The Chinese Government is issuing force majeure certificates to companies who are unable to satisfy the commercial terms under their contracts. The aim here is to attempt to protect those companies from breach of contract claims in light of the coronavirus outbreak.
Where do we contractually stand in the UK?
Will future travel restrictions or lockdowns driven by the coronavirus impact on your ability to perform your contracts or to require the other party to perform?
The intervention of the Chinese Government is welcome and appears to provide comfort to those parties affected, but under a contract governed by English law the party seeking to exclude or limit its obligations under the contract will need to rely on the contractual terms agreed with its counterparties. These usually take the form of exclusion clauses and force majeure clauses.
What is force majeure?
The concept of force majeure does not exist in English law, the term “force majeure” is derived from French law.
A force majeure clause will usually provide details as to what happens if certain unforeseen events arise, which impact on a contractual party and which events were beyond the control of the party relying on the clause. The party suffering from the event is excused from, or entitled to suspend, performance of all or part of its obligations under the contract.
The events are usually extreme events, not caused by either contracting party and could include outbreak of war or natural disasters. Given the recent outbreaks of various flu epidemics, is the coronavirus an unforeseeable event? Is “disease” or “epidemic” included within the terms?
Where a party is seeking to rely on this powerful exclusion mechanism, it will need to refer back to the underlying contractual terms and understand the full extent of any force majeure drafting included.
The party seeking to rely on the force majeure clause must prove that the force majeure event falls within the clause and that non-performance was due to the event.
If there is no force majeure clause in the underlying contract, then any form of certification issued by a government body, effectively trying to excuse the defaulting party, may not make any difference.
Force majeure cannot be implied into contractual terms, it must be specifically drafted.
Because a force majeure clause will attempt to exclude a defaulting party from liability under a contract, the English courts will look to interpret the clauses quite strictly and will ask what the parties intended at the time of making the contract. The courts will give general words their wider and natural meaning where appropriate.
In an English case relating to the compliance with government requests, it was determined that a government authority’s request to a party not to perform a contract did not fall within the contractual force majeure clause because the affected party had procured that the government authority issue the request.
It’s in the detail!
Even if such a force majeure clause is drafted, the detail of that clause is still critical and a high-level general force majeure clause may not include excusing the defaulting party due to the impact of the coronavirus on that party.
Common wording included within force majeure contracts frequently require the party relying on the clause to evidence:
- that the event was beyond its reasonable control;
- that the event has significantly prevented or delayed its ability to perform the required terms. Under English law just because the event renders the performance more expensive or less economical on a performing party will not mean that it falls within force majeure; and
- it has taken mitigation steps.
Whether the contractual force majeure clause includes the coverage to cater for the coronavirus outbreak and/or any resulting government restrictions will really depend on the scope of the clause.
It is usual to see further drafting in these clauses dealing with contract pricing, suspension of payments and services, resumption requirements, and a potential to terminate.
Even if you do not have a force majeure clause in your contracts, or if the force majeure clause you have is not appropriately drafted so as to capture coronavirus, it could be that the English law doctrine of frustration could apply. So, if the event of coronavirus causes the contractual obligations of fulfilling party to the contract to be commercially impossible or where, for example, the virus outbreak causes the fulfilment of the contract to be something very different to what was agreed, it may be that the contract is “frustrated”. This may provide recourse to the party seeking to rely on the event as the contract is automatically discharged when a frustrating event occurs so that the parties are no longer bound to perform their obligations.