Lois Horne, Guy Morpuss QC, and Christopher Charlton from our litigation team and Malcolm Walton and Anne Todd from our commercial team considered force majeure clauses and the doctrine of frustration in the light of the Covid-19 pandemic. After a recap of the doctrine of frustration and an analysis of force majeure clauses in the context of Covid-19 (see also our force majeure/frustration briefing note), the panel examined various case studies, and discussed typical issues arising in practice and how these might be addressed in future.
Force majeure clauses: we heard how parties have to prove that the Covid-19 pandemic (or the consequences of it) fall within the scope of the force majeure clauses, demonstrating causation, taking steps to mitigate and meeting notice requirements. There was discussion about whether options for termination are always effective, the challenges of force majeure in a supply chain and different consequences for a party depending on whether it is the supplier or customer.
The panel considered the surrounding commercial and practical considerations, such as, what benefit a party might gain from termination; and whether a party might achieve its desired outcome through another means, such as negotiating a variation, if only for the short term. Such considerations will vary case by case and need to be considered in light of other contractual risks, such as waiver of contractual rights or displaying an intention not to perform the contract, which could give rise to repudiatory breach arguments.
Frustration: we learned that a contract is discharged by frustration where it is impossible to perform, or the obligation is radically different. However, a change in economic or market circumstances, affecting the profitability of a contract or the ease with which the parties' obligations can be performed, is not regarded as a frustrating event. When considering whether frustration applies, a party must first examine the terms of the underlying contact. If the frustrating event has been covered in the contract (for example, in a force majeure clause), then frustration will have no place. However, as force majeure clauses are construed narrowly, frustration may be available in circumstances where the agreement has not provided full and complete coverage for the event in question.
Future Arrangements: when considering what works, what does not and what needs to be changed in respect of their contractual arrangements in light of Covid-19, clients are typically starting with their force majeure clauses. In particular:
- The nature of exclusions: whether to explicitly include or exclude Covid-19 and related events. Both approaches can raise issues. For example, where Covid-19 is excluded this will not necessarily address Covid-19 related events which may arise such as government regulations, and which could prevent performance.
- Industrial disputes: typically, references to industrial disputes are either heavily negotiated or excluded from a force majeure clause, as it is arguable whether industrial action by the affected party's own employees is really beyond its reasonable control. In these circumstances, additional difficulties may arise where employees are able but unwilling to work due to Covid-19.
- Notice and mitigation provisions: parties are starting to consider what will happen when an obligation to give notice becomes impractical, unworkable or prone to failure.
- Termination: it might be that performance is only intermittently prevented due to the force majeure event, but it would be in the client’s best interest to terminate.
Where force majeure clauses may not apply, other provisions may be of relevance:
- Crystal ball gazing: for example, provisions that are triggered by a material change in circumstances or a change in law. While such provisions are capable of being applied to the Covid-19 pandemic, they could deprive the client of its ability to rely on arguments like frustration, which may have put it in a better position.
- Broad insolvency termination rights: such provisions may enable a party to terminate when where it is not entitled to do so under the force majeure provisions. For example, if it becomes apparent that the other party will become unable to pay its debts due to the ongoing Covid-19 pandemic.
- Time is of the essence: such provisions may permit a party to terminate an agreement where the applicable force majeure clause requires a party to wait for a specified time before it can terminate.