COVID-19: Force Majeure and Frustration of Contracts

The global economic and commercial impact of COVID-19 will be nothing short of unprecedented. The government restrictions introduced on public health grounds, both domestically and internationally, have led to the large-scale disruption of global business and supply chains. Almost all industry sectors will be affected. Many parties to commercial contracts will find themselves unable to fulfil their contractual obligations indefinitely, or at least for a significant period of time. This briefing will examine the options available under the law of contract to companies whose ability to carry out their contractual obligations has been impacted by the pandemic.

What is a force majeure clause?

A force majeure clause is generally included in commercial contracts to excuse the parties from fulfilling some or all of their obligations in circumstances where they have become impossible to perform due to unforeseen events which are out of their control.

There is no standard definition of force majeure, so what will constitute such an event will depend on how the particular contract is drafted. Events which are often provided for in a force majeure clause are “acts of god” such as fires, floods, earthquakes and other natural disasters.

Will COVID-19 be considered a force majeure event?

This will depend on how the individual contract is drafted and the reason why the party is unable to perform its obligations. If the force majeure clause provides for a disease or pandemic then the circumstances associated with COVID-19 will clearly be covered. If not, then references to an act of God, an act of Government or a national emergency could be sufficient to trigger the provisions of the clause, depending on the circumstances. Often there will also be a catchall clause in the contract referring to “any other event beyond the parties’ control” which could potentially be relied upon, but will be subject to interpretation by the Courts as to its precise scope.

Force majeure clauses have generally been interpreted quite strictly and any ambiguity has been construed against the party seeking to rely on the clause. In interpreting the application of a force majeure clause to COVID-19, the Courts will consider the contract as a whole and whether, as a result of the virus, performance has been rendered impossible or whether it has merely been hindered. It will not be sufficient to show that the relevant party’s obligations have just become more difficult or expensive to perform. It must also be demonstrated that the COVID-19 pandemic is the sole reason for not meeting those obligations.

Providing notice of the force majeure event

It is crucial, when seeking to rely on a force majeure clause, that all obligations stipulated by the clause are adhered to. It is likely that notice of the triggering event is required to be served on the other party within a certain period of time. It is often the case that an estimation of the effect and duration of the force majeure are also required to be provided. Failure to provide the correct notice within the time provided will be detrimental to any attempt to rely upon the clause. However, the constantly evolving nature of the COVID-19 crisis means it may be difficult in many cases to ascertain when the triggering event actually occurred and its duration.

What is the effect of a force majeure clause?

Where a force majeure clause is successfully triggered, 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.

What if there is no force majeure clause in my contract?

There is no legal presumption of force majeure under Irish law and it is, therefore, difficult to persuade a court to imply a force majeure clause into a contract in which it has not been included.

Where no force majeure clause has been included in a contract, it may be possible to rely instead on the doctrine of frustration. This allows a contract to be set aside where an unforeseen event either renders contractual obligations impossible or radically changes the party's principal purpose for entering into the contract.

Frustration can be difficult to prove and the legal threshold for relying on it is extremely high. The Courts favour legal certainty in contract law so that commercial parties are free to allocate risk between themselves. Whilst every claim for frustration will turn on its own particular facts, the following principles, derived from the judgment of McWIlliams J. in MacGuilll v Aer Lingus & United Airlines, will generally apply:

• One party must have been bound to do something which has since become impossible

• The frustrating event is not the fault of any party

• The frustrating event was unexpected and could not have been anticipated at the time of entering into the contract

• All of the circumstances of the contract, and the frustrating event, will be scrutinised

• The doctrine will not be applied lightly

If successful, a claim for frustration will generally result in the automatic termination of the entire contract, unlike a force majeure clause which may allow for contractual obligations to be merely suspended for a period of time. A party thinking of relying upon the doctrine of frustration should carefully consider whether termination of the contract is the outcome that it wants. If the contractual relationship is one that the party wishes to continue when the current situation has passed, it may be worthwhile trying to negotiate a suspension of contractual obligations.

Duty to mitigate loss

The majority of force majeure clauses will require the impacted party (or parties) to mitigate the effects of the force majeure event and avoid any unnecessary losses. There is a similar duty on applicants in any claim for breach of contract to take all reasonable steps to mitigate their potential loss and damages for breach of contract may be refused if they fail to do so. In the particular circumstances of a breach that is precipitated by the Covid-19 crisis, businesses should ensure that they avail of any relevant statutory protections that have been implemented to deal with the crisis. They should also consider whether they might have any recourse to business interruption insurance cover.

Commentary

The situation businesses are finding themselves in at present is beyond what anyone could have imagined even one month ago. Although the Courts have traditionally leaned in favour of enforcing contracts and strictly interpreting their terms, more latitude may be shown to businesses affected by the COVID-19 pandemic, particularly where their failure to deliver on a contract is the result of Government-mandated restrictions. As of midnight on Friday, 27 March 2020, all but a certain list of essential businesses have been required to close by the Government. A compulsory cessation of business such as this, with a corresponding inability to earn income, will very likely be taken into account by the Courts in considering claims for breach of contract. In the absence of an appropriate force majeure clause, it is likely that claims for frustration on the basis of impossibility due to these unique circumstances will be more readily accepted by the Courts.

In the future, it is likely that we will see disease epidemic scenarios such as this being specifically provided for more often in commercial contracts and lending agreements.

Any business that is affected, or anticipates that it may soon be affected in its ability to perform its contractual obligations, should seek legal advice as soon as possible to ensure the most favourable outcome.