Covid-19 pandemic may provide a wake-up call

A force majeure clause in a contract generally excuses one or all parties from performance of the agreement, explains Paul Harper

Rarely has the phrase force majeure carried so much potency. As a society, we would be hard-pushed to describe the extent of the situation in which we find ourselves as anything other than unforeseeable.

The effects of coronavirus on businesses have been profound. While various support packages have been announced to mitigate the long-term impact, many still have questions about their circumstances and – in some cases – the significant challenges they face.

In many years of practice, I’ve never experienced a situation which affects so many people on so many levels. From a legal perspective, my colleagues and I have been working hard to ensure we are on top of fast-moving developments to give the most effective advice.

We have seen a surge in clients contacting us to inquire how their business may be affected by Covid-19, many related to the contractual position in light of the disruption.

Many wonder whether they can be relieved from obligations if they find themselves unable to fulfil them due to the effects of the pandemic. This is where the legal definition of force majeure may prove pivotal for businesses.

In general, a force majeure clause in a contract generally excuses one or all parties from performance of the agreement in some way following an event – deemed as being beyond all reasonable control – which makes fulfilling their obligations impossible. Examples may include natural disasters, industrial action or, crucially, a pandemic.

But the specifics related to coronavirus need to be considered on a case-by-case basis. As we have been advising clients, people need to check whether their own force majeure clause specifically covers pandemics. If not, they need to consider whether the effects of Covid-19 are among those which would fall under the force majeure wording.

Importantly, whatever the circumstances, people will normally have to show they have made every endeavour to meet their obligations.

However, if you are able to implement your force majeure clause, the most common likely outcomes are that you will be able to suspend your contractual obligations for the duration of the event, that you will be subject to non-liability for not being able to fulfil your obligations or that either or all parties can serve notice to terminate the contract.

In practice, therefore, a force majeure clause could firstly suspend obligations for a certain period. But, if the effects of coronavirus still make fulfilling the contract impossible after that time, it may be possible to terminate the contract.

But what if you cannot rely on force majeure?

Another potential avenue is using a common law doctrine, the name of which adequately sums up the situation for many – frustration. Yet this comes with a warning; it can be difficult to prove.

Similar to force majeure, frustration can be pursued if an event makes it impossible to perform a contract. However, unlike force majeure, where a contract is frustrated, the contract is automatically terminated.

To apply frustration, you must be able to prove the frustrating event goes to the root of the contract and is beyond what any party contemplated when agreement was reached.

For example, the contract may require a party to deliver certain goods where time is of the essence but, due to the government-imposed lockdown, that is no longer possible.

It is important to note that if you rely on the doctrine of frustration due to coronavirus, any contractual obligations prior to the outbreak will remain and you are still liable for carrying these out.

However, if you rely on frustration to terminate a contract and this is later challenged and proven not to apply, there is a risk of being sued for damages.

Like many unexpected events, Covid-19 can provide a wakeup call for how we carry out our work and the safeguards in place. It would be my advice to review contracts for force majeure clauses – and whether these specifically cover a pandemic – or appropriate wording. People should familiarise themselves with the detail.

We all want to play our part in ensuring our economy emerges as strongly as it can from this crisis – and that firms doing business remain on good terms.

Paul Harper is a Partner, Lindsays