Many businesses are continuing to reel from the Coronavirus pandemic and the effects of the lockdown. It is clear that this is not going away anytime soon. As a result, the majority of businesses will be, and will continue to be, significantly impacted.
The concept of an “act of god” or “extraordinary circumstances” is not new under the rules governing UK contracts and may, in certain circumstances, provide an exit under the contract, thereby relieving a party from its contractual obligations. This type of provision is referred to as a force majeure clause and is generally intended to include occurrences beyond the reasonable control of a party.
Force majeure clauses are not uncommon in commercial contracts. Typically, a force majeure clause will either extend the time for the performance of the contract and/or, in certain circumstances, excuse performance altogether.
Typically, clients are asking us what is the position if a business is unable to deliver under a contract due to:
- a lack of resource monetary or otherwise;
- unavailability of parts or raw materials; or
- it has become prohibitively expensive.
Points to Consider
There is no standalone concept of force majeure under English law. The starting point is always to look at the actual contractual term and its particular construction. Whether a virus pandemic will come within the clause in question will depend on a number of factors, such as whether the force majeure events are specifically defined in the contract. The approach taken is to look at the natural meaning of the words used in the contract and whether the present circumstances, the affected party is seeking to rely upon were intended to fall within the definition.
Once the scope of the clause has been considered the affected party must show a direct causal link between the event, in this example the ‘COVID-19 pandemic’, and its inability to perform the contract in time, or at all. So, developing the example further, a more lenient contract may only require the event to have hindered the party, whereas a more stringent contract may require that the event has prevented performance altogether.
In any event, the party alleging the force majeure must show that it has taken all reasonable steps to mitigate the event and its consequences.
It is always necessary to consider whether a reasonable alternative course of action could have avoided the failure to perform in time or at all.
If a party seeks to rely on a force majeure clause, it is necessary to act quickly. A positive action is required to bring the circumstances to the attention of the other party, so as to demonstrate that the affected party is not in breach of contract for failing to perform its obligations, and accordingly that the time for performance should be extended, or that the contract should automatically terminate.
We would advise that wherever possible you seek legal advice on the construction and interpretation of the particular contract in question.
Likewise going forward, consider the desirability of revising your terms and conditions in relation to future contracting on the basis that the continuing circumstances continue to prevail or re-appear at a later date.