Covid-19 and Contract Law

Covid-19 and Contract Law

The shutdown brought about by the COVID-19 virus has resulted in a shift in circumstances for which most have never prepared. A huge number of events have been cancelled, many at the last minute. Many work projects have been postponed or cancelled, leaving either the customer or the supplier suffering financially. As a result, there has been concern around whether these situations are covered by insurance.

In these circumstances, it is understandable that businesses are looking at their contracts and whether the COVID-19 situation is covered under Force Majeure provisions.

What is a Force Majeure event?

A Force Majeure event is an event which is outside the reasonable control of the party and causes the party from being prevented from performing its obligations in the contract.

A Force Majeure provision is an express term, outlined clearly in a contract in English law. The extent to which either party can claim compensation or not from an event classed as Force Majeure will be expressly outlined as part of the Force Majeure provision. In other words, it cannot be implied.

While each Force Majeure provision needs to be read according to its own particular merits, there are some standard features of Force Majeure provisions.

The test of Force Majeure

For a situation to be considered Force Majeure under English Law, it needs to meet three criteria:

1. The event must be beyond the reasonable control of the affected party

Often contracts separate Force Majeure events into political and natural forces, which is the most relevant to the COVID-19 situation. There tend to be different remedies for each type of event, which may include an increase in the time allowed for completion of the contract and relief from termination.

It is usual for contracts to set out Force Majeure provisions with a list of specific events which are considered to be beyond the control of the parties. In the current circumstances, a reference to pandemics or diseases will simplify claims that Force Majeure has been invoked, although other criteria will still need to be satisfied.

If the language is not specific, then it comes down to a consideration of whether the event is covered by the more catch-all provision of being an “Act of God”. This would most likely see the current situation qualifying as a Force Majeure, or even the political and economic consequences as a result of the shutdown imposed by the government as a qualifying event. Either way, the test is the impact of the affected parties to complete its obligations under the contract.

2) The party’s ability to complete its obligations must have been hindered as a result of the event

A Force Majeure provision will usually relieve the party from what would have been considered a breach of contract through failure to perform its obligations under the contract. It must be shown that there is a direct link between the event and the reason why the obligation cannot be fulfilled.

Under the current circumstances where COVID-19 has resulted in entire workforces to self-isolate due to government intervention and health reasons, there would be a clear level of impact and a direct causal link under most Force Majeure provisions.

3) The affected party must have taken all reasonable steps to avoid or mitigate the event

The party will have to demonstrate there were no other ways to perform their obligations under the contract. Although each case will be defined by the facts of the situation, the general rule is that it has to be a “reasonable” mitigation of the events and its consequences.

The all-encompassing nature of the COVID-19 situation will dramatically reduce the opportunities for mitigation for the affected party.

If you consider Force Majeure to be invoked

To seek relief under a Force Majeure clause, it will be necessary to issue a notice to the other party supported with evidence of the claim. The specifics of how to do this may be covered in the contract provision itself. Failure to issue a notice within a specified period of time will often lead to the inability to rely upon the right to relief.

In terms of what can be done as a result of the Force Majeure claim, this is again contingent on what the contract sets out. Common remedies for these claims may be extending the time to complete the obligations under the contract, delaying performance while the event is happening and, if for a further extended period, terminating the contract altogether.

Advice if you are making a Force Majeure claim

Here are our guidelines if you are considering making a Force Majeure claim:

  • Document carefully all the actions taken to mitigate the impact of the Coronavirus situation on your ability to fulfil your obligations under the contract from as soon as the situation started
  • Consider whether the COVID-19 outbreak itself or the subsequent disruption and government intervention are the Force Majeure events

Advice if you are subject to a Force Majeure notice

Here are our guidelines should a party issue a notice of a claim:

  • Check the claim to see if it complies with the criteria as outlined above
  • Consider whether the notice guidelines as outlined in the contract have been followed correctly and in a timely fashion
  • Consider whether the party has provided sufficient and relevant evidence to support the claim

As always, the devil is in the detail and exactly what has been provided for in each contract.

Whether you are making a Force Majeure claim or subject to a Force Majeure notice, we can advise on what next steps to take and how to move forward in the legal and correct manner. To speak with one of our team, please call 020 3475 6751, and we’ll be happy to advise you.

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