COVID-19 Coronavirus Business Impact: English Law Considerations on Force Majeure, Frustration and Termination

The current outbreak of the coronavirus (also known as COVID-19), recognised by the World Health Organisation as a global pandemic, has already had a significant effect on certain businesses and appears likely to have an even greater impact, raising concerns about parties’ ability to meet contractual obligations and parties’ willingness to perform obligations where it is no-longer commercially beneficial to do so.

This OnPoint discusses some of the key issues around contractual non-performance and termination under English law. This is a highly technical aspect of English law and any party either seeking to rely on force majeure or frustration or in receipt of a notice relying on these concepts should consider its options carefully and take appropriate advice. 

Termination Clauses

There is a tendency in extraordinary circumstances for parties to look straight to force majeure clauses and common law doctrines such as frustration where their ability to meet contractual obligations is in doubt.

As a starting point, however, parties should look to the express termination provisions in their contracts. Many contracts do allow termination on notice or for a wide variety of events. Depending on the precise terms and any penalties, these provisions may offer an important fallback should force majeure or frustration not apply.¹ 

Force Majeure

Force Majeure is a contractual remedy and will apply only where there is an express clause in the contract.

The party relying on force majeure must prove that:

• the event falls within one of the circumstances described in the clause;
  
• the event was beyond that party’s reasonable control;
  
• it’s ability to perform its obligations under the contract was prevented, impeded or hindered by the event; and
  
• it took all reasonable steps to seek to avoid or mitigate the event or its consequences.  
  

The applicability of force majeure will depend greatly on the precise wording of the relevant clause as well as the length and nature of the disruption relied upon. The devil is in the detail. Where force majeure does apply, the effect will be whatever the parties provided for in the contract and can vary widely from agreement to agreement.

The English courts have, historically, interpreted force majeure clauses narrowly. In particular:

• the event relied upon must fall squarely within those described in the relevant clause. The English courts are unlikely to interpret those descriptions widely or to expand them to include those not expressly provided for. Many force majeure clauses do not specifically reference pandemics but do, for example, reference government intervention preventing performance. In those circumstances, while a decision to remove personnel from an office may not be sufficient to trigger a force majeure, a government directive to close offices may be;
  
• absent specific wording providing for concurrent causes, the event relied upon must be the sole cause of the failure to perform;² 
  
• unless expressly provided for, the event relied upon must prevent performance; an event making performance more onerous or expensive will generally be insufficient;
  
• it is insufficient for the party relying on force majeure to be denied the benefit of the contract; it must be prevented from performing its own obligations; and  
  
• importantly, in the current circumstances, force majeure is unlikely to cover an inability to perform as a result of economic hardship caused by the circumstances surrounding Covid-19.   
  

Frustration

If force majeure does not apply, the English common law doctrine of frustration may present an alternative for a party seeking to void onerous contractual obligations. It is, however, difficult to rely on and its availability may be negated by a force majeure clause in the contract.³ 

Frustration under English law applies where a subsequent event which is both unexpected and beyond the control of the parties makes performance of a fundamental obligation impossible or radically different from what was contemplated.⁴ Where there has been a frustrating event, its effect will be to terminate the contract automatically. 

The types of claim that have previously been found valid grounds for frustration and may prove relevant to situations arising from Covid-19 include:

• where a specific individual or object required for performance becomes unavailable. This may apply as a result of lockdown requirements in particular locations but, given any incapacity or unavailability is likely to be temporary, the contract would likely need to provide that performance must take place within a specified time; and
  
• where the vessel named in a shipping contract has been seized or detained. This could become relevant as a result of travel restrictions imposed as a result of Covid-19 or if ships or other forms of transport are quarantined; and
  
• where performance of the contract has become illegal. For example, a contract for hire of a restaurant space in circumstances where there has been a government ban on restaurants opening.
  

If a contract is terminated for frustration, the parties will generally be able to recover any sums paid for performance of future obligations less expenses already incurred by the counterparty in preparation for performance.

Practical steps

Parties relying on force majeure

• Check the contractual provisions by which force majeure must be notified. English law requires notice provisions to be adhered to strictly and it may not be straight forward to comply with requirements given restrictions imposed as a result of Covid-19;
  
• ensure that the force majeure notice is drafted carefully so that the event relied upon is framed to fall squarely within one of the force majeure events specified in the contract. For example the Covid-19 pandemic may not itself constitute a force majeure event but government intervention as a result of the pandemic might; and
  
• ensure that all reasonable steps are taken to mitigate the impact of the force majeure event. Parties should document these efforts together with the efforts to continue performance.
  

Parties in receipt of a force majeure notice

• Don’t immediately accept the force majeure. Consider carefully whether the event relied upon is covered by the force majeure clause in the contract and whether the notice has been served in accordance with the relevant contractual provisions;
  
• ask the counterparty to provide evidence of the event relied upon; how that event prevents performance and the steps taken to try to continue performance and mitigate the impact of the event relied upon; and
  
• consider whether there may be alternative options that might allow the contract to continue. For example, it may be possible to extend a specific deadline for performance.
  

Footnotes

1) See, for example, Seadrill Ghana Operations Limited v Tullow Ghana Limited [2018] EWHC 1640 (Comm), in which Tullow gave notice of termination relying on force majeure, frustration and termination for convenience. The court ultimately determined that neither frustration nor force majeure applied but that the contract had been terminated validly for convenience.

2) See, for example, Seadrill Ghana Operations Ltd v Tullow Ghana Ltd ibid

3) See, for example, Jackson v Union Marine Insurance Co Ltd [1874] LR 10 CP125

4) Davis Contractors Ltd v Fareham U.D.C [1956] AC 696