The importance of the small print: force majeure clauses
The situation concerning COVID-19 is developing at a rapid pace. In light of the global pandemic, the governmental advice against large gatherings and the effective lockdown of normal life in the UK, the result is an unprecedented level of business interruption.
What happens if your business is unable to supply a product or service?
We are helping our clients to protect their businesses as best they can by ensuring that they understand the small print in contracts and encouraging them to put in place practical and effective measures to minimise loss. This may include renegotiating supply agreements or putting temporary contractual arrangements in place, to take into account delays in supply chains during this period of uncertainty. We can also advise on how to mitigate loss if, and more likely when, they are facing a claim.
Facing a claim
Many businesses who are unable to honour their contractual terms are likely to face claims for breach of contract. Businesses therefore need to be clear on the terms of the contract they have entered into, what can be claimed if there is a breach and whether there are practical and immediate steps that they can take to minimise any loss.
Making a claim
If you have suffered a loss, you may be entitled to make a claim. We have been speaking with a number of businesses who were due to attend international conferences over the last few weeks. The conferences were cancelled at short notice, before the pandemic was declared and/ or before any forced closure. In many of these examples, the event organisers have relied on a “force majeure” and indicated that fees paid to attend the event, take a stand and associated costs will not be refunded.
What is a force majeure clause?
A force majeure clause is one which is designed to alter the parties’ contractual obligations or to avoid a breach of contract by excusing the party seeking to rely on it from performing its contractual obligations, following the occurrence of an exceptional event or circumstance beyond the party’s control.
The majority of contracts between, for example, event organisers and suppliers will likely contain such a clause but how effective they are in excusing non-performance will be dependent on the precise wording in each case and the particular set of circumstances. If the clause states that a triggering event must prevent performance then that event must have made the performance legally or physically impossible. Mere difficulty in fulfilling the contractual obligations, or extra expense arising as a result of that event, is not sufficient, unless expressly stated to be so.
Effective force majeure clauses list specific examples of force majeure events such as acts of terrorism, natural disasters or, pertinent to the current circumstances, pandemic and government intervention. There may also be ‘catch all’ wording to include events which are “beyond the reasonable control” of a party. Such ‘catch all’ wording may cover the COVID-19 pandemic but it will always be a question of interpretation and dependent on the relevant facts. It may be that the courts will take a broad interpretation of such wording where it has been genuinely impossible for the parties to fulfil the contract.
What is the effect of successfully invoking a force majeure clause?
The impact of the force majeure clause on a contract, again, will depend upon the wording. Generally, if invoked successfully, they may:
- Suspend the obligation to perform while the force majeure event continues such that when the relevant event ends the obligation is effectively re-activated.
- Extend the time for performance of the obligation (although, unless an event can be rescheduled, this is unlikely to be of relevance).
- Provide the right to terminate the contract entirely and without liability, either immediately or after complying with a prescribed procedure, or upon the expiry of a certain period of time if the circumstances are ongoing.
Does notice need to be given or other formalities satisfied?
The serving of notice by the relevant party within a particular time period may be required under the terms of the clause. It is critical that the clause is reviewed by the parties as soon as possible and the relevant procedure followed to the letter, if the clause is to be invoked successfully to avoid a breach of contract. The party receiving such a notice should consider its position on whether the COVID-19 pandemic constitutes a force majeure event under the contract. The parties should also keep detailed notes of the factors leading to the impossibility of performing the contract, including dates and times of announcements.
Importantly, to rely on a force majeure clause, the non-performing party needs to demonstrate that it could not reasonably mitigate its risk of non-performance. If the event could have been provided by an alternative method (such as by video conferencing), then the clause cannot be relied upon.
In short, force majeure clauses need to be reviewed closely by organisers and suppliers to ensure that pandemics and/or government intervention have been specifically covered, the effect this will have on the individual contract alongside future commercial relationships and any procedural requirements that need to be followed.
Defending a claim
If you have cancelled an event and are relying on the force majeure clause, it is important that you seek urgent legal advice to ascertain whether the force majeure clause is valid and/or limited and whether you have an obligation or liability to the other party.
Businesses also need to consider how to deal with this period of uncertainty. It may be necessary in the short term to renegotiate contracts or have specific terms in place to govern either an increase or decrease in demand for goods and services, considering how work levels could vary depending on how the workforce and supply is affected. Normal delivery times, particularly if goods are imported or travel is ordinarily expected within a business, may need to be adapted in the short term, and/or reflected in a new contact. Businesses may also need to consider requesting a non-refundable deposit, to avoid being left with nothing, in the event of events/services being cancelled.
Although businesses are currently dealing with the immediacy of the current situation, and the uncertainties as they unfold, we all need to plan for the future. At this stage, businesses should consider long term solutions to any issues they are experiencing, so that they can survive and/or evolve from this situation with minimal disruption and loss (so far as possible). They should also consider the need to maintain long standing business relationships to avoid customers or suppliers becoming alienated, with support that is provided now hopefully not they forgotten when things return to some sort of normality.
Read the small print
If you are contemplating legal action or have been threatened with a claim:
- Review the terms of the force majeure clause for any specific references to epidemic or pandemic or events “beyond the reasonable control of the parties”.
- Consider whether the effect of the pandemic on the obligations can be mitigated. Could the event be postponed or convened by alternative methods?
- Consider whether any notices are required to be served in order to comply with the terms of the clause.
- Consider whether the clause provides that costs incurred should be borne by a particular party.
- Keep detailed records of the timeline of events and official government announcements.
- Communicate with the other party at an early stage to establish if a compromise or rescheduling of the event can be mutually agreed.
- Check whether your insurance may provide cover in the circumstances.