Taylor&Emmet’s Media Law Department looks at how English contract law on force majeure and frustration applies to the COVID-19 pandemic and highlights other contractual hints and tips that clients should be aware of.
What does an affected party need to do to show that it can’t perform its obligations?
Once it has been established that COVID-19 falls under a force majeure event under your particular contract, the party seeking to rely on the force majeure clause will need to show a clear link between the event and its failure to perform.
Again, there is no standard formulation in English law contracts. Sometimes a clause will only help a party in breach where it is “unable” to perform its obligations. Other more generous clauses will apply to a party in breach not just where it is point-blank “unable” to perform, but where it is “delayed” or “hindered” in performing its obligations. A clause might use any number of different links between cause and effect.
By way of illustration, the affected parties might have to show:
- That they are PREVENTED – This is likely to mean that performance must have become physically or legally impossible, not merely difficult. For example, a live music event organiser/promoter may have to evidence to an artist that their tour cannot go ahead because the government in the countries where the tour is going ahead has mandated the postponement or cancellation of its event (through legislation or binding guidance). The affected party will generally also need to show that it was “ready, willing and able” to perform its obligations under the contract and it was the force majeure event which specifically impacted performance.
- DELAY – This has a wider scope which may make it easier for a party to secure the protection of a force majeure clause. Using the example above, a music event organiser/promoter arranging an artist’s tour would need to establish that as a result of the force majeure event, performance of its obligations is taking longer than planned. The clause may require the delay to be the direct result of the force majeure event and the affected party will still need to comply with the remaining steps below in order to claim relief.
- HINDER – Similar to above, this also has a wider scope than simply being unable to or prevented from performing and may make protection easier to establish. It’s important to bear in mind that hindrance may not be merely financial: English case law makes clear “the fact a contract has become expensive to perform, even dramatically more expensive, is not a ground to relieve a party on the grounds of force majeure”, unless the contract specifically addresses this. The clause may require the hindrance to be the direct result and the affected party will still need to comply with the remaining steps below in order to claim relief.
What steps do you need to take to mitigate the impact of the force majeure event?
Contracts will often state that the parties have taken “all reasonable steps” to avoid the operation of the force majeure clause or to mitigate its consequences. This is an implied duty which applies, in all apart from exceptional situations, even if the contract is silent on requiring the affected party to mitigate the impact of the force majeure event.
Sometimes the consequences of COVID-19 will be clear and nothing can reasonably be done to mitigate its impact. For instance, Glastonbury has been cancelled by the organisers, therefore a supplier who has contracted to provide entertainment at the festival cannot perform its obligation. It may not always be this simple.
So, what is ‘Plan B’ and how far should you, as a business, go?
It will be a question of fact as to whether an affected party has taken steps to mitigate the impact, but relevant factors could be:
Assuming an event cancellation has not been mandated by law in the applicable jurisdiction, what could the affected party have done to prevent cancellation during COVID-19 (e.g. protective measures)?
Do you have a business continuity/ disaster recovery plan is in place? This might be expected to implement it before it can invoke force majeure.
The fact that taking mitigating steps may be more expensive than performing the original contract usually does not matter. “A mere difficulty or additional expense is not a sufficient ground” for the force majeure provisions to be invoked, and the English courts are particularly alive to attempts to use force majeure provisions to avoid performance for economic reasons i.e. that you can’t afford it in the crisis. Therefore, just because a contract has become more expensive as a result of COVID-19, or even uneconomic, to perform, that will not always constitute a force majeure event.
What does the granting of force majeure ‘relief’ actually mean under the contract?
An entitlement to force majeure relief generally means (1) that the affected party is excused from contractual liability, including damages, in relation to its non-performance (or delay); and (2) either party may terminate the contract where the force majeure event continues for a defined period (e.g. 3 months plus). Relief could include:
- relief from liability for liquidated damages with an extension of time to delivery dates;
- relief from breach of contract claims for non-performance; and
- relief from termination for default.
Whilst you may get bored of my repeating it, everything will depend on the drafting of the contract in question.
It’s particularly important to look out for language such as:
“The parties are relieved of its obligations “if” or “where” it is unable to perform because of a force majeure event”.
However, others will say that this relief is only available:
“to the extent that failure to perform results from the force majeure event”.
To put it another way: if the affected party is not affected from performing some of its obligations as a result of force majeure, it must continue to perform those obligations.
Some clauses will only allow relief:
“…for so long as” or “during” a force majeure event”.
For a party with performance obligations these types of provision can be particularly dangerous, as they suggest that performance has to resume, and be on time, as soon as the force majeure event is over.
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