Coronavirus seems to be the major headline at the moment. While the pandemic’s long-term impact on the economy, society and politics is not yet certain, we all know that major changes lie ahead.
One of these changes may be the way that commercial contracts and more importantly, force majeure clauses are drafted in the future. After all, not even force majeure clauses saw coronavirus coming…or did they?
What is a force majeure clause?
Force majeure clauses are found pretty often in commercial contracts. They are all about predicting the unpredictable. War? Earthquake? An ‘Act of God’? You name it, force majeure clauses will cover it.
There is no ‘default’ definition of force majeure. However, the general understanding of this term is:
A force majeure clause is an express contractual provision which is designed to exclude liability for non-performance of a contractual duty in the occurrence of an event which has happened beyond the control of the contracting parties. Usually, one or none of the parties will be at fault.
Allow me to break this down a bit.
A force majeure clause allows the parties to either temporarily suspend their obligations to perform or to completely terminate the contract on the occurrence of a force majeure event. Usually, it is up to the parties to decide beforehand which route to take.
What is the effect of a force majeure clause?
A force majeure clause essentially acts as a shield which protects a party from the consequences of not performing their contractual obligations. In other words, it provides a valid excuse for them not doing what they were contractually obliged to do. Here is an example:
X (seller) and Y (port owner) had a contract where X would ship his goods to Y’s port every Monday at 10am. The contract included a force majeure clause which defined any significant natural disasters as a force majeure event. If a hurricane occurred on Sunday and resulted in the temporary closure of the port the following day, X would not be liable for the late delivery of his goods.
When will a force majeure clause be enforced?
While force majeure clauses may seem pretty unusual and far-reaching, the courts usually tend to enforce them. This was confirmed in the case of J. Lauritzen AS v Wijmuller BV, The Super Servant Two  1 Lloyd’s Rep 1.
Although it is not fundamental, both parties are usually advised to agree on an exhaustive list of what constitutes a force majeure event and what does not. Furthermore, they should also agree upon their rights and obligations if a force majeure event does occur. This is simply to make the litigation process simpler if things do go wrong.
What does a force majeure clause look like?
Here is an example of an exhaustive definition of a force majeure event.
So, in what format will we see a force majeure clause? Here are a few examples:
‘Neither [Party X] nor [Party Y] shall be considered to be in breach of this contract to the extent that performance of their respective obligations is prevented by an event of force majeure that arises after the effective date.’
‘Neither Party shall be in breach of their contractual obligations under this Agreement (other than payment obligations) or incur any liability to the other Party for any losses or damages of any nature whatsoever incurred or suffered by that other (otherwise than under any express indemnity in this Agreement) if and to the extent that it is prevented from carrying out those obligations by, or such losses or damages are caused by, a force majeure event.’
‘Neither Party shall be responsible for any failure to perform its obligations under this contract, if it is prevented or delayed in performing those obligations by an event of force majeure.’
What happens if a force majeure event occurs but your contract does not include a force majeure clause?
As we previously established, a force majeure clause is an express contract provision. Therefore, if it is not in the contract, you cannot rely on it. However, there is another remedy for parties that find themselves in this position…the doctrine of frustration!
If your contract does not include an express force majeure clause, it may be that your contract has been ‘frustrated’ by a supervening event. This means, that if an unforeseeable event has occurred which has resulted in your inability to perform your contractual obligations, you may be discharged from your duty to perform. However, the event must destroy the purpose of the contract for both parties (Krell v Henry).
There are also other types of frustration. A contract can be frustrated by:
Supervening impossibility: where the circumstances no longer make the contract performable. Examples of this include:
- Destruction of subject matter – Taylor v Caldwell.
- Temporary impossibility – for example, if a party could not perform on the particular day due to illness (Robinson v Davison).
- Death of a party – Stubbs v Holywell Railway Co.
Unavailability of subject matter: where the subject matter of the contract is no longer available.
- Gamerco SA v ICM: The venue (concert stadium) was declared as unsafe and no replacement venue could be secured in time.
Supervening illegality: where a supervening event causes the contract to become illegal. This is very rare.
- Fibrosa Spolka Akcyjna v Fairbairn: English firm had contracted with a Polish manufacturer. Shortly after, WW2 was announced and Poland was the enemy. It became illegal to contract with the enemy.
Supervening impracticality: where the circumstances no longer make the contract commercially practical.
- NOTE: Mere commercial inconvenience (eg; paying more money) will not constitute frustration – Davis Contractors; Amalgamated Investment.
The doctrine of frustration sounds like a dream come true, right? Wrong, there is a catch.
Unfortunately, the doctrine of frustration is widely considered as a ‘residual doctrine’. This means that it is very rarely used, and will only be applied in the most exceptional cases. Therefore, it is probably safest not to place all your bets on frustration, and you should seek other remedies first.
Does the COVID-19 crisis constitute a force majeure event?
While a pandemic is not usually included in force majeure clauses, some industries would suffer from this lack of protection more than others.
Consider this example.
Party X agrees to supply Party Y with goods for an agreed price on an agreed date. In order to perform his contractual obligation, Party X must transport the goods from his warehouse to Party Y’s shop. However, due to the breakout of COVID-19, many of Party X’s workers decide to self-isolate and not go to work. Party X is now suffering from an extreme shortage of labour and he will be unable to deliver the goods on time.
In this example we can see the impact of coronavirus on the service and manufacturing industries. Further problems could include redundancies and disruptions to service and supply chains. As a result, coronavirus and any similar pandemics/epidemics may qualify in future contracts as a force majeure event.
Only time will tell…