Search

Covid – 19 scenario of force majeure in contracts


By Dhammika Ranasinghe – Partner Chambers Colombo

Force majeure refers in contracts to absolve liability for natural and genuine unavoidable catastrophes that are beyond the control of a party (to a contract), that interrupt the expected course of events and restrict or prevent the parties from fulfilling contractual obligations.


Fundamentals of force majeure in a contract are,

If non-performance of a party to a contract is,


i. due to an impediment which is beyond the reasonable control of that party and


ii. could not have reasonably foreseen by that party at the time of conclusion of the contract, and


iii. neither the impediment nor its consequences could have been avoided or overcome by the non - performing party ,and


iv. the non-performing party did not assume, explicitly or implicitly, the risk of the occurrence of the impediment


that party is excused for non performance of respective contractual obligation/s.


The term ‘force majeure’ translates literally from the French as ‘superior force’. This can invoke a sense that such an event must be catastrophic and outside the Parties’ control, similar to ‘Act of God’


If non-performance is only for short period and performance of the contract is suspended during that short period of time that the period of non-performance becomes unreasonable, the other party may claim damages and terminate the contract.


Unless otherwise agreed by the parties expressly or impliedly, Force majeure events as mentioned above are impediments such as,


  • war, whether declared or not, civil war or any other armed conflict, military or non-military interference by any third party state or states, acts of terrorism or serious threats of terrorist attacks, sabotage or piracy, strike or boycott, acts of governments or any other acts of authority whether lawful or unlawful, blockade, siege or sanctions, or

  • accidents, fires, explosions, plagues, pandemic or epidemic

  • natural disasters such as but not limited to storm, cyclone, hurricane, earthquake, landslide, flood, drought etc., or

  • any event of a similar nature *


Notice is required

Notice of failure to perform shall be given to the other party and its effect on its inability to perform. If the other party does not receive such notice within a reasonable time after the party who fails to perform knew or ought to have known of the impediment, the party is liable for damages resulting from such non-receipt.


The notification requirement results from the application of ‘Trans-Lex Principle’ (duty to notify) in the force majeure context. The non-performing party's duty to notify the other side of the impediment is a contractual duty where the other party may claim damages pursuant to Trans-Lex Principle VII.I (damages in case of non performance) if the non-performing party violates this duty of noticing.


Common Issues with Force Majeure Clauses

The drafters appear to have spent inordinate amounts of time trying to include every possible catastrophe that could cover the parties from fulfilling contractual obligations. Thus they end up including vague and imprecise Force majeure clause into contracts.

There is no general doctrine of ‘Force majeure’ under English law, unlike the position in French law from which the term Force Majeure derives. In essence,whether or not such a clause applies to a particular circumstance entirely relies on the precise wording used and the proper construction of the contract as a whole. This could lead to a frustrating process; where the interpretation of the meaning would be entirely in the hands of judges.


A very general force majeure clause would read as;

‘Force Majeure: where a party is affected by a force majeure event or circumstance, they shall not be liable for any failure or delay in performance of their obligations under this contract if such failure or delay is caused by that force majeure event.


‘A force majeure event is any event which is not due to the fault of the party seeking to rely on this clause, beyond the reasonable control of the parties and could not have been reasonably avoided.’

‘examples’ of force majeure events commonly defined in case law such as ‘riot, war, invasion, earthquakes, floods, fire, Act of God, strike, industrial disputes’ and then tag additional wording to the end of the clause to the effect ‘or any other causes beyond the parties’ control’.

There are a number of issues that could arise with these clauses and which could give rise to litigation.

Qualifying under Force Majeure

Force majeure requires that performance under the contract becomes physically or legally impossible for the party invoking the force majeure defense.

The mere fact alone that performance of a contract becomes economically more onerous or commercially less attractive for one party does not constitute a force majeure event even though the lack of funds may have been caused by a force majeure event listed in force majeure clause.

  • A change in economic or market conditions, affecting the profitability of a contract or the ease with which a party's obligations can be performed, does not constitute a force majeure event.

  • Lack of funds may be considered a force majeure event, if the parties have extended the scope of force majeure to such scenarios in their contract in the force majeure clause, if the economic onerousness of performance comes close to a physical impossibility to perform.

  • Certain clauses expressly provide that additional costs incurred due to the inability to perform or perform on time will be borne by a particular party. If not, then it is likely that costs will be borne by the party that has incurred them, because there is no contractual provision to override it.

  • If a seller has problems with his supplier, that situation does not in and of itself constitute a force majeure event. The seller's responsibility for its supplier is part of its general procurement risk, unless the seller has included a "delivery-against-supply clause" into the contract.

No Profit – no loss

No party should derive an advantage from the force majeure event. This "no profit-no loss" rule is expression of an international standard of fairness.

The meaning of ‘fault’-

In some clauses it is specified that the force majeure event must not be due to the fault of one or both of the parties. In determining whether or not the event is due to the fault of a party, there are significant overlaps with whether or not the event was within their reasonable control, as discussed above. Aside from this, there is not much consideration of the meaning of ‘fault’ in itself in relation to force majeure clauses. In some case the words ‘fault or negligence’ will be specified, and this usually means actionable negligence as opposed to the more colloquial use of the term. This is likely to be due to the difficulty in showing that it was in fact on party’s ‘fault’ without a further test as to whether or not they should be prevented from relying on the force majeure clause as a result.


One of the leading commentators considers that the law in this area is still open, and as this is often subsumed in the discussion of ‘reasonable control’ (if ‘fault’ is specified at all) it may remain open for the foreseeable future. In any event, the general principle that a party cannot rely on or take advantage of his own wrongdoing would presumably operate and could potentially cover ‘faults’ which fall outside of negligence and default under the contract. This is doubted in the commentary, see Benjamin at 8-081 and Chitty at 15-163 where it is suggested that failure by a third party to fulfill his contract would not suffice to form a force majeure event. However the cases set out above appear to cast doubt on this broad generalization, and therefore interpretation will entirely depend on the contract wording in question.

Parallels can be drawn with self-induced frustration, where the meaning of ‘fault’is discussed in more detail in the commentary, albeit not to any great extent. The overriding them appears to be that there must be some wrongful conduct which amounts to ‘deliberate commission of a wrong or to want of care and diligence’, which would presumably rule out genuine accidents or mistakes. Of course this then engages whether or not an act, omission or possibly mistake, was ‘beyond the control’ of a party, but this will depend upon the circumstances case by case.


Judicial review (case law)

  • What counts as a ‘force majeure’ event or ‘other cause beyond the parties control’?

  • Do the courts have any specific principles in respect of events of force majeure?

  • Whether the event must be ‘beyond the reasonable control’ of the parties;

  • Does the event have to prevent performance? Or only make it more onerous or difficult?

  • The meaning of ‘fault’;

  • Does the force majeure event have to be unforeseeable?

  • Type of event

As is often the case with fairly niche areas of contract law, an side effects in the absence of principles guiding the courts’ approach to this area is that unwitting parties may assume too much to their cost. Particularly those who may not have had the benefit of extensive legal advice on the precise construction of this type of clause could run the risk of drafting too wide a clause without realizing the broad range of events, which can count as a Force majeure event. Therefore it is necessary to narrow their clause to specified transactions and related events.


Should there be physical or legal impossibility, or is increased difficulty sufficient?

As noted above, force majeure clauses are dependent on their wording and do not in general appear to be restricted in any particular regard as a matter of law; rather they must be construed in accordance with their precise wording and the general interpretation of the contract. As a result, there is no reason why parties cannot specify the degree to which the obligation is prevented, for example that such obligation has become more onerous.

However, in the absence of such wording, it does not follow that a court could interpret this type of clause to include increased difficulty. There is no authority, which expressly states that a force majeure clause ought to be interpreted narrowly against the party seeking to invoke it. However, as a matter of general principle and drawing from the similarities with such clauses and exclusion clauses, it follows that there ought to be a requirement for clear and express wording the very least. It seems to be that in the absence of any clear wording that increased difficulty would suffice; a party would have to show either legal or physical impossibility.

If we take the example clause set out above, ‘delay’ is sufficient to bring it into operation, as long as the relevant event ‘caused’ the failure in performance. This particular clause is very widely drafted but not uncommon in force majeure terms and the courts have had to grapple with the meaning and extent of the ‘delay’. In particular, readers will be unsurprised to learn that ‘delayed’ is not to be treated as equivalent to ‘prevented’, but circumstances, which ‘hinder’ performance, may fall within the clause.


*click here for case law


Covid -19 scenario

No event is, in itself, a Force majeure event unless it qualifies by cumulatively meeting the fundamentals as discussed above. Having said that, seeking cover under Force majeure is entirely depends on each individual case.


One decision has already been rendered by French Courts in relation to the Covid-19 pandemic and Force majeure (Colmar Court of Appeal, 12 March 2020, n°20/01098). Although this decision was not rendered in a contractual matter, the Court held that the circumstance that the defendant was unable appear in person before the Court due to his potential infection of the virus constituted a case of Force majeure. It remains to be seen in which circumstances Courts will uphold Force majeure in cases involved in contracts. Such judicial intervention is absent even in the case of 9/11.


Ongoing contracts and future contracts

With respect to your ongoing contracts as well as contracts that are intend to enter into in near future, it is recommended to investigate whether they contain obligations which must be performed within a deadline falling between now and at least next 18 months ahead. If so, the contracting parties should consider careful construction of Force majeure clause in the contacts.

Contracts already in force, which you suspect could be affected by the Covid-19 pandemic, it is recommended to examine whether they contain relevant force majeure and/or hardship clauses and, in the affirmative, whether those clauses may cover the fundamentals as a result of Covid-19 pandemic on the non performance of the contracts. These clauses an expert to ascertain what review me their effects are on those contracts and the possible requirement of meeting procedural conditions.

Contracts to be drawn up for future, it may be necessary to construct proper clauses modifying Force majeure, depending on whether the business may be affected by the current circumstances and their potential evolution


Documents:

Proper documentation of the real impact and mitigation measures in line with fundamentals in Force majeure is important in a subsequent dispute to help courts or arbitrators to determine liability.


Procedural aspects of invoking Force Majeure

A business seeking to invoke Force majeure must comply with any procedural requirements under the contract, such as a requirement to give notice of its intention to rely on the clause to the other party within particular timescales, including any formalities required for the service of notices. Some contracts carry clauses that require updates to be provided and/or an express obligation to mitigate.


It is important to check whether there are any insurance policies in place to cover the losses in a situation like pandemic, including whether the business is covered in the event of nonperformance as a result of a pandemic.


In the case of no Force Majeure

Force majeure is a creature of contract and not a rule imposed by the general law. In the absence of a Force majeure clause, an affected party may seek other provisions of the contract for possible remedies for difficulties in performing contractual obligations. If the contract does not provide any such routes, it may in certain circumstances be possible to rely on the doctrine of frustration of contract.

  • Judicial remedy under frustration of contract would be a difficult task and it is not intended to include in this article.

  • Test for prevention - It is recommended paying further attention to the test for "prevention" of performance under Force majeure clauses; the fact that performance has been made more difficult or costly is not enough. In addition, it is questionable whether an epidemic, or even a pandemic, would be considered to be unforeseeable, given previous recent epidemics and warnings that further epidemics or pandemics are likely to occur. However, it might be possible to argue that the extent of the global government enforced lockdowns was unforeseeable in this particular Covid-19 situation

  • Possible obstacles: It may be difficult to use COVID-19 to claim force majeure in the absence of government policies such as travel restrictions or lockdowns that have created impediments to business operations, because it would be difficult to determine at what point exactly COVID-19 could be categorized as a force majeure event. For example, if the government enacted a citywide curfew and ordered companies to halt business operations, and during the lockdown a business failed to perform its contractual obligations, it is clear that COVID-19 could be categorized as a force majeure event during such period..

  • Mitigating damages to the other contracting party: We would suggest parties seeking to invoke force majeure for nonperformance take reasonable steps to mitigate the foreseeable damages brought about by the nonperformance, to strengthen its case in legal proceedings.

There is no doubt the COVID-19 pandemic has presented unprecedented challenges and impediments to businesses in conducting their normal operations. It is imperative that businesses enact policies and measures to protect themselves during this time.


Conclusion

In English law, force majeure is a creature of a contract and not of the common law. It therefore is a general legal concept and where courts may declare that a particular event, such as a pandemic like Covid-19, is a force majeure event.

In unprecedented global pandemic situation like the present, the courts are likely to be generous in their interpretation of this sort of wording when faced with parties who have encountered genuine impediments in performing provided that such parties will still need to show that their non-performance, or late performance was truly within those fundamentals of Force majeure

As much as in all other scenarios as discussed above, in order to trigger the Force majeure, it is imperative that the key elements that was reviewed in this article has to be fulfilled by the contracting party seeking redress.

Use of this Web site and materials presented on it is subject to the following terms and conditions.  By using this site, you agree to these terms and conditions and acknowledge reading them.

Disclaimers and disclosures:

Communication of information by, in to or through this Web site and your receipt or use of it

· is not provided in the course of and does not create or constitute an attorney- client relationship,

. is not intended as a solicitation,

· is not intended to convey or constitute legal advice, and

· is not a substitute for obtaining legal advice from a qualified attorney.

You should not act upon any such information without first seeking qualified professional counsel on your specific matter. The hiring of an attorney is an important decision that should not be based solely upon Web site communications or advertisements

All materials on this website have been prepared for general information purposes only. The views expressed in any article or paper are the views of the authors only except as otherwise noted. Information presented is not legal advice, is not to be acted on as such, may not be current and is subject to change without notice

END OF DOCUMENT

www.chamberscolombo.com



91 views

Powered by Chambers Colombo IT