Montserrat: COVID-19, an act of God to consider when drafting commercial agreements

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The impact of COVID-19 continues to significantly disrupting businesses and their rights and obligations under contracts. The business world remains alert, reacting to the operational realities of the world’s latest pandemic, COVID-19, which has forced some companies to suspend or terminate business agreements they once held. As insecurity are forecasted to persist into 2021, companies may be compelled to invoke a force majeure clause or the doctrine of frustration in an attempt to terminate contracts altogether.  

The rise of this new pandemic, begs the question; does COVID-19 and its ongoing economic effects excuse a party from performing its obligations under a contract? This article seeks to examine this issue.

Commercial contracts - invoking a force majeure clause

A force majeure clause is a clause that is usually written into many contracts that allows a contract to be canceled or postponed due to the impossibility of performance upon that contract. Merriam Webster's legal dictionary defines “force majeure” as an event (as war, labor strike, or extreme weather) or effect that cannot be reasonable anticipated or controlled. 

Depending on the drafting of a contract, a force majeure clause entitles a party to the contract to:

  1. terminate the contract;
  2. delay in the performance of the contract;
  3. be excused from the performance of the contract, in whole or in part; or
  4. suspend performance; or to claim an extension of time for the performance of its obligations under the contract.

It is important to note that where the force majeure clause provides for a delay in or suspension in the performance of contractual obligations, these obligations under the contract will resume once the event or condition has been remedied or can be overcome.

COVID-19 & its causal link

When it comes to COVID-19, the party that is seeking to invoke the force majeure clause must show a causal link between the force majeure event and its failure to perform.

Courts have ruled that a party seeking to rely on a force majeure must show that “but for” the force majeure, it would have performed the contract. However, where that party is unable to perform the contract, the innocent party is still entitled to substantial damages in circumstances where the contractual performance would nevertheless have become impossible by reason of extraneous events.1

Application of force majeure clauses in Montserrat

In the case of Devcon Ltd. v. Cap Juluca Properties Ltd 2 the court made the point that a contract may be discharged where a thing is destroyed which is not the subject-matter of the contract but the continued existence or availability of which is essential for the performance of the contract.

In law, a purely economic change in circumstance for a contracting party does not constitute a force majeure defence. Cheryl Mathurin J in the case of Temenos Development Inc. v. Luxury Properties LLC and Ultimate Luxury Properties LLC 3 considers whether such circumstances can be considered as a force majeure defence. She made the point that such circumstances are not considered a force majeure event and that it would have to be specifically contracted as a term for it to be considered a force majeure defence.

Given the approach adopted by the Eastern Caribbean Supreme Courts, each case will turn upon its particular set of facts and the scope and effect of a Force Majeure Clause will depend on the contractual language used.

Other factors that the Courts will take into consideration when seeking to interpret a Force Majeure Clause depending on the wording of the particular clause are:

  1. whether the event rendered the performance of the contract impossible, as opposed to simply more difficult or less profitable;
  2. whether the party seeking to rely on the Force Majeure clause made all reasonable efforts to mitigate the effects of the Force Majeure event;
  3. whether the event is beyond the control of the parties and beyond the scope of normal, foreseeable business risks.

Commercial contracts and the doctrine of frustration?

The doctrine of frustration is a common law remedy that may be invoked and relied on where an event occurs that makes the performance of a contract impossible, illegal, and/or it radically changes the originally intended purpose of entering into the contract.

For the doctrine of frustration to apply there must be:

  1. the occurrence of a supervening event, that is, an event not in the contemplation of the contracting parties;
  2. such an event that is not the fault of either of the parties; and
  3. such an event that renders the performance of the contract impossible or radically different from that which the parties had originally contracted.

Where a contract has been frustrated, the contract:

  1. ends without compensation to either party for any losses; and
  2. puts the parties in the position they were at the time of the frustrating event.

The courts have repeatedly emphasised that a contract will only be terminated by frustration in exceptional circumstances. While general principles have developed over time, application of the doctrine of frustration is extremely fact-specific and will depend on many factors, including the construction of the relevant contract. The courts will be guided by the facts of every individual case.

In the case of Geddes Meyer v. Kehvin Dickinson4 , the Eastern Caribbean Court relied on Lord Simon’s statements in National Carriers Ltd. v. Panalpina (Northern) Ltd.5 to make the point that when a contract is frustrated, it is brought to an absolute end automatically. Lord Simon stated:

“Frustration of a contract takes place where there supervenes an event (without default of either party for which the contract makes no sufficient provision) which so significantly changes the nature (not merely the expense of onerousness) of the outstanding contractual rights and/or obligations from what the parties could reasonably have contemplated at the time of its execution that it would be unjust to hold them to the literal sense of its stipulations in the new circumstances; in such case the law declares both parties to be discharged from further performance.”

Conclusion

Given the foregoing, it is important to note that whether the COVID-19 pandemic triggers the doctrine of frustration or a force majeure clause under a contract depends on the drafting of the contractual provision and the particular circumstances in the contract.

During this time of crisis, parties experiencing difficulties should try to re-negotiate the terms of their agreements in light of the consequences of the pandemic instead of trying to opt-out of a contractual obligation by relying on the doctrine of frustration or force majeure. Parties who are now seeking to enter into new contracts are urged to review carefully the terms and conditions of an agreement and identify the contractual provisions providing for force majeure and hardship.


  1. Classic Maritime Inc v Limbungan Makmur SDN BHD [2019] EWCA Civ 1102
  2. AXAHCV 0041/2009
  3. AXAHCV 2013/0078
  4. ANUHCVAP2014/0005
  5. [1981] AC 675 at p.700

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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