As governments ease lockdown restrictions globally, the UK Government has announced similar measures in England. Force majeure will once again come under scrutiny as the timing of force majeure events coming to an end becomes a focus for many businesses.
Boards are having to address and manage the contractual and practical implications of the evolving guidance which relaxes some restrictions and allows certain types of businesses to resume trading while still attempting to manage the risks posed by COVID-19.
Where a party is excused, by the force majeure provisions of the relevant contract, from performing its contractual obligations (whether that be due to the COVID-19 outbreak itself or the related government interventions) that party will need to reconsider its position due to the changes in guidance. Do the more relaxed restrictions mean that performance of obligations must be resumed? If so when and to what extent? If the benefit of force majeure relief is no longer available but a party does not, or cannot, resume performance of its contractual obligations there is a risk that the other party will exercise its rights to terminate the contract and sue the non-performing party for damages for breach of contract.
Where to Start?
Some key considerations will include the following:
Has the force majeure event ended?
There is no one size fits all force majeure clause. Whether or not a force majeure event has ceased for the purposes of the agreement in question will be dependent upon the precise wording of both the definition of force majeure event itself and of the force majeure provision that sets out in what circumstances force majeure relief will be available.
On the face of it, a force majeure event will not end until performance of the required contractual obligations is no longer interfered with in the way described in the applicable clause which may include various degrees of interference (i.e. must performance be ‘hindered’, ‘prevented’ or ‘delayed’?). For example, where a clause permits force majeure relief only where obligations are ‘prevented’ by a force majeure event, it is likely that the protection of the force majeure provisions will cease where performance can, as a matter of fact, recommence even if the standard of performance will still be adversely impacted.
Similarly, the emergence from lockdown will refocus attention on the validity of any contractual notice. Is there any dispute around whether a force majeure event occurred in the first place or indeed the validity of a force majeure notice received? This might be either because it is contended that a force majeure event has not occurred or that the notice was not served as required by the wording of the force majeure clause or notice provisions? If the notice itself is invalid a party may find itself unable to rely on force majeure at all. As well as checking historic compliance, parties should carefully check the requirements for further notices as the lockdown eases. For example, it may also be a requirement to notify the other party that the force majeure event has ended or of your plans to recommence performance.
Even if the easing of the lockdown doesn’t mean that the force majeure event is at an end, does the force majeure clause require that updates are issued to the other party? Is the availability of the ongoing force majeure relief conditional upon such updates being provided? Also check whether updates required must be in a prescribed form, at a specified frequency or include certain content. Whilst the impact of failing to provide updates where they are contractually required may not be critical in every instance it will, at the very least, open the door to a suggestion by the other party that the lack of updates is indicative of the force majeure event coming to an end.
Is the force majeure the sole cause of inability to perform?
In order to rely on force majeure relief, the force majeure event must generally be the ‘sole’ cause of the applicable degree of interference with performance of a party’s obligations. Where there are multiple causes case law generally provides that it is not possible to rely on force majeure provisions. Causation will be a question of fact in the relevant circumstances and it may be that this arises in the context of the release from lock down, for example where the party is no longer impacted by restrictions but there may be an issue with that party’s own supply chain. Sole causation may not be straightforward to determine and is likely to be the cause of disputes.
Has the agreement already terminated?
There may no longer be an agreement in force to perform. Where force majeure provisions were invoked, check whether the agreement has already terminated – either automatically (due to the duration of the force majeure event) or upon service of notice by either party in accordance with any rights to terminate specified in the force majeure clause or termination provisions. Again, it is necessary to look to the force majeure clause to check the wording. The relevant time period for the purpose of termination either automatically or upon notice will usually run from the date of the notice or the occurrence of a force majeure event but the contract wording should be checked carefully. Where an agreement has terminated and parties wish to resume dealing with one another on the same or similar basis, new terms will need to be agreed and ideally formalised in a new, correctly executed written agreement which sets out the terms which will govern the resurrected commercial relationship.
If the agreement has not terminated, consider the following:
- Gear up for performance and prioritise: Assess your contract portfolio to ascertain when an obligation to perform will resume. Focus on key relationships and most valuable agreements as a priority. Examine your obligations and consider to what extent performance of obligations will be possible.
- Stay close to your key suppliers: Ensure that you have regular dialogue with key suppliers in your supply chain to understand risks and limitations which may impact your own performance obligations. Are your suppliers able to restart their own operations in the required timeframe? Will they be unable to perform or face delays in performing their obligations as a result of raw material shortages due to delays in delivery; workforce shortages due to COVID-related illness or restrictions; or due to liquidity issues. Consider what mitigating steps could look like. For example, supporting at risk suppliers with upfront or expedited payments or whether contingency plans need to be made.
- Manage workforce issues: Ensure that that the implications of the new guidance on your people and their safety at work is understood and thought through. Consider whether the implementation of social distancing and protective measures to ensure the safety of staff will prevent businesses from recommencing at all or will mean that the rate of production or service delivery is reduced. For example, where fewer employees can be physically present on site at once or there is a reduction in employee working hours to reduce exposure.
- Take any mitigating steps: There is a duty on the party seeking to rely on force majeure to mitigate against the adverse effects. As restrictions are lifted consider whether adequate steps being taken to recommence services and mitigate against adverse impact of non-performance. If steps are not taken to resume performance to the extent possible there is a risk that a court may hold that the force majeure relief is no longer available. Consider keeping factual evidence of external factors which back up claims that the performance of obligations as required under the agreement is not possible.
- Be prepared: Further peaks in COVID-19 infection rates are possible and restrictions may be re-imposed either in the near future or periodically for years to come. This means that even though the pandemic may have been considered to be a force majeure event for the purposes of the agreement in the context of the initial wave of COVID-19 infections this may not be the case in future where the risk of disruption to performance as a result of COVID-19 is no longer unforeseeable. Businesses should be prepared and ensure that clear and quick to implement disaster recovery or contingency plans are put in place to mitigate against any future adverse effects of reoccurrence including taking practical steps to protect operations and ensure business continuity by way of mitigation. Without such steps it is less likely that parties will be able to rely on force majeure provisions.
- Future proof new contracts: Never again will force majeure provisions be considered “boilerplate” wording. Lessons learned over the last few months from the failings and unintended effects of some force majeure provisions should be taken into account. Force majeure provisions in any newly entered agreements should be considered carefully with commercial input from the parties and an active engagement with how risk should be allocated between them where the unforeseen happens.
- Redraw the lines: If performance of the agreement cannot be resumed in the way required but the parties wish to continue commercial dealings on a different footing, consider agreeing revised terms which reflects the new commercial realities of the COVID-19 new normal including in relation to performance levels, time scales and contingency plans. These terms should be documented formally by way of correctly executed written agreement.
In dispute? Responsible contractual behaviour
Disputes will undoubtedly arise from the application of force majeure provisions and issues with recommencing performance or performing to the standard contractually required. However, there is a new ‘non-legal’ overlay that parties must consider when determining what steps to take. The UK Government has issued ‘Guidance on responsible contractual behaviour in the performance and enforcement of contracts impacted by the Covid-19 emergency’. This guidance calls for ‘responsible and fair behaviour’ of parties in key areas including responding to force majeure or frustration claims to protect jobs and the economy. The guidance is not ‘law’ and makes clear that it is not intended to override any specific contractual provisions, any support or relief available in law or any other legal duties which a party to a contract is bound by but the Government ‘strongly encourages’ parties to take note of the sentiment. The impact on future disputes remains untested but it seems unlikely the Courts will have regard to the guidance or penalise parties who fail to follow it. It is fair to say that reference to the responsible contractual behaviour guidance may be used as a commercial deterrent against acting unreasonably when parties seek to resolve force majeure related issues between them directly.
As the Coronavirus situation is rapidly evolving you can keep track of government announcements and on-going developments on our Coronavirus COVID-19 hub which includes many sector and issue specific examples of our latest thinking.