UPDATED: 24 AUGUST 2021

A business being forced to default on commercial obligations due to Covid-19 just may have a commercial lifeline, in the form of a “force majeure” provision included in its contract.

In this FYI we outline what these provisions are, and provide a checklist of when and how they might work in this context.

Commercial impact of the coronavirus

The commercial impact of Covid-19 is hard to understate - affecting the global economy and creating unprecedented commercial challenges for businesses around the world.

For many industries, commerce has been forced to a grinding halt. A business may be forced into the position where it cannot perform its obligations under a contract and will be concerned about its liability to the other party. 

Force majeure provisions may help

Those businesses with a contract to supply or buy goods or services, which - due to the Covid-19 outbreak (or measures imposed as a result of Covid-19) - they cannot meet, may have a commercial lifeline in the form of a “force majeure” provision in their supply contract.

Note - not every contractual arrangement includes a force majeure provision, and each provision - if included - will be different. The rights provided by it will depend entirely on how the provision has been drafted.  

A force majeure provision is an exception to the usual consequences of breaching a contract. It recognises that there can be failure to meet contractual obligations due to an event that is beyond the control of either party.

If a party has breached an obligation, and that breach is as a result of a force majeure event, then the consequences normally flowing from that default won’t arise (no damages, no penalty and no termination).

Covid-19 force majeure checklist

Does your contract include a force majeure provision? 

• Not all contracts include them. If it’s there, it is likely to be towards the back of the document, grouped with the “Default” and “Termination” arrangements.

What actions does the provision provide for?

• Force majeure provisions allow the parties to include some flexibility into their contracts regarding what happens after the occurrence of a force majeure event. Generally, a force majeure clause will excuse the affected party from performing its obligations under the contract for so long as the force majeure event exists.
• While the effect of force majeure is generally to excuse performance by the affected party, most force majeure provisions will confer a right on either party (or in some cases only on the unaffected party) to terminate the contract should the force majeure continue for a stipulated period of time.

What events trigger the provision? 

• The triggering events will generally be listed. Common examples include: fire, flood, earthquake, terrorism, act of God, act of any government, a labour strike or lock-out.
• Many standard force majeure clauses specifically refer to “epidemics” or “pandemics” as a triggering event. Either of these will capture Covid-19.

What if there is no specific reference to “epidemics” or “pandemics”?

• This doesn’t automatically mean the provision won’t be triggered. Force majeure provisions tend to include both a list of specific triggering events and an event, which is “beyond the control of the parties”, and which was not reasonably foreseeable.
• The Covid-19 outbreak, and (probably more relevantly) various governmental and administrative actions taken in response to it, could well fit this description. 

What if the force majeure clause refers to a “government action”

• Many force majeure clauses specifically refer to the action or inaction of any government. 
• In many cases, the affected party’s inability to perform will be due to government action taken in response to Covid-19, rather than Covid-19 itself.
• Businesses which are unable to operate due to Covid-19 responses imposed by the government, such as during the alert level 4 lockdown period, may have grounds to rely on a force majeure clause.  It will depend closely on the wording of the clause and the nature of the obligations to be performed.

Has performance been prevented?

• This is critical. Assuming the event in question is included in the list of triggering events, the affected party must then show that due performance of the contract was prevented by the event in question.
• When considering whether performance has in fact been prevented, the core purpose of the contract is relevant. The prevention of the performance of secondary obligations under the contract will not amount to force majeure.
• Remember too that performance must have been actually prevented - the fact that the price of relevant goods rose or performance was made more difficult is not enough.
• Importantly, performance is only excused to the extent that it has been prevented by the force majeure event. If the affected party can still tender partial performance under the contract, it must do so.

Obligation to mitigate/try to perform

• A force majeure clause will often require the affected party to mitigate the impact of the force majeure and/or endeavour to continue to perform it obligations despite the force majeure.
• An affected party that is relying on force majeure must be mindful of its obligations in this regard and cannot simply step away and forget about the contract once it has called force majeure.
• What these obligations mean for the affected party will depend on the circumstances and the nature of the particular contract.

The law may still help even if there’s nothing in the contract

If there is no force majeure provision in the contract, the general legal principles of ‘frustration’ may apply, with similar effect. The rules of frustration say that where the agreement becomes impossible to perform due to an unforeseeable, extraneous event, the party experiencing the event may be excused from its failure to perform as the contract is treated as if it was automatically terminated going forward. 

This only applies to contracts that do not detail what should happen in such circumstances - such as through a force majeure clause. Establishing that a contract has been frustrated may, however, be more difficult to prove than relying on a force majeure provision.  More information on the applicability of frustration in context of Covid-19 is available here.

Next steps

If you are commercially hamstrung by the Covid-19 response measures, and you had the foresight to include a force majeure provision in your contract, you are unfortunately only half way there. Read the provision carefully. Whether it applies - so whether it helps - in the context of this outbreak and the global response to it, will depend entirely on (exactly) how the provision is drafted.

Get in touch

Please get in touch with our contacts to discuss this topic in more detail and for assistance in determining if a force majeure provision applies.

Contributors robert.bryson@simpsongrierson.com