While thousands of coronavirus sufferers around the world will be getting doctors’ notes to excuse them from work, Chinese businesses have been getting ‘force majeure certificates’ from their government to excuse them from contractual performance.
Along with Brexit and events likely to be caused by the climate emergency, the outbreak of coronavirus which started in late 2019 will cause and has already caused disruption, delay, added expense and/or significantly increased difficulty in performance for many contracts due to be operative this year.
Accordingly, parties (and their insurers) will be looking for answers to the following legal question: When will those events, or other similar ones, excuse contractual performance under ‘force majeure’ clauses? In this article, we will consider the current state of force majeure in English law; how several critical events of 2020 might trigger a force majeure; and what parties should be doing to protect themselves from their own - or their counterparty’s – failure to perform in light of these events.
1. Ordinary usage of force majeure clauses
Although ‘force majeure’ as an excuse for failed contractual performance has no automatic application in English law, a force majeure clause of some kind is included in most commercial English law contracts. Such a clause typically suspends or extinguishes a party’s obligation to perform the contract in specific, often so-called ‘emergency’, circumstances. Force majeure clauses are more common in certain types of contracts than others. For instance, they are an important part of most construction and shipping contracts. In finance contracts, they are often also used to suspend any lender obligation to advance further funds under a debt facility, and as a mandatory prepayment event for the borrower.
Because the concept of force majeure has no legal meaning outside that which is drafted in the contract, answers to the following questions will depend on the specific drafting of the clause:
- In which ‘emergency’ or other circumstances does the clause apply? Typically a force majeure clause applies in cases of natural disaster, epidemic, changes in the law, and similar designated circumstances.
- Does the circumstance need to prevent performance or only make it more difficult? Clauses may either provide for cases where a force majeure event ‘prevents’ contractual performance, or more widely (for example) ‘prevents, hinders, or delays’ performance.
- How does a party assert force majeure? There may, for instance, be a requirement under the contract’s force majeure clause to give notice as soon as a force majeure event occurs.
2. Recent force majeure cases
Two significant cases in the last two years have considered force majeure clauses:
- Classic Maritime Inc v Limbungan Makmur SDN BHD, Lion Diversified Holdings BHD [2019] EWCA Civ 1102. The case concerned a failure by a charterer to deliver a cargo of iron ore after an accident at the relevant mine. The Court of Appeal held that the clause did not protect the charterer from liability for breach of duty in circumstances where it would not have been able to perform the contract regardless of the accident (as the clause required that the failure to perform be 'resulting from' the force majeure event).
- Seadrill Ghana Operations Ltd v Tullow Ghana Ltd [2018] EWHC 1640 Comm. In this case, an oil company failed to carry out drilling due to (i) a moratorium imposed by the Ghanaian government, and (ii) Ghana’s refusal to approve the drilling for separate reasons. The High Court held that the force majeure event must be the only effective cause of default to engage the protection of the force majeure clause; and that the defendant’s failure to use reasonable endeavours to secure approval would also have prevented reliance on the force majeure clause in this case.
3. Coronavirus, Brexit and the climate change emergency
COVID-19 has now infected over 200,000 people worldwide and caused more than 8,000 deaths. Travel restrictions, event cancellations, and sick and self-isolating workforces and consumers are causing challenges for businesses across the globe, many of which are now unable to perform contracts in the manner agreed with their counterparties. One notable government response has been the production by the Chinese government of ‘force majeure certificates’ which are intended to provide evidence of the force majeure event. The certificates have legal effect under Chinese commercial law, but it remains to be seen whether non-Chinese counterparties will recognise them.
In a different sphere, Brexit will also have important implications for businesses this year. These implications may ensue from either Britain’s actual exit from the European Union (which took place on 31 January 2020), or from the end of the ‘transition period’ on 31 December 2020. While Canary Wharf v EMA showed us in 2019 that Brexit is rarely likely to frustrate contracts, the broader regime created by force majeure clauses could provide for Brexit to excuse non-performance of some contracts by that method instead.
A final category of ‘force majeure event’ likely to be seen in 2020 relates to our changing weather and climate – what many have called the ‘climate emergency’. Already in the UK this year, disastrous flooding, linked by many to the climate emergency, has impacted thousands of homes and businesses. A point likely to be argued in future litigation is whether such weather events can fall under force majeure clauses as a 'natural disaster' or 'act of God', particularly in circumstances where humans have provably affected weather patterns.
4. Practical guidance for parties
If an investor or business is concerned that it or a counterparty has been affected by any force majeure-type event, it should review any affected contracts (and potentially-affected contracts) as soon as possible, with assistance from legal advisors where useful. With regard to entering new contracts, counterparties should endeavour to agree force majeure clauses which provide for their preferred risk allocation in the case of events such as those considered herein. They may also want to consider whether existing contracts can be amended to achieve the same.
As the affected party, appropriate steps to take when a force majeure occurs (or is expected) may include documenting the force majeure event, and notifying and/or entering negotiations with counterparties. As the non-affected party, re-negotiations may also be advisable, but ultimately legal action against a non-performing counterparty may be required.
Finally, monitoring is always of utmost importance for all businesses and investors. Force majeure events, by their nature, are difficult to accurately predict. As such, it is imperative that businesses have a good understanding of their contractual landscape, so that they are prepared when force majeure strikes.
Jumana Rahman (partner) and Charlotte Ritchie (associate), Cohen & Gresser
*The Law Society is keeping the coronavirus situation under review and monitoring the advice it receives from the Foreign & Commonwealth Office and Public Health England.
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