Covid-19: Frequently asked questions
By Maria Walsh
26 March 2020
Following our earlier Insight, we received a range of queries from our clients as the COVID-19 outbreak continues to disrupt commercial operations and markets across the globe, sending shockwaves through all businesses and supply chains.
We outline some of these queries below and set out some key considerations for all businesses with contracts which have been affected by the outbreak so that they can not only manage events as they arise over the coming weeks, but also allow them to prepare as effectively as possible during these uncertain times.
What initial steps should businesses with contracts impacted by COVID-19 take?
- We recommend that businesses review the relevant contracts to identify what force majeure rights, remedies, and requirements may apply if a party’s operations are disrupted by the effects of COVID-19 and carry out a preliminary assessment of the consequences of a breach or default of the contract. Contracting parties should also be mindful that purchase orders or other documentation which incorporates standard terms and conditions may constitute a contract, and accordingly these terms and conditions should also be reviewed.
- It is important for a party who wishes to plead force majeure to be conscious of the wider consequences of doing so. It may be the case that continuation of the contract is otherwise profitable to the business or in circumstances where the cost of complying with contractual obligations triggered by a claim of force majeure exceeds the cost of temporarily engaging, for example, more expensive local suppliers.
- Discuss the matter with the contract counterparty as early in this process as possible. The sooner the parties notify one another of concerns about performance or inability to perform, the greater likelihood of resolution of disputes. The parties should communicate to assess alternative means of performance and try and find a practical and reasonable solution or determine if there are any mitigating steps which may be taken to avoid or reduce disruption to operations.
- Before invoking a force majeure clause, a party is usually required to take reasonable steps to mitigate the effects of the event which it is claimed is force majeure. Even where this is not expressly stated, it may be implied. For example, in respect of wording such as “circumstances beyond reasonable control”, it may be implied that an event is not beyond a party’s reasonable control unless it has taken steps to avoid or mitigate it.
- Identify the notice requirements. Any party which makes the decision to seek to enforce a force majeure clause, should carefully follow the notification process in accordance with the terms of the contract. Such a clause will typically set out the scope of the remedy available to the party and the steps necessary to activate the clause. It is critical that if a party intends to rely on this clause, it follows the process outlined in the contract to ensure there is no breach.
- Throughout this process, a business should organise and retain all supporting documentation.
What protection can a force majeure clause afford?
A business may be in a position to avoid liability where the delay or failure to perform is solely due to an event outside of their control. Although it should be noted that force majeure operates only as a relief from delay or performance of contractual obligations and doesn't allow a contracting party to rely on force majeure to require the performance of obligations.
It may operate to suspend the affected party’s obligations and/or remove their liability for any breach caused by the force majeure event where that party has taken all reasonable steps to overcome or mitigate such event and avoid invoking the clause. However, depending on their construction, extended force majeure clauses may also include the right for the non-affected party to terminate the agreement if the event continues for a certain prolonged period of time.
Force majeure will not necessarily relieve a party of all payment obligations. While a party may be relieved from its payment obligations where they are tied to the provision of deliverables by the other party, a party may not be relieved of its fixed periodic payments (e.g. monthly licence fees or rents).
Does COVID-19 constitute a “force majeure” event?
There is no standard definition of ‘force majeure,’ and the scope of such a clause will depend on its construction and interpretation. In Coastal (Bermuda) Petroleum Ltd v VTT Vulcan Petroleum SA (No 2) (The Marine Star), the English Court of Appeal held that force majeure clauses should be interpreted by reference to the words used by the parties, rather than their general intention. A business should therefore carefully consider the language used in force majeure clauses in its contracts having regard to the remainder of the contract when determining the protection the clause affords.
Force majeure clauses in contracts usually provide for a non-exhaustive list of unforeseen events or circumstances which would qualify, however, some may set out an exhaustive list of qualifying events.
Provisions most likely to succeed in the context of the COVID-19 outbreak are those which specially reference disease or which envisage such an outbreak. In circumstances where there is no specific reference to disease, epidemic or quarantine, the same may be caught by ‘Acts of God,’ ‘Acts of Government’ or by general wording such as ‘other circumstance beyond the parties’ control.’
It is important to monitor developments as new directions from the WHO or the Irish Government may influence whether or not COVID-19 falls within the scope of a force majeure clause which does not specifically provide for disease or similar.
Can I rely on the force majeure provisions in my contract?
In order to rely on a force majeure clause:
- Performance of the contract must have been prevented, hindered, or delayed due to an event not within the reasonable control of the party seeking to claim force majeure. In cases where the force majeure clauses sets out that the event in question must prevent performance, as per Tennants (Lancashire) Ltd v G.S. Wilson & Co. Ltd., the party seeking to rely on the clause must establish that performance has become legally or physically impossible and mere difficulty or unprofitability will not be sufficient.
- The relevant event (e.g. the outbreak of COVID-19) must be the only effective cause of default or delay. The recent English High Court case of Classic Maritime Inc v Limbungan Makmur SDN BHD outlined that it must be clear that, if the force majeure event had not happened, the contract would not have been breached. Therefore, in order to rely on this protection, the force majeure event must not only cause the contractual breach, but it must be the only cause of the contractual breach.
Does the foreseeability of an event prevent reliance on a force majeure clause?
This will depend on the construction of the specific force majeure clause. With the exception of the definition of an "Act of God", there is no general requirement that the event of force majeure must have been unforeseen. Where a party seeks to rely on catch-all language like “circumstances beyond reasonable control”, it is likely to be more difficult to assert that circumstances were beyond a party’s reasonable control where they were foreseeable.
What if there are no force majeure provisions?
Our Insight piece takes a further look at the following options for businesses in circumstances where a contract does not contain a force majeure clause or where such provisions do not apply:
- Doctrine of Frustration;
- Termination for convenience;
- Price variation mechanisms; and
- Contract management mechanisms.
For more information on the content of this Insight, please contact:
Maria Walsh, Solicitor | E: email@example.com | T: +353 1 6054236
Susan Moore, Solicitor | E. firstname.lastname@example.org | T. +353 21 2332834