For most of us, the Covid-19 pandemic has brought sweeping changes to our lives. For weeks now we have been subject to the space of our homes. Now the conversation has begun on easing the lockdown and with that the beginning of our functionality in the new world.
As we will all be emerging into our new lives, it will soon become apparent that the intention to both make the promises and to keep the promises we made are compromised. Promises are the basis of contracts – stipulation of obligations which legal personalities make to each other. It is fair to say that keeping up with promised obligation will at best be onerous and at worst impossible. For businesses and particularly Small Medium Enterprises (SMEs), the disruptions are propping up like never before – delays, shortage of funds, supplies, increase in liabilities, withdrawal of credit lines. The extent to which businesses are tested is apparent from media reports, with some tragically even shutting their blinds for good. In such circumstances what legal avenues are there to reconcile with the new reality of non-performance? Though much will depend upon the individual make of each contract, in England and Wales and in most common law jurisdictions, the answer lies in what constitutes satisfactory discharge by the parties or the law. Consequently, it will be through the invocation of ‘Force Majeure’ and/or establishing the doctrine of frustration that parties can halt the brakes on a contract.
For most express and written contracts, the escape route will depend on a broadly drafted Force Majeure clause. Literally the phrase translates to ‘superior force’ from French. Such a clause allows a party to be discharged from obligations in the event of an unforeseen event. A typical boilerplate clause will most likely be in the lines of –
‘No Party shall be liable for non-fulfilment of its obligations under the Agreement if such non-fulfilment is attributable to force majeure. Force majeure shall be taken to mean events over which the relevant Party has no control and which that Party could not have prevented, avoided or anticipated, including, but not limited to, stoppage of work, strikes, lock-outs, war, terrorism, natural disasters, states of emergency and similar.’
If the clause specifically includes pandemics with reference to ones declared by the World Health Organisation (WHO) then it will be a case of invoking the clause and writing promptly to the counterparty. However, if for instance, the contract does not contain pandemics specifically, then it will be a matter of interpretation. Like in the above clause, can the pandemic related event be covered by reference to ‘event over which relevant party has no control’ or for instance, ‘state of emergency’? The notice has to be timely, persuasive and be clear on the outcome intended to achieve. Parties must articulate whether the force majeure clause is intended to completely discharge itself from the contract or is it aimed to get negotiating leverage on a particular aspect of the contract. Much will depend on the persuasiveness of the communication and the receptiveness of the receiving party of such notice.
Though it is prevalent for all types of industry sector contracts, Force Majeure provisions are now receiving renewed focus in commercial conveyancing and landlord tenants matters. With lots of business operating remotely or transiting to increased online presence, the lower need for physical premises means many businesses will seek to break or surrender the tenancy invoking force majeure. Covid – 19 will thus engender a lot of activity in security of tenure and continuity of leases.
An interesting development on force majeure can be seen in China, where the China Council for the Promotion of International Trade (CCPIT) has been issuing Force Majeure certificates to shield Chinese companies from litigation threats. The CCPIT website states that as of April 20th 2020, a total of over 7000 certificates had been issued against contracts worth RMB 690 billion. Since the onset of Covid-19 this has been by far the most extensive State back endeavour to aide businesses for invoking force majeure. Though internationally these certificates have not always been recognised, this goes to show the importance of force majeure provisions to help discharge contracts.
London Chamber of Commerce (LCC) also issues special Force Majeure certificates. These certificates by LCC will only attest the existence of the force majeure circumstances or fact as pleaded by the party. However, it will not certify whether force majeure applies on behalf of the party. Certificates will only be issued upon application with evidence and payment. The extent to which such certificates will be used by Covid-19 affected business by remains to be seen and its impact assessed.
In the event force majeure cannot be pleaded, or interpreted the fall-back position will be the common law doctrine of frustration. As with most common law doctrines, frustration is very narrowly interpreted and courts tend to lean towards principle enunciated in the case of Paradine v Jane (1647) that obligation of performance is absolute. Judicial activism in Taylor v Caldwell (1873) brought about conservative reform that if an event makes performance impossible then parties could be excused from their respective obligations. Legislators’ activism also lead to the enactment of Law Reform (Frustrated Contracts) Act 1943 that allows a party to recoup money paid towards the contract less reasonable expense if and only if frustration is prima facie established. More recently in 2019, in the case of Canary Wharf (BP4) T1 Ltd v European Medicines Agency, the High Court ruled against a company EMA, seeking relief from a 25-year lease on account of Brexit being a frustrating event. Therefore it is evident that whereas in the principle of frustration is available, establishing it will be a hard sell.
In the service sector, frustration can offer some glimmer of hope on account of the loss of personnel caused by Covid-19 illness. In the 1966 case of Condor v Barron Knights Ltd the courts held that personal incapacity caused by illness was capable of frustrating a contract to provide a service. At times when the workforce is self-isolating for illness or observing quarantine for health reasons, arguments framed around such established case law can provide much needed relief to struggling businesses. However, arguments have to carefully framed to reach maximum impact and ideally should be supported by robustly highlighting the fact-specific impact of the frustrating event.
It is worthwhile to be reminded of the necessity of such a discussion – to insulate the business against litigation/liabilities, minimise business risk and prevent further loss. Businesses can adopt the following measures in view of this objective: –
1. Take advantage of a force majeure clause and seek legal advice to be sure that the facts meet the criteria as envisaged in the contract. Correspond with the other party at the earliest opportunity to give them maximum notice of the discharge.
2. If the contract does not have a force majeure clause or has one but inadequate, then immediately write to the other party to seek consent on varying the contract to insert such a clause. A clause will benefit both parties and the proposal has to look attractive to the other party for them to agree. Take stock of all upcoming contracts and insert a comprehensive force majeure clause. If the other party is amenable then it is worthwhile to take the opportunity to insert a liquidated damages clause to cap damages to a manageable level and insert a Material Change of Circumstances (MAC) clause for future contingencies.
3. In the absence of an appropriately drafted force majeure clause which covers pandemic and government announced shutdowns, businesses should look to explore whether the doctrine of frustration could offer any respite. It is a hard hurdle to overcome, however upon careful reflection of which aspect of one’s obligation is impacted, it could be possible to narrow down the issue and draw an analogy with an established frustrating event. For example, it is that they cannot deliver, or they have run out of resources to produce, or that the transportation and personnel are unavailable. Parties need to keep records of such analysis and any legal advice received. Secondly, parties should communicate the concern with the other parties. This will not only take care of practical need to buy more time to assess the impact of the non-performance, but it will also show activism to mitigate against loss and accountability to insurers to recuperate against incurred losses.
4. If neither is feasible and in most cases, in any event, businesses must negotiate – price drop, longer turnaround time, inserting liquidated damages and price adjustment clauses, flexibility to sources alternative products or from alternative destinations, altering product specification, refund, discount vouchers, credit notes and a myriad of other avenues can be considered to come to a settlement on the best way forward. The important thing is that a settlement is reached. If a business is the receiving end of a detriment then the last thing they need is to feel high and dry. Communication and activism are vital at this stage to give an outlook of compassion and goodwill.
The disruptions caused by the pandemic are resulting in grave consequences to performances of contracts and thus bringing renewed focus to modes of discharge in particular through Force Majeure and Frustration. As discussed above, despite the gloom, there are processes and steps businesses can take to manage the crisis and steer ahead. Most businesses will wish to continue the business relationship beyond the COVID – 19 crisis and businesses can now take this opportunity to explore how to turn a failing contract to a stronger beginning than a sour end.