ONELAW CHAMBERS CIVIL LITIGATION NEWS: The effect of COVID-19 upon commercial contracts and the impact of a force majeure clause

27/05/2020 | Civil Litigation News | Isadora Carvalho

ONELAW CHAMBERS CIVIL LITIGATION NEWS: The effect of COVID-19 upon commercial contracts and the impact of a force majeure clause

The force majeure clause provides relief to businesses seeking to trigger the clause due to the inability to carry out the legal obligations stated in their commercial contract as a result of COVID-19 impacts.  Those facing difficulties in assessing whether or not a force majeure clause has been triggered in your agreement should find clarity in this short article. 

 

 

 

Effect of COVID-19 in commercial contracts:

 

COVID-19 has created an immovable shock and implications for industries and sectors around the world. Many businesses are suffering due to this pandemic and this is not an unforeseen revelation. The infuriating imbalance between carrying out their contractual commercial obligations but also understanding different avenues available to perhaps limit the scope of those obligations is tricky, however, not impossible. 

 

Commonly, commercial contracts typically accommodate mutually agreed clauses where both parties inevitably consent to their rights and obligations terms. With this in mind, parties also must highlight predominant and significant terms should anything go wrong. In these terms, a list of events which constitute relief from performing ‘some and/or all’ obligations stated in the contract. Essentially, events which are beyond the ‘reasonable control of the affected party’ preventing them from performing their part of the contract. 

 

What is the force majeure clause and when can you rely on it? 

 

In the UK, a force majeure clause is a limitation clause, which alters parties’ obligations and/or limits their liability for not performing their contractual obligations under ‘extraordinary circumstances which could not be foreseen and which could not be guarded against’, resulting in the prevention of fulfilment of obligations. Subsequently, these circumstances include pandemics, such as COVID-19.

 

Is COVID-19 an event trigger by a force majeure clause?

 

The sharply focused question above has left room for a number of interpretations for the expressions of ‘pandemic’ and ‘epidemic’, which all lead to one answer, COVID-19 was declared by the World Health Organization (WHO) as a pandemic due to the geographic spread around the world beyond expectations. 

 

Clarifying and identifying a force majeure clause:

 

The cloud of uncertainty lies in determining whether your commercial contract contains the provision clause (force majeure clause) will entirely depend if your contract has it in the first place. Otherwise, if the commercial contract does not contain the provision clause you will not be able to rely on it.

 

Steps you should take to safeguard yourself and whether you can rely on a force majeure clause under the COVID-19 pandemic:

 

  1. Identify whether a force majeure clause exists within your contract (which allows relief for non-performance);
  2. Identify which ‘events’ IF ANY you are protected under;
  3. Assess whether or not COVID-19 falls within the scope of the ‘events’ limiting liability (this will depend on how your contract is drafted);
  4. Identify substitute means of performance or whether you can prove you have mitigated the loss;
  5. Assess to what extent can your insurance policy cover you for any potential losses, if you have any; and
  6. Does your contract allow you to terminate it or simply to suspend obligations for the duration of the COVID-19 pandemic. 

 

The benchmark is high and room for interpretation under English law may open floodgates for discussions and perhaps disagreements. If a clause only states “events beyond either party’s reasonable control’ this will leave room for interpretation as it is vague and unclear on what constitutes ‘events beyond reasonable control’.

 

In future situations, ensure that your contract contains a precisely drafted clause to include and reserve specified events and highlight situations where the performance will be constituted as impracticable.

 

Under the agreement and from a legal perspective, parties should carry on continuing to perform the unaffected portion of the contract, perhaps a piece of good advice here is to come to a consensus and negotiate methods for going forward so both parties are satisfied and ready to operate as best as they can in full force. 

 

How can you demonstrate mitigation of loss?

 

This principle under English law constitutes that “a party who has suffered loss, has to take reasonable action to minimize the amount of the loss suffered”. In other words, in an event of a breach of contract, you (the party who suffered a loss and is seeking relief) took reasonable steps in order to minimize the extent possible or the impact of the loss. These reasonable steps will depend on the nature of your business, the rights and obligations specified in your commercial contract. However, in the ordinary terms of commercial contracts, parties should consider the ‘reasonableness test’ under the Unfair Contract Terms Act 1977, note, this test nor Act applies to international supply contracts. 

 

If you want to terminate the contract, what should you do?

 

Again, this will depend on the terms of your contract. However, a party seeking to terminate the contract because of the provision should follow the strict requirement of providing notice, you should find the termination clause in the section of your contract. Failure to do so could potentially open room for the other party to dispute under ineffective termination of the commercial contract.

 

Alternative measures in the absence of a force majeure clause:

 

If a force majeure clause cannot come to your aid, you may consider the following alternative measures you could consider:

 

  1. Frustration of contract: this principle deals with the issue of whether the particular supervening event occurred beyond the reasonable control of the parties which negatively influenced the futureperformance of the commercial contract.

 

  1.  Commercial impracticability: this principle demands parties to meet its high benchmark where pursuant to the terms of the contract: (a) the occurrence was unforeseen (the coronavirus outbreak); and, (b) whether there was an expectation about how that unforeseen occurrence could be handled.

 

Please note that both of these alternative measures are unlikely to be applicable if the commercial contract has a force majeure clause which deal with the occurred event. 

 

About ONELAW Chambers as London’s Leading Litigation Law Firm

 

Understanding and analysing complex contractual terms and whether you can benefit from the application on such contractual terms in these unprecedented times can be a cumbersome and tedious exercise. At OneLaw Chambers, our expert solicitors and barristers can help provide you with tailored solutions and help steer you around the obstacles you face with creating business continuity and efficiency.

 

Book a consultation to speak with our expert London solicitors and barristers now by calling us on 0208 616 1819 or emailing us at aejaz@onelawchambers.com so we can assess your matter and advise you of the next steps you should take in a consultation. Due to the COVID-19 pandemic, we are able to book you in for a telephone or Skype consultation.