Force majeure and frustration in a coronavirus world – dealing with commercial contracts

Many new words and terms are coming into everyday language – coronavirus, pandemic and self-isolation to name a few.

In business circles there is a sudden interest in the words “force majeure”, which while not new have come to the fore in multiple conversations. Many commercial contracts include a clause about how to deal with the parties’ obligations in the event of force majeure.

These clauses are usually in fairly standard terms and often little attention is paid to them, perhaps because they are so rarely invoked. Until now, that is. So what does force majeure mean and how does it apply in the current situation?

What is force majeure?

Force majeure, which can be translated as “superior force”, is an unforeseeable and unavoidable circumstance that prevents someone from fulfilling a contract. Examples typically include war, riots and natural disasters, but they can be quite detailed and reflect particular concerns of one or other party – shortage of raw materials for food production, for example.

Subject to the wording of the contract, an event will qualify as a force majeure if it is beyond the reasonable control of the affected party; has prevented or hindered the performance of the contract obligations; and the non-performing party has taken all reasonable steps to avoid or mitigate the impact of the event.

How does a force majeure clause operate?

If you wish to claim that your performance is affected by force majeure, there may be notice provisions requiring you to formally notify the other party of your intention to rely on the force majeure clause. Any such provisions should be carefully followed with required notices issued in the manner stated by the contract, as failure to do so means the “defence” of force majeure, even if provided for in the contract, may not be relied upon.

Once invoked, the consequences of triggering a force majeure clause will differ from contract to contact. The contract terms may provide that a party is permitted to delay performance of its contract obligations until the force majeure event ceases; or it may provide for termination of the contract if performance has become impossible, for example where performance is time critical – often referred to as frustration where performance of the contract has become impossible.

A force majeure clause will only provide protection for a party in breach if the force majeure event is the true cause of the failure to perform. If the non-performance is due to any other reason then it will be treated as an ordinary breach of contract. So if a party is already in breach, it cannot be used to excuse that breach, but may still apply to stop the clock ticking on the time for which the breach continues, which may be relevant for termination and other purposes.

Is the coronavirus pandemic a force majeure?

Maybe. On the face of it a global pandemic is precisely the kind of event that you’d expect to trigger a force majeure clause. However, as there is no statutory definition of force majeure, whether or not current circumstances trigger your force majeure clause will depend on the wording of the specific contract clause. Some clauses will make reference to plague, epidemic or disease, while others may be drafted in more general terms and will require to be interpreted in light of all of the circumstances.

The Chinese government is reported to be issuing “force majeure certificates” to companies who have been unable to fulfil their contractual obligations in order to avoid penalties being imposed on them for breach of contract. The UK and Scottish governments are not taking this approach and we suggest that this is sensible as, in Scots law, an event is either a force majeure in line with the contract terms or it is not; a certificate cannot convert a non-force majeure event into a force majeure event, regardless of who issues it.

Who decides if Covid-19 is a force majeure or not?

The party seeking to rely on the force majeure clause to excuse its breach of contract has the burden of proving that the current Covid-19 crisis constitutes a force majeure event and triggers the relevant contract clause. And circumstacnes may change – a full lockdown preventing employees from attending work is different from a recommendation not to do so.

In reality we would expect that parties, particularly those with an existing commercial relationship, will be prepared to enter into reasonable discussions about the impact of the current circumstances, but if there is a disagreement and a judicial or arbitral determination is required, it would be for the non-performing party to prove its case.

What if my contract doesn’t have a force majeure clause?

Force majeure is a contractual concept and cannot be invoked if there is no relevant term in your contract. If the contract has become impossible to perform, however, it may be possible to rely on the common law doctrine of frustration in order to bring the contract obligations to an end as a result of the current, unforeseen circumstances.

Get in touch

Please contact our commercial contracts team if you have any concerns about the impact of coronavirus on your contracts.

We can review contracts to assess the risk of non-performance resulting in future claims against your business or your ability to enforce contract terms against third parties. This may help you assess which contracts to prioritise and to quantify any potential losses arising.