Force Majeure Clauses and COVID-19

A Force Majeure Clause is commonly found in commercial contracts which excuse either party to the contract from an obligation when an extraordinary event occurs, such as a war, riot or a global pandemic.

These clauses are being more closely examined than ever, as businesses seek to stem losses and disruption as a result of the COVID-19 pandemic.   Force Majeure is a contractual clause rather than a general doctrine, so it cannot be generally relied on under Irish law.

In order to rely on a force majeure clause, the relevant circumstances must be unforeseeable by all contracting parties. The obligations must be impossible to perform due to the force majeure event, not just more difficult or more costly.

Force majeure provisions in commercial contracts usually list specific events that the parties agree will constitute force majeure. This will often include outbreak of disease, war, work stoppages, actions of governments and extreme weather events. Since the outbreak of foot and mouth disease in 2001, it has become common to specify epidemics and pandemics. Some contracts may also include industry-specific eventualities.  These may be interpreted to cover COVID-19 or the social restrictions imposed by the government.

On 11 March 2020, the World Health Organisation announced its assessment that COVID-19 can be characterised as a pandemic. If a clause specifically refers to pandemics – or indeed work stoppages, layoffs or actions of government – as events of force majeure, then a clause may be activated by the outbreak of COVID-19 and subsequent events. There is usually a specific timeline in which force majeure must be notified and failure to do so may limit the ability to rely on the force majeure provision.

Where a force majeure clause is successfully relied upon, the relevant party may be excused from performing their obligations under the contract, or their obligations may be suspended until the force majeure event passes. The precise effect will depend on the drafting of the clause. Most clauses operate to permit the side that is not in default to exit the contract without penalty but some clauses operate to allow either party to withdraw from the contract. This highlights the importance of ensuring that you fully understand the consequences of a contract before triggering a force majeure clause.

Overriding factors such as industry specific regulations, codes of practice or international law may also be relevant.

It should be remembered that any party claiming force majeure relief is usually under a duty to show it has taken reasonable steps to minimise its losses as a result of the force majeure event.

 

Force Majeure and Building Contracts

The RIAI 2017 Building Contract is the most commonly used building contract in Ireland.  In it, the term force majeure is not defined and therefore will be interpreted by reference to the intention of the parties when entering into the contract. Some contracts may specifically make reference to a “pandemic”, “epidemic” and/or “disease” which would cover delays caused due to COVID-19. Most contracts, however, will contain more generic catch all provisions referring to “acts of god”, “natural disasters”, “government action” or “events outside the reasonable control of the parties”.

Where a contract does not make specific reference to “disease” or “pandemic”, it is unclear whether delays caused as a result of COVID-19 would qualify as a force majeure event. It is conceivable due to the unprecedented nature of the pandemic and the restrictions necessitated by it, that courts may interpret these clauses in a way that does not deem a force majeure clause to apply in the current situation.

 

Frustration

The equitable doctrine of frustration applies where the performance of the contract has become impossible due to the COVID-19 pandemic.  It is based on reasonableness and fairness, but it has very limited applicability. The test is extremely subjective and is applied in every case on its own merits.

While every claim for frustration will turn on its own particular facts, the following principles are derived from the judgment of McWIlliam J in McGuill -v- Aer Lingus Teoranta and United Airlines Incorporated (High Court, Unreported, 3 October 1983):

Frustration will not apply in circumstances where it is still possible to perform the contract, even if it is a greater economic burden. It will not apply where it simply becomes more difficult to perform a contract.

Frustration may however apply in circumstances where it has become impossible to secure the benefits envisaged by the contract.  These are known as the ‘Coronation Cases’ from the landmark cases of Krell -v- Henry [1903] 2KB 740 and Herne Bay Steam Boat Company -v- Hutton [1903] 2 KB 683 where the contracts that were frustrated were for the viewing of the Coronation of Prince Edward, the Prince of Wales, which did not happen.  These cases defined frustration as being a situation where the precise purpose of the contract becomes impossible.

Although the scope for frustration is extremely narrow, there may be some situations whereby contracts can be deemed to be frustrated by the pandemic. Key considerations will include whether the contract has become physically or commercially impossible to perform or whether the obligation under the contract has become “radically different” to that which was initially envisaged by the parties.

 

Conclusion

Whether the COVID-19 pandemic would constitute a force majeure event will depend on an objective interpretation of a number of factors including:

If you require further information, please contact us by telephone on 01 676 5473 or by email at mail@mwmlegal.ie

 

Disclaimer

This information is for guidance purposes only.  Each contract is judged on its own circumstances and the legal landscape is constantly changing. It is not and should not be regarded as a substitute for taking legal advice.  If you are affected by these issues, please contact us for specific legal advice.