Does Covid - 19 trigger the Force Majeure clause in a contract?
Force majeure clauses are what commercial lawyers will be chewing on for breakfast, lunch and dinner for the foreseeable future. Force majeure is intended to cover situations where a party cannot fulfil its contract obligations because of an unavoidable and unexpected event over which it had no control. But it is far from a ‘get out of jail free’ card.
The first thing to note is that force majeure is different in the civil and common law. Civil law recognises a ‘doctrine’ of force majeure, but this background framework does not exist in the law of English and Wales, where it all comes down to the precise wording of the contract itself. ‘You are more likely to be able to claim force majeure due to Covid-19 in civil law jurisdictions such as France and Spain, than in English law – because of the ability to rely on legal doctrines of force majeure and of hardship,’ explains Matthew Saunders, a partner at Ashurst. He adds that with contracts in the oil and gas sector, for example, being worth tens of millions of pounds each, the question of which law applies is ‘worth arguing about’.
For contracts governed by English law, force majeure clauses will fall broadly into two camps: those that specify a list of the events that will trigger force majeure, and those with more ‘generic’ wording and, perhaps, more wiggle room. Contracts that specify ‘pandemic’ as a force majeure event are rare and will normally involve a party from Asia who has learnt lessons from SARS. But even if ‘pandemic’ is listed, invoking force majeure may not be easy, Upson says: ‘I’m convinced Covid-19 can be considered a force majeure event; after all, Ebola was. But you have to look at what is being prevented and whether Covid-19 is really preventing it. If you’re running a restaurant, for example, it is government regulations, rather than coronavirus itself, that is the relevant event.’
And even if the regulations – rather than the virus itself – are capable of triggering the force majeure clause, this will not help every sector. Upson says: ‘I feel for the construction industry. The regulations don’t say that the construction industry is shut down, but in March and April most of the sites were closed because employers were doing the right thing to keep people safe. In a dispute, the other party will say – what was stopping you [from fulfilling the contract]? Not the regulations.’
One concept sometimes listed as giving rise to force majeure is an ‘act of god’ – an uncontrollable, unpredicted, natural event. Is coronavirus an act of god? Again, there is the question of whether the virus itself caused the loss, or government intervention. There is also the question of foreseeability.
Saunders observes: ‘Back in December, you could say that a pandemic was not foreseeable, but you couldn’t say that in April or May. There is a strong argument – from pretty ancient 19th century case law – that an act of god needs to be unforeseeable; so you probably can’t rely on an act of god for contracts entered into after coronavirus became known.’
Saunders notes that parties are also seeking to invoke ‘change in law’ provisions in their contracts to free them of obligations. He explains: ‘If there has been a “change in law”, then relief can be obtained. What is interesting about change in law clauses is that they are not generally restricted to “law” in the sense of decisions by parliament or the Supreme Court.
‘But “law” often includes things like mandatory guidance, and much of what has happened in relation to coronavirus has been in the form of mandatory guidance, or edicts issued by government. There was a week or so between the instruction given by Boris Johnson to “stay home” and the Coronavirus Act in which regulations were made, so during that period it was just mandatory guidance that was in play.’
Even if parties can establish that the pandemic itself, or the Covid-19 rules, fall into the contract’s definition of force majeure, that will not be the end of the matter. Depending on the wording of the clause, they will probably still need to show that they were prevented from fulfilling their obligations and could not have fulfilled the contract in another way.
With so many legal questions thrown up by the pandemic, the approach taken by the courts will be crucial. Upson predicts that judges may adopt a ‘more expansive view’ of how force majeure clauses should operate in future legal disputes.