The COVID-19 outbreak has led to many businesses struggling to meet their contractual obligations, both in the UK and abroad. For some, it may mean having to invoke a ‘force majeure’ provision to lessen the pressure. However, in cross border supplier contracts, it is vital for both parties to assess the details of the clause to ensure everyone is on the same page.
A force majeure clause gives a party – due to unavoidable or unforeseeable events arising - a reason not to fulfil its contractual obligations. These events include natural disasters, wars, acts of government, riots, strikes, and of course, pandemics.
However, the impact of the COVID-19 outbreak on businesses may largely depend on the terms of the supply chain contract.
Although most English law supply contracts will contain a force majeure clause, the term has no recognised meaning in English law. Therefore, whether the coronavirus outbreak and the resultant restrictions are covered will be determined by the wording of the specific term of the agreement.
Depending on this wording, it may be necessary to establish that performance of the contract has become impossible, not just difficult or less profitable. However, some clauses could be invoked where performance is still possible, but the event means there will be delay or other obstacles to overcome.
The party who wishes to assert a force majeure event will need to prove how they have been impacted by it, including the extent to which they can no longer carry out their obligations. Also, the affected party will be obliged to show how they have tried to mitigate the impact of the event where possible.
As well as this, contracts usually contain a requirement that the impacted party gives notice of the force majeure event within a certain timeframe of the event happening, and often include how notice is to be given, too.
When it comes to international supply contracts, a complicating factor is that force majeure provisions vary in different jurisdictions. As such, parties need to assess which law applies in their particular circumstances.
Force majeure is a contractual mechanism that is only available if expressly set out in a contract. Unlike civil law jurisdictions, English law has no statutory provisions governing such clauses, nor will force majeure be implied into contracts under English law.
The language of a force majeure provision will be understood in line with existing interpretation principles under English law and there is precedent regarding the meaning of particular phrases. The English Courts will focus closely on the contractual language used such that each case will turn on its own facts and the contractual interpretation of the relevant term.
If a contract does not contain a force majeure clause, frustration of contract can apply instead. However, its application is quite limited, and the consequences also need to be considered.
Frustration requires a supervening event that is not the fault of either party, and which significantly changes the nature of the contractual rights. It is not enough if the event merely makes it more expensive or difficult to perform the contract. In addition, unlike the invocation of a force majeure provision, frustration results in the termination of the contract. As a result, businesses should only turn to claiming frustration as a last resort.
Although force majeure can be helpful in times like this, where cash flow has slowed dramatically, it can also lead to costly disputes. This is potentially more of a risk in international supply chains, where interpretation can differ considerably.
As it is currently unknown how long the circumstances arising from the COVID-19 outbreak will continue, negotiation may be the best strategy to adopt in order to deliver a fair and realistic outcome for all parties in the supply chain.