As the impact of the COVID-19 pandemic continues to be felt across all jurisdictions and sectors, companies are considering their options should they find themselves unable to perform their contracts. Under English law, there is no general doctrine of hardship or change in circumstance. Therefore, unless the narrowly confined common law doctrine of frustration applies, parties to English law contracts will need to turn to the express terms of the contract. Reliance on a contractual force majeure clause, if there is one, may be one route for parties to mitigate their exposure. However, it is important to obtain legal advice before making a declaration of force majeure or responding to force majeure notice from another party.
A force majeure clause excuses one or both parties from performance of the contract upon the occurrence of a specified event or events beyond their control. There is no single agreed meaning of "force majeure" in English law. Whether the COVID-19 outbreak and/or particular consequences of the outbreak constitute force majeure events will depend on the wording of the contract, construed in accordance with the general principles of contractual interpretation.
Even if the words of the clause appear to encompass the event in question (for instance, because it refers to "pandemics" or "epidemics"), a declaration of force majeure by a counterparty should not be taken at face value. There are some important limitations on force majeure under English law:
- Causation:The party relying on the clause must prove that non-performance was the result of the relevant event falling within the scope of the force majeure clause. The party will not be able to rely on the force majeure clause if, but for the specified event, it would still have been unable to perform.
- Restrictive interpretation:It is common for force majeure clauses to specify that the relevant triggering event must "prevent" (rather than merely hinder or delay) performance. If that is the case, performance of the contract must be legally or physically impossible, not just commercially difficult. Changes in market circumstances, including an economic downturn (or specific cash crisis), will not generally be sufficient to trigger a force majeure clause.
Because of the difficulties involved, English law advice should be sought whenever a potential question of force majeure arises. If a decision to invoke force majeure is made (or you are faced with a claim from your counterparty), strict regard should be had to the contractually specified notice provisions. The English courts have repeatedly stressed the need to comply with any express pre-conditions in invoking force majeure. A party relying on a force majeure clause should keep a detailed record of all steps it takes in mitigation of loss.
Frustration of contract
The conventional test for frustration of contract is that there must be an event which:
- occurs after the contract was formed;
- is so fundamental as to be regarded by the law as striking at the root of the contract and as entirely beyond what was contemplated by the parties when they entered into the contract;
- is not due to the fault of either party; and
- renders further performance of the contract impossible, illegal or makes it radically different from that contemplated by the parties at the time they entered into the contract.
The effect of frustration is to end the contract and release the parties from future obligations. Payments made, services rendered and expenses incurred before the contract was discharged will be dealt with under a statutory regime.
Historically, the courts have emphasised that the doctrine of frustration is very narrow. It is generally considered to be extremely difficult to convince the courts that a contract has been frustrated (as there needs to have been an unforeseeable change in circumstances which has rendered the performance of the contract impossible). However, given the wide-ranging effects of the COVID-19 pandemic, there may be circumstances in which parties can successfully run a frustration argument (e.g. where a specific event has been cancelled). Each case will turn on its own facts.
Again, parties should proceed with care – a wrongful claim of frustration might amount to a renunciation of the contract and significant liability for damages. Equally, both concepts might offer vital lifelines.