clause usually requires the defaulting party to show that it used its reasonable endeavours to prevent, or at least mitigate, the effects of the force majeure.
9. Is the force majeure analysis different for standard Ts and Cs?
In standard form terms of business, parties should consider the impact of the the Unfair Contract Terms Act 1977 and the reasonableness test.
- UCTA does not apply to “international supply contracts” (Section 26) – see Trident Turboprop v First Flight Couriers for an example.
- UCTA has complex anti-avoidance provisions (Section 27) which may mean it applies to contacts not expressed to governed by English law – see Kingspan s v Borealis for an example.