William Occleston Michelle Craven-Faulkner 27 April 2020

Making use of a force majeure provision

Making use of a force majeure provision image

At the height of the COVID-19 pandemic, the level of interruption that many local authorities and businesses are experiencing cannot be overstated. Tighter budgets, staff resourcing issues and economic uncertainty mean that businesses are increasingly reviewing their contracts to ascertain exit and relief strategies. One area that is receiving a significant amount of attention is the "force majeure" clause.

This article provides a summary of the steps a party could take if they wish to make use of a force majeure provision. Further, it provides a brief review of the law of frustration, which parties may make use of in the event that there is no force majeure clause or where the terms of it do not provide any relief.

A force majeure clause is a contractual remedy which excuses one or both parties from the performance of a contract following the occurrence of specified events. The remedies usually include the right to suspend obligations, the right to obtain a time extension for performance, and/or the right to terminate the contract. Strictly speaking the remedy is whatever is written in the contract.

If a party wishes to rely on COVID-19 as a force majeure event, the first step it should take is to review whether a force majeure clause is available in the contract in question. It is important to review the contract as a whole just in case there is not an express provision but there is a clause which has the same effect.

If such a clause is available, the breadth of the force majeure clause should be reviewed. If it refers to "pandemics" or "epidemics" and or "events outside of a party's reasonable control", COVID-19 will be captured. There may also be room to argue that clauses referring to "acts of God" are also wide enough to capture pandemics.

If a force majeure clause is available, and encompasses COVID-19, the next step is to determine whether the force majeure event actually caused the inability to perform or the delay in performance. The way to ascertain this is by applying the facts of the matter to the words in the contract. Much depends on a literal interpretation of what is written. If the contract refers to the force majeure event "preventing" or "precluding" a party from performing its obligations, then clearly the bar is very high. If the contract simply refers to business being "interrupted", the standard is much lower.

The third and final stage is in notifying the counter party that a force majeure event has taken place. This often requires a review of the notices clause in the contract to ensure proper service takes place and to obtain certainty as to when the force majeure clause is effective.

It is important to be aware however that even if there is no force majeure clause, there are other remedies that can be employed in the event of an unforeseen event, most notably, the law of frustration.

Frustration requires the occurrence of an unforeseen event, outside of the control of the parties which has made the contract impossible to perform, or has transformed the performance of the obligations under the contract into something so radically different from the mutually agreed state of affairs, that it would be unfair to hold the parties to the obligations.

There are a number of disadvantages to arguing that a contract has been "frustrated" rather than using a force majeure clause.

One is that frustration is comparatively inflexible: if a contract is frustrated it terminates. It is not possible to suspend obligations. A further disadvantage is that the threshold to surpass is high. Courts may question whether COVID-19 was an unforeseeable event, especially for recently signed contracts. What is clear is that just because a contract is more expensive than expected, or less convenient to perform, or has become, on retrospect, a "bad bargain" is not enough since this does not make the contract ‘impossible to perform’.

Local authorities should be reviewing their contracts to consider how COVID-19 could impact on key contracts taking into account the potential likelihood that key suppliers could seek to rely on force majeure clauses.

Michelle Craven-Faulkner is a partner, and William Occleston is a solicitor at Geldards LLP

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