Following the outbreak and spread of the coronavirus (“COVID-19”) throughout the world, the World Health Organization declared COVID-19 to be a pandemic on March 11, 2020.
In this note, we consider how force majeure provisions in commercial contracts may be used in the context of the COVID-19 outbreak. This analysis focuses on the position under Scots law and suggests steps you can take to safeguard your position as much as possible in view of the evolving situation.
A force majeure clause is a contractual clause that generally provides that one or both of the parties to a contract may be excused from performing its obligations when an event occurs which is outside the parties’ control. On the occurrence of such specific events, that party is excused from, or entitled to suspend performance of all or part of its obligations under the contract. That party will not be liable to the other for its failure to perform the obligations, in accordance with the clause. The concept of force majeure is not implied into a contract in Scots Law, meaning that the parties can only rely on this concept if and to the extent that it is expressly covered in the contract.
For force majeure to apply there is usually a three strand test to be satisfied:
- an event must be beyond the reasonable control of the affected party;
- the affected party’s ability to perform its obligations under the contract must have been prevented, impeded or hindered by the event; and
- the affected party must have taken all reasonable steps to seek to avoid or mitigate the event or its consequences.
It is important that you consider what the consequences of a successful claim for force majeure will be under your contract.
As the situation continues to unfold, we recommend you consider taking proactive steps as follows:
- Review your contracts to determine whether they include force majeure provisions and, if they do, is the epidemic specifically covered as a force majeure event? If not, is the general language used sufficient to include COVID-19 and its consequences? i.e. is there pertinent wording such as “pandemic”, “epidemic”, “outbreak”, “crisis” or “governmental action” used? If in doubt, seek legal advice as early in the process as possible for clarity on the contract and your position.
- Carefully consider which parts of the contract you are no longer able to perform and that your inability to perform them is due to the consequences (direct or indirect) of COVID-19 and not because of a different reason. It wont be enough to prove that performance is more difficult, more expensive or less profitable – you must be prevented from performance of the contract.
- What, if any, notice requirements need to be followed to invoke the force majeure clause and what are the time limits for serving notice?
- Keep records, especially of why performance is impossible, hindered or delayed, the steps you are taking to find alternatives (i.e alternative sources of labour or materials even at a higher cost) and copies of any notices serves including receipts of delivery.
- Reliance on a force majeure clause can sometimes lead to one or more parties terminating a contract. If the parties do not wish this to happen it is important to engage in discussions at the earliest possible time.
If your contracts do not contain express force majeure provisions, you may be able to rely upon the common law doctrine of frustration. Under the doctrine of frustration, where the emergence of supervening circumstances beyond the control of the contracting parties renders further performance of the contract impossible or radically different from what had been contemplated in the contract, the contract will be terminated and the parties discharged from the requirement of further performance of the contract.
The doctrine of frustration will apply if:
- the underlying event is not the fault of any party to the contract;
- the event or circumstance occurs after the formation of the contract and was not foreseen by the parties; and
- it becomes physically or commercially impossible to fulfil the contract, or transforms the obligation to perform into a radically different obligation from that undertaken initially.
As the doctrine of frustration results in the contract automatically coming to an end, the threshold for proving frustration is very high – it must be shown that the obligations impacted by the event or circumstance are fundamental to the contract.
Contracts often also contain a “change in law” provision which may be helpful in the current circumstances. These clauses addresses circumstances where there has been a change in the law that then makes it impossible for a party to perform its contractual obligations. Given the continued global spread of the outbreak, it is possible that laws may be passed by the UK Government to contain the spread of the virus, resulting in parties being unable to fulfil their contractual obligations (e.g., travel restrictions or nationwide quarantine and self-isolation measures, as recently implemented across Italy and in the USA).
If you have any concerns or questions about your on-going contracts and your obligations under them, we are ready to assist you in any way we can. Please contact Stephanie Farrell, Euan Faulds or Emily Wiewiorka.