Legal Implications of a Force Majeure Clause
April 17, 2020
Aaron Marshall, head of our dispute resolution department at AFG LAW, explains the potential legal implications arising from sale contracts and contracts involving goods in this article.
As the global crisis arising from the ongoing spread of COVID-19 (coronavirus) continues, we have been examining the potential legal implications arising from sale contracts and contracts involving goods.
English law does not have a general concept of force majeure. Therefore, any claim to ‘force majeure’ must rely on a contractual term. If there is no such applicable term, then the party must establish that the contract is frustrated as a whole, so that the contract is effectively null and void. This involves seeking to prove that the performance of the contract has changed radically from that which was envisaged.
Where there is a contractual force majeure term, the English courts will pay very close attention to how the clause itself is worded.
What will a general force majeure clause do?
A general force majeure clause will stipulate its specific effect, for example giving rise to a right to delay or suspend performance or to a right to cancel the contract. If the clause does not provide for cancellation rights a right to terminate will not arise under the clause. The party seeking to remove itself from the contract would then have to fall back on the legal doctrine of frustration to avoid exposure to a claim for default.
The clause will usually list a number of events that constitute force majeure, followed typically by a generic catch-all provision. An event in the list needs to have occurred to trigger the effect of the clause.
General catch-all wording such as ‘all other causes beyond the control’ will need to be treated with caution, as the ‘other causes’ must be similar in kind to the specific events previously listed in the clause. If on the other hand the general wording is ‘all other causes whatsoever’, that will widen the scope of events that will trigger the clause.
Whether there is / has been a relevant event will depend on the facts and crucially, there must be a causal link between the event and the prevention or hinderance of performance.
Any such force majeure clause will typically provide that the relevant event must be beyond the control of the party seeking to rely on it, as well as prevent or hinder performance. Generally, it will not be sufficient to show that a relevant event has merely caused delay. If a party can perform its obligation by taking reasonable steps to mitigate the effect of the event (by an alternative method of performance) then it should take those steps.
Similarly, the party attempting to rely on a force majeure clause may be required to prove that it would have been able to perform the contract if the event had not occurred.
Finally, if the clause contains notice provisions the courts require strict adherence to such requirements, failing which the notice will not be effective.
The alternative remedy of frustration involves proving that a supervening event outside the parties’ control has defeated the commercial purpose of the contract.
Considering whether such a term is applicable, it is important first off to identify what contractual obligation is at risk of non-performance and its degree of importance to the contract as a whole.
Primary obligations that go to the root of the contract include the supply of goods and payment for goods or of freight. An inability to perform this sort of obligation (or extreme delay in performing it) may lead to termination and claims for default unless a contractual term or the doctrine of frustration apply to relieve the obligated party from any such liability.
Breaches of minor obligations due to delay or inability to perform will usually only give rise to damages unless a contractual term protects the obligated party. The doctrine of frustration will not apply in such situations.
Both force majeure and frustration are difficult doctrines to rely on to release a party of their performance obligations. Because the effect of a force majeure clause is the ending of a contract or suspending performance, it will be strictly interpreted. It will therefore not be straightforward to apply with any certainty in any given case. Similar considerations apply to assertions of frustration.
The best recommendation, especially given the present levels of uncertainty, is to investigate all avenues for alternative performance.
Whether coronavirus is a force majeure event will depend heavily on the facts of any given situation and on the specific terms of any contractual provision. Every care should be taken in giving notice of force majeure to ensure that the notice correctly identifies a qualifying event and is given in accordance with the relevant clause. An incorrect declaration of force majeure will most likely amount to a repudiatory breach. Likewise, a party in receipt of a force majeure notice should proceed with caution and check the underlying contract(s) to determine whether force majeure is in fact applicable.
Contact Aaron on 01204 377600 or email email@example.com to discuss your own situation.