Does Covid-19 have a legal aspect? Yes – it may be in your force majeure clause!

16 March 2020

Introduction – the importance of boilerplate

I was going to do a series on boilerplate provisions – those little clauses tucked away at the back of a contract – as reporting on cases very has shown me how important they often are. While many lawyers get bogged down in the frenzy of negotiating liabilities, indemnities and warranties, sometimes a case never gets that far as some little boilerplate provision is actually decisive of the issue.

My aim was to start at the back of the contract with the clause that so often concludes the “frontend” of most commercial contracts – the jurisdiction clause. However, the emergence of Covid-19 has changed my plans. The delicious irony of such an unforeseen event causing a change of plan is not lost on me. In fact, since the Buncefield fire, my experience is that lawyers have been negotiating force majeure clauses more assiduously than before. Brexit has added fuel to the fire (no pun intended with reference to Buncefield). What started as a simple catch-all to excuse non-performance for something coming from left of field has turned out to be a hot potato in many modern negotiations.

A frustrating experience

What happens if you don’t have a force majeure clause? What does the general law provide?

There is a common law doctrine of “frustration”, although you don’t hear much about it as it is rarely invoked successfully.

The courts have expressed the concept in various ways over the years, but lawyers are all agreed that it is of very limited application as a means of getting out of a contract. I wrote about a recent example here looking at the case of Canary Wharf v European Medicines Agency [2019] EWHC 335 (Ch). This case arose because of Brexit – the EMA had taken a long lease of premises in London to carry out its functions. Naturally, after the Brexit referendum, it needed to find another location in the EU. Had the lease become frustrated by Brexit?

The judge in that case picked his way among many authorities on the subject. Essentially, there are various ways of showing frustration. In one type you have to show that the contract has become impossible of performance – not just that it is economically non-viable or less profitable or more burdensome to perform, but actually impossible because something unexpected has happened to make it so. Another way of demonstrating frustration is to show that the performance of the contract will be something radically different following the event said to be frustrating – it was this type that the judge in Canary Wharf considered. Reading the lengthy judgment will show that it is not any easier to prove frustration on this ground or any other: in the end, the court held that the EMA had failed to show that Brexit had frustrated the lease.

There is another sting in the tail when it comes to invoking the doctrine of frustration, one ignored by many lawyers, and it is this: if the contract provides for unforeseen events by dealing with risk allocation, that tends to oust the doctrine of frustration. So in the Canary Wharf case, the parties had addressed the problem of the EMA having to vacate the premises by allowing it to sub-let, albeit at a price. As the parties had dealt with the potential problem by providing a risk allocation mechanism in their contract to get around the potential problem, it was one of the reasons that the EMA could not claim frustration.

However, this note is not about frustration – the very difficulty of proving frustration means that commercial contracts for years have included a force majeure clause.

Force majeure – exactly what is it?

Answer – there’s no such thing!

The reason why commercial contracts tend to include a force majeure clause is because, without it, there would be nothing in the contract dealing with the unexpected. English Law simply does not have a concept of force majeure, only frustration which, as we have just seen, is very limited.

At times of recession, the cases on force majeure come to the fore as parties seek to rely on them to get out of what have become onerous obligations. An example of this was Tandrin Avation Holdings v Aero Toy Store [2010] EWHC 40 (Comm) in which Tandrin sold an executive jet for $31.75m to the aptly named Aero Toy Store. Tandrin proceeded with the transaction, purchasing the jet from a third party vendor for $26.5m but Aero Toy Store refused to accept delivery and paid nothing. Tandrin terminated the contract and said that it had had to sell the jet for only $24m and claimed damages for its losses. Aero Toy Store pointed to the “unanticipated, unforeseeable and cataclysmic downward spiral of the world’s financial markets” and invoked the force majeure clause. However, the clause itself said nothing whatsoever about the general economic situation – it had a long list of individual events that could be force majeure and it did refer to “any other cause beyond Seller’s reasonable control” but it said nothing about anything beyond the buyer’s (Aero Toy Store’s) reasonable control. The court approached the matter simply applying the words of the force majeure clause itself – there was no special approach, either by broadening the clause out or by trying to restrict its application. Aero Toy Store, in other words, could not get out of its obligations simply by pointing to its own poor financial situation. As the judge observed, that did not constitute frustration either.

So how do you draft a force majeure clause?

This is an eternal conundrum: do you draft a force majeure clause listing out every conceivable event that you might need to rely on as force majeure or do you just include a few words to specify that any event beyond a party’s reasonable control will suffice?

There is no silver bullet. If you list every event, then the one thing that happens to prevent performance is the one thing you inadvertently left out of your list. On the other hand, simply providing for anything beyond a party’s reasonable control could lead to the other party claiming force majeure whenever anything untoward occurs.

You can of course hedge it – provide a list of events and finish up with “… and any other event beyond a party’s reasonable control”. You ought to be aware of the canon of construction going by the quaint Latin name of eiusdem generis (meaning “of the same type”), which means that a general proposition will be interpreted in line with any specific items preceding it – so the general words will be understood in the light of the preceding list. It is an approach to construction, not a firm rule. However, it could limit the intended breadth of the words.

Words along the lines of “beyond a party’s reasonable control” may sound nice and vague, but there is a bit of case-law on the meaning of such wording. For example, in Channel Island Ferries v Sealink  [1988] 1 Lloyd’s Rep 323 the Court of Appeal thought that such language put a duty on a party to take reasonable steps to avoid the operation of the clause or to mitigate its effects: in other woreds, a party could not passivly stand back and let things take their course.

Typically, when making a list, parties include such things as

  • act of God – in these secular days, this phrase is still encountered and is generally taken to refer to natural disasters such as floods, earthquakes, volcanic eruptions and so on
  • fires (not started by either party)
  • wars, terrorist acts, invasion
  • blockades or trade embargoes

The actual list may be quite long, depending on the drafting. The really important thing is not simply to accept the words as they are first drafted but to see whether they include some of the things that you anticipate might actually occur in the course of your particular contract. If you are working in an area where some events do crop up from time to time, you might want to include them as force majeure events. Which leads to the next point.

Cheating

Actually, it is not really cheating. The force majeure clause has become the dumping ground for a large number of items which are not necessarily what most people would call force majeure. Given that the force majeure clause comes naturally towards the end of a contract, the reader’s eye may well have glazed over when reading through the contract, and the reader may just assume that the clause contains the usual litany of disasters without paying attention to the detail.

In fact, some parties put some things in there which may not really be force majeure in the sense that they are not beyond what most people think of as being within that party’s control. Examples include:

  • failure of subcontractors – the normal expectation is that a contractor takes responsibilty for its subcontractors’ failings
  • failure of or delay in supply – as with the above, supply chains are normally thought to be within a party’s control so if one supplier lets you down, you should seek alternative arrangements
  • shortage of staff – a party should be expected to maintain recruitment at the right level
  • financial hardship – this is something normally seen as being part and parcel of ordinary business and within a party’s control
  • government actions or regulations – if this is in the form of changed regulations, you may want the provider to comply with any such new or changed requirements and, in fact, there may be a clause dealing with compliance with changing legal requirements

As stated above, you do need to read the words themselves with a questioning mind.

Thresholds

Having decided on your definition of force majeure, you need to decide what level of interruption is required to constitute force majeure. If you say that such and such an event must “prevent” continued performance you may be setting the bar quite high. “Prevent” could be interpreted as meaning actually physically or legally stopping performance. At this point, you are back to the world of common law frustration.

As against which, you could use a word like “hinder”, which could be interpreted in a broader sense than “prevent”. In the old case of Tennants (Lancashire) v G.S. Wilson & Co [1917] AC 495, suppliers of a chemical had a clause providing that “delivery may be suspended pending any contingencies beyond the control of the sellers or buyers (such as . . war . . ) causing a short supply of labour, fuel, raw material, or manufactured produce, or otherwise preventing or hindering the manufacture or delivery of the article”. The First World War interrupted supply and the supplier gave notice of suspension to all its customers. In fact, they got a small amount of the chemical at a much higher price, which amount would have satisfied the buyers in this case but none of the suppliers’ other customers. However, the court held that “hinder” was broad enough to justify the suspension. The suppliers had not been prevented, but they had been hindered. Importantly, the view expressed was that a mere price fluctuation would not suffice to amount to “hindering”, but the physical shortage would do so.

What is the effect of a force majeure clause?

The effect of a force majeure clause is for the parties to set out in their contract: the court will not do it for them.

Normally, the parties will provide that a force majeure event suspends performance of the contract until such time as it is possible to continue with the contractual performance. There can be notification provisions around this, requiring formal notice of the event and a desription of the performance that has been affected and what is being done to circumvent the force majeure event. Getting the notice right is crucial – there is a good deal of case-law on this and the bottom line is that strict compliance with notification provisions is necessary in most cases. A recent example is GPP Big Field v Solar [2018] EWHC 2866 (Comm) where a force majeure clause required the party claiming relief to notify the other party “without unjustified delay”. Another clause made this even clearer saying days when work was suspended could only count as force majeure after any force majeure events “have been duly communicated by [the contractor] to [the customer] without unjustified delay, in the terms of this paragraph”. The court found that any notice for this purpose had to comply with the formal notice provision requiring (among other things) certified letter with acknowledgement of receipt with a copy sent to the lawyers. On the evidence, there was no such notice – giving oral notice would not suffice and the court gave a limited reading to “without unjustified delay” so that waiting some months before writing would not do.

In larger, more complex projects, the contract may provide that the parties should continue with the performance of the rest of their contractual obligations to the extent that they are not affected by force majeure and compelling the provider to find alternative methods of performance. The clause may go on to provide that a party (or both parties) may terminate the contract if the force majeure continues for more than a defined period.

As all of these things have the propensity to cost money and involve effort, they have come to be hotly negotiated. At the risk of generalisation, the provider of a service will want to get out quickly with minimal obligations regarding ongoing performance following force majeure whereas the customer will not want the cost and effort of a re-procurement and so will want to have the right to compel performance during and after the force majeure event to the extent possible, leaving termination as an option for it alone, the customer.

Another approach to force majeure is to draft a clause in the form of a “contractual frustration” clause: the parties will define force majeure and then provide that, if a defined event of force majeure occurs, the contract is automatically terminated. Again, there will normally be notification provisions around this, but the clause is simpler on the whole: if x happens, then the contract is simply terminated and there is nothing the parties can do to keep it going. This tends not to be used so much.

The distinction was discussed in the recent (and complex) case of Classic Maritime v Limbungan Makmur [2019] EWCA Civ 1102 where Limbungan was obliged under a contract of affreightment to provide various cargoes of iron ore pellets for shipment by Classic out of various named ports in Brazil. The Fundao Dam burst made shipments impossible from the area affected by the burst. The force majeure clause was very long, but the parties were agreed that the dam burst was an “accident at the mine” and that it was “any other causes beyond the [Classic’s or Limbungan’s] Control”. 

The judge and the Court of Appeal approached the matter on the basis of applying the words on the page. On that basis, the contract was not a “contractual frustration” clause, terminating the contract immediately on the occurrence of the force majeure event. Rather, it was an “exceptions” clause which kept the contract alive but potentially provided a defence following a force majeure event as defined. The factual situation was complicated by the fact that Limbungan was not going to make the shipments anyway as the market for its iron ore pellets had collapsed. This being so, the force majeure clause did not apply as  Limbungan would never have supplied any iron ore pellets for shipment – it had no customers to ship them to. According to both courts, there had to be some sort of causal link between the force majeure event and the failure to perform: in this case, the failure to perform consisted of the prevailing market conditions preventing Limbungan having anything to ship. This was not a force majeure event as defined in the contract. Having failed to make shipments as it was obliged to do, Limbungan was liable in damages notwithstanding the force majeure clause.

Yet another possibility used in some industry sectors (not normally in the technology sector) is the use of a Material Adverse Change (or MAC) clause. As they are not widely used outside of some sectors (corporate and financial services sectors make good use of them, for example) and as they tend to raise rather different questions, no further consideration will be given to them here. One issue that comes up a lot with these clauses is whether there should be an objective or subjective test – does the determination of whether there has been a MAC depend on whether the party claiming it “reasonably believes” (or whatever) that it has occurred or does it depend on whether, objectively speaking, it actually has occurred. As I say, this gets into a different ball-park and I will not pursue this here.

A universal panacaea?

What happens where you have various factors operating simultaneously to prevent performance, one of which is force majeure and another of which is not? Everything will depend on the drafting of your force majeure clause. Termination of a contract is normally the end of a complex process where one party has found that it is simply unprofitable to proceed and is looking for the exit: the force majeure clause may give it an opportunity to exit without liability. All with come down to the wording used.

This came up recently in Seadrill Ghana v Tullow Ghana [2018] EWHC 1640 (Comm) where Tullow hired a drilling rig from Seadrill. The relevant clause defined force majeure as including “Drilling moratorium imposed by the government”. In a sense, there was a drilling moratorium as the government of Ghana had stopped drilling following an order made by an arbitral tribunal adjudicating on disputed title to the area where the proposed drilling was located. However, the government of Ghana also stopped Tullow drilling for the more prosaic reason that a Floating Production Storage and Offloading unit operated by Tullow had broken down and Tullow could not progress its proposal with Ghana for deploying the drilling rig elsewhere. So there were two reasons in operation simultaneously and one was force majeure while the other was not. The court held that what had happened did not fall with the force majeure definition: while there had been a moratorium, the real reason for not drilling was the fact that Tullow’s infrastructure had broken and it could not progress its proposal for more drilling with Ghana. That was not force majeure.

So what should I be doing now?

Everything is fact and context specific. At the moment, parties are urgently reviewing their force majeure clause to see what they say about epidemics or plagues. It may mention “plague”, but a plague is properly a bacterial infection, not a virus like Covid-19. Having mentioned eiusdem generis above, it is as well to mention another canon of construction, “inclusio unius est exclusio alterius” (meaning “inclusion of one means exclusion of the other”). In other words, if you mention bacterial infection specifically, this approach to construction might lead to the conclusion that the parties intended not to include viral infection.

If the clause mentions an epidemic, the next question is whether we are yet at that stage. It is an interesting question: the Government famously recently presented a graph showing a sombrero representing the number of infections over time, the rate of infections sharply peaking so as to look like a sombrero hat, but at what point along the line does it become an epidemic? As I say, interesting question.

As a general checklist, people should be thinking of the following:

  • review force majeure clauses and decide whether the clause provides for e.g. Covid-19
  • ascertain any conditions necessary for invoking force majeure e.g. notification or providing “reasonable details” of the event (there is a vast amount of case-law dealing with notices and communication of reasonable details – this will have to await my note on Notice clauses)
  • consider whether continued performance is feasible or whether some alternative performance is either possible or actually mandated by the force majeure provision
  • remember that words like “beyond a party’s reasonable control” have been interpreted as meaning that a party must take active steps to progress performance or mitigate the effect of a force majeure event
  • note what the clause requires in terms of continued attempts to perform, alternative means of performing, standing teams down, re-commencing work
  • note what the clause provides for termination e.g. following a minimum period of continued force majeure, and ascertain whether you would in fact like to terminate for force majeure if the clause permits it
  • review contracts currently under negotiation to see what is provided in the case of the current situation and what would happen if the situation should worsen
  • check your insurance position and consider whether you need to notify the insurers of any potential claim (you may be in for a nasty shock following the SARS threat of a few years ago when insurers excluded liability following such epidemics)
  • where you may need to claim force majeure, document your processes, mitigating steps, decision-making, basically prepare for the worst (and hope for the best)

For a more detailed checklist, you can take a look at my checklist here.

Always remember – if you are suffering because of some force majeure event, the other party might be as well. It may be a good idea to see whether some commercial re-negotiation of the contract is possible to ensure that both parties’ interests are protected. After all, while it is wonderful to have an indefeasible legal right, it is even better to receive performance of the contract you entered into.

A final point is this: force majeure clauses often deal with the unforeseeable and may even use that word. If you are negotiating a contract right now which talks about unforeseeable events, is a Covid-19 caused economic meltdown unforeseeable? I would suggest that it is highly foreseeable at the moment. In dealing with this issue now, it is not so much a question of relying on some general words in the force majeure clause, but rather dealing expressly with the risk allocation for that foreseeable, even existing, event somewhere in the drafting. It all depends on the particular wording of your clause of course: there is certainly some authority to suggest that the normal force majeure wording we see does not require that a force majeure event should not exist at the time of contracting (see Navrom v Callitsis Ship Management [1988] 2 Lloyd’s Rep 416).

It cannot be stressed enough that this “boilerplate” clause that is force majeure is not really standard boilerplate at all – it should bespoke to every deal.

Richard Stephens 16 March 2020

Caveat – force majeure clauses are highly word and context specific. Always take professional advice before acting in particular circumstances, whether drafting them or seeking to rely on them.