John Tunnard of 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.
Does the non-affected party have to do anything to help the affected party and what about continuing to pay them?
Again, this will depend on the contract. The non-affected party may have a contractual obligation to help the affected party to mitigate the impact of the force majeure event. This is not common in most media agreements.
What about the fact that the customer may have to keep paying for something (for example, a service) they are not receiving?
During Covid-19, cashflow/expenditure is at the top of the list of priorities for businesses. It is therefore likely that an obligation to continue paying for services not being received will underpin negotiations arising from disputes at this time.
Unsurprisingly, the starting point is, as usual, to look at the terms of the contract.
It is not unusual for a contract to require a customer or licensee to continue to pay a supplier or licensor even if it is affected by a force majeure event. A contract might alternatively provide that the sums payable by a customer are reduced while performance is affected. For the present, the important point to bear in mind is that if the provisions of an English law contract are clear, and especially where the contract has been negotiated by sophisticated parties with advice from lawyers, the courts will be very reluctant to step in.
NOTE: Look at the other provisions of your contract!
It’s important never to look at a force majeure clause in isolation. Take a holistic view of the entire contract. Other clauses that may be relevant include:
Payment – considered above- check whether there are any rights for the customer to withhold payments if obligations are not performed due to force majeure or not.
Suspension – are there any rights for the affected party to suspend its performance (for example, due to economic changes or under an express ‘hardship’ clause)?
Changes in the law – many countries, to include the UK, are introducing new emergency laws to deal with COVID-19 which could make performance of obligations more difficult to adhere to and indeed more expensive. Consider how this is dealt with under the relevant contract. Change in law may be a force majeure event itself, but a contract may also have a separate provision which specifies what the consequences of a change of law will be.
As highlighted above, first check how any references to “applicable law” are defined (if at all), and consider whether it includes guidance, court or regulatory orders as well as primary legislation. For example, if a music festival is to be held in Germany and local law impacts on the costs of performance, does this still trigger a change in law price adjustment if the contract is governed by English law?
Termination – can either party (including the party affected by force majeure) terminate, and will any compensation be payable for termination for force majeure? And, similarly, are there any clauses entitling a party to terminate the contract where a material adverse change or event means that the contract would be loss making?
Health & safety – can the supplier or licensor still comply with health and safety regulations and guidance that it may be contractually bound to comply with?
Key personnel – are specified people who are stated in the contracts “key man” provisions still available or have they been furloughed, for example?
Notice clause – As stated above, notice plays a hugely significant role in respect of obligations under a contract. Read the notice clauses carefully to ensure that any notices that have to be given are valid and look out for provisions regarding “deemed service” of notices
Variations – another key aspect of contracts. Please bear in mind that any contractual amendments agreed due to COVID-19 will need to be made in accordance with any variations clause. Contracts often specify that any changes must be agreed between the parties in writing to be effective. The UK Supreme Court has made it clear that the terms of a contract specifying how any amendments should be made must be complied with in order for variations to be effective, sometimes with results that can be surprising and unexpected from a commercial perspective.
No waiver – a no waiver clause does not necessarily protect a party. A non-breaching party should still reserve its rights and remedies and notify the party in breach by formal contractual notice.
Dispute resolution – a dispute resolution clause may include a process which requires parties to resolve any dispute by following certain steps or using a particular process. These clauses can be very prescriptive and should be followed carefully.
Could any other implied English law be relevant? Frustration?
Yes, we are all currently frustrated in some way or another, but this is with reference to the English common law doctrine of frustration.
If a contract includes a force majeure clause, the common law rules on frustration are ordinarily displaced in relation to that same event so that frustration cannot be relied on as an alternative; this means that if a party has a legitimate claim for force majeure but fails to invoke a contractual procedure under the relevant clause, it is unlikely that it could argue that a contract has been “frustrated” in relation to the same event.
However, even if there is no force majeure clause, frustration may enable a party to avoid its contractual duties if it can show:
- the event was unexpected and beyond the control of the parties; and
- the event renders it physically or legally impossible to fulfil the contract, or transforms the obligation to perform into a radically different obligation from that undertaken when the contracted was agreed.
- Follow the contractual process for providing notices are required by the agreement meticulously.
- Take a holistic view of the contract – consider what clauses may help/hinder and don’t forget to look at the boilerplate.
- Retain documented evidence of steps you are taking, the reasons surrounding those steps and steps taken to mitigate. This could include credible records – including trustworthy public domain information where available – which set out the factual context for the decision in question. It is important to document the alternative options available at the time of performance (or lack of them!).
- Consider whether you wish to adopt a collaborative approach to resolve the issue. Early engagement with contract counterparties and a collaborative resolution of issues may be preferable to an adversarial approach.
- Ensure you make all required third party notifications in timely fashion (including insurance providers etc.); and
- Most of all, feel free to contact us here at Taylor&Emmet where our experienced team are on hand to offer you bespoke advice and to guide you through the necessary processes.