Covid-19 as a Force Majeure Event in your Contract
Force Majeure is not a term that’s defined in legislation, it is contractual term. The Courts have considered various other events as to what amounts to a force majeure event. They arise in circumstances which are outside the control of the asserting party, abnormal, unforeseeable and unavoidable despite exercise of due care.
You cannot use Covid-19 to simply get out of an unfavourable contract. it needs to be the actual and genuine reason for non-performance of the contract.
How Is A Force Majeure Event Defined Within A Contract?
The contract will generally list specific events (e.g plagues, epidemics, pandemics, plans of government etc). If you are a business in retail and you have a Force Majeure clause that references acts of government, you will be in a strong position in the current climate with COVID -19. It is vital that you establish whether the list is exhaustive or not. A question to ask oneself is whether issues can be implied into the contract? The contract may have a sweep up clasue. Importantly the Courts will look at totality of contract.
Types of Force Majeure Clause
- Prevents Performance: similar to the Doctrine of Frustration – the party trying to rely on the clause must be able to demonstrate that performance is legally or physically impossible. Just because it is less profitable/unpalatable to one party, does not mean it is sufficient to invoke Force Majeure. Equally, if more effort is required, then that is not sufficient either.
- Hindering Performance: an increase in cost in not sufficient. Performance must actually be hindered. For example a genuine shortage in supply may hold up.
- Delayed performance: easier to invoke this than the first two as the contract may simply be performed at a later date.
Views of the Courts
- The drafting of the clause is crucial. The clause is to be interpreted by the words used, not the general intention of the parties.
- The burden of proof is on the party who wishes to rely on the clause. It is up to the person moving the litigation to prove that the event is a Force Majeure.
- Sole cause of delay: if you are going to relay on COVID-19 to invoke Force Majeure, it must be the sole case of your inability to perform. Mere inconvenience will not stand up.
It is important for parties to do all they can and to mitigate the effects of COVID-19.
Some clauses may allow either or both parties to serve a Notice of Termination, where the Force Majeure event continues.
After the expiry of a specified period of Force Majeure, the contract will often provide that if it continues for a certain amount of time, either party may serve notice to terminate.
This clause must not operate unfairly, e.g., if one party has given a deposit – there must be restitution.
Other Financial Remedies
If there is no Force Majeure clause in the contract, the Doctrine of Frustration may assist here, absolving parties of their obligations due to a supervening event. There is a high threshold to meet, but this is not to say that COVID-19 will not be applicable here. Lockdowns could give you sufficient basis to maintain that the contract is frustrated.
Other Relevant Clauses
- Price Adjustment Clause
- Limitation/Exclusion of Liability Clause
- MAC Clause (Material Adverse Change) If there is a gap between signing and closing, there may be a MAC clause. If circumstances have changed materially between these two dates, the buyer can get out of its obligation to buy the goods etc.
- Review the clauses in your contract.
- Mitigate your risks if and where possible.
- Engage with the other parties to the contract.
- Consider what effect COVID-19 will have on future business arrangements with these parties – try to maintain a good relationship with your business connections.
Once the “event” (e.g Covid-19) comes to an end the contract is reactivated.
If you have any queries relating to how Covid-19 may have affected your contract please contact G J Moloney:- email@example.com