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15 May 2020 / by / in

The Devil’s in the Detail… So what exactly did it say? Force Majeure & Covid-19

As Covid-19 has demonstrated, unprecedented situations can occur which we have no control over. As lockdowns begin to ease in parts of the world and businesses adapt to a ‘new normal’, it’s likely to spark a new wave of litigation for the commercial courts and trigger force majeure claims.

What is Force Majeure?

Force majeure is usually a clause in a contract that extinguishes liability from a party who is unable to complete its contractual obligations due to an unforeseeable event that is beyond the control of the contracting parties. Typical events can include but are not limited to war, terrorism, earthquakes, hurricanes, acts of governments and an act of God. Some contracts may stipulate pandemics and/or epidemics within these events which may overcome one requirement in this process.

The jurisdiction of the contract will determine whether civil law codes or case law applies. In China, businesses have applied to The China Council for the Promotion of International Trade, a quasi-governmental body for ‘force majeure’ certificates which will exempt them from their contractual obligations with overseas parties. However, in the UK such certificates wouldn’t have any legal bearing but are likely to be considered by a judge in addition to other evidence.

There is no ‘force majeure’ legal concept embedded in law in the UK and without written clarification on the definition for each contract, it has no real meaning. The devil is in the detail of the contract and each one will be scrutinised by the courts for its precise definitions. The key question… how has force majeure been defined in the contract?

What needs to be considered for Force Majeure?

The burden of proof is on the party seeking to rely on the force majeure clause. It must prove that the force majeure event which occurred caused the non-performance of the contract that was beyond their control and it did everything possible to mitigate the circumstance and fulfil its obligation.  This can be loosely broken down and assessed in the following categories:

  • Event
  • Beyond reasonable control
  • Causation
  • Mitigation

It’s likely to be accepted that Covid-19 will be classed as a force majeure event. However, the occurrence of a force majeure event doesn’t automatically invoke the clause.

The construction of the wording of the clause, the circumstances and the entire contract is considered in depth and will be key in determining if it can be relied upon. Many may try and use the ‘Act of God’ wording to claim force majeure under this. It is possible to challenge a Force Majeure notice for contractual discrepancies; however, the courts have taken a strict approach to the wording in contracts. Vague and wide-ranging terms attempting to cover any eventuality such as ‘any other events beyond X’s control’ will still be subject to express terms mentioned in the contract and the individual facts. In Tandrin Aviation Holdings Ltd and Aero Toy Store LLC and another [2010] EWHC 40 emphasis was put on the ‘explicit terms’ listed under events and whether the event, in this case a financial downturn, was remotely connected to any of the events listed in the contract. Having looked at the clause in its entirety and other specifics of the contract it was held that it was not connected in this instance.

In any case causation can be a difficult point to argue. To show that a party was prevented, hindered or delayed performance of the contract does have slightly differing thresholds with the highest being prevention. Historically it has proven difficult to show that prevention amounted to non-performance because the party must show that it was physically or legally unable to perform its duties. It was further held in Tandrin that non-performance in an economic disaster was not enough to trigger force majeure unless the parties expressly agreed to this effect. The courts have typically dismissed claims to rely on a force majeure clause when a contracting party incurred increased costs to complete performance. This could make many companies think long and hard about whether they do have a viable claim.

A further consideration for companies should be how they are going to prove that Covid-19, as a force majeure event, was the sole reason for non-performance of the contract. This could prove problematic for companies who are recovering from financial difficulty following Brexit uncertainty and the fluctuation of the pound against another world currency.

The additional factors of financial difficulty could render the force majeure claim invalid if the event was not the sole cause for the non-compliance as demonstrated in Classic Maritime Inc v Limbungan Makmur SDN BHD [2019] EWCA Civ 1102. The Court of Appeal confirmed that the force majeure event should be the sole cause for the failure of contractual obligations. If any other factors are present which could have prevented the contractual obligations being met as well as the force majeure event, the clause cannot be relied upon.

Medical practitioners and scientists have already predicted that it is likely that a ‘second wave’ of the virus is likely which may bring back another lockdown or other restrictions. A common feature often attached to force majeure clauses is ‘reasonable endeavours’ and if exists, both parties must make reasonable efforts to overcome the force majeure events and deliver the obligations of the contract or attempt to make it happen.

It’s likely that the courts will take a stricter approach in monitoring how parties will be taking the necessary steps to ensure that they can fulfil contractual obligations should a second lockdown occur. The actions taken by parties at this time could be instrumental when assessing how the parties have tried to minimise disruption.

In the case Seadrill Ghana Operations Ltd v Tullow Ghana Ltd [2018] EWHC 1640 Comm Tear LJ held that the defendant was unable to rely on the force majeure clause because they had failed to make use of the reasonable endeavours listed in the contract. He said: “As a matter of language ‘reasonable endeavours’ is a phrase which enables account to be taken of all matters which bear upon the question whether it is reasonable to expect a party to take certain steps to avoid or circumvent a force majeure.”

Historically the court does not accept that a party incurring additional costs separate from the agreed fee as a reason for non-performance of the contract or valid reason to invoke force majeure clauses. Many businesses who are suffering from the economic effect of Covid-19 must weigh up what they can afford to spend to be seen to have made reasonable efforts to continue as scheduled versus imminent crippling financial cashflow issues. Not to mention the potentially expensive litigation costs should a settlement or a solution not be reached.

Summary

WHO declared Covid-19 a pandemic on 12 March 2020. Amongst all this, the statutory limitation clock will have started ticking for those who wish to proceed with service on the parties to ensure compliance with the specified time limits.

English law was traditionally a favoured jurisdiction for contracts, it may seem that there are many prima facie cases of force majeure. However, many companies will be scrutinising the details of their contracts and whether they would have satisfied all the criteria above to rely on the clause.

Smart businesses will be making the necessary expansive edits to their contracts to this important and sometimes overlooked clause in preparation of any second wave of Covid-19.

Banking

For sectors such as banking, the courts will have to investigate how they will seek to protect borrowers who are in loan agreements at risk of having the lender recall the loan in full if the borrower has suffered financial difficulty and is unable to meet scheduled payments. Naturally contracts such as this will be favourable to the lender and put the borrower in a further position of debt. The FCA acknowledges that regulations around commercial and individual lending are still lack lustre and courts will have to collectively ensure that commercial interests are not put above and beyond individuals.

Nonetheless, force majeure is poised to make a dramatic comeback and we wait to see how it is handled.

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