Q&A: Force Majeure Clause
Else Solicitors have been servicing clients whilst adhering to government guidelines to ‘stay home, save lives’. Our Corporate and Commercial legal team have received a number of enquiries on the effect of COVID-19 with a noticeable peak in matters relating to force majeure clauses in contracts.
In order to communicate to all our clients the issues we are currently dealing with we have identified some of the key things that businesses need to be alert to in these times.
Please note that the questions and answers below are for guidance only and should not be taken to be understood as covering your specific scenario or legal advice. Should you wish to discuss the effect of a force majeure clause in your contract or Terms and Conditions, please contact us and a member of our Corporate Commercial Team will be happy to review and advise you on specific contracts and Terms and Conditions.
Q: My contract includes a force majeure clause, does this mean I can rely on it during this COVID-19 period?
Not always unfortunately!
Having a force majeure clause in the contract is not conclusive that it can be relied upon. This is because the onus is on the party trying to rely on the clause to show it applies to the particular situation.
We have had numerous clients mistakenly suggesting that because of COVID-19, force majeure “must apply” as it an “act of God”. This is not always correct. The clause would need to be looked at taking the entirety of the contract into account and what the parties’ intention was when they entered into the contract. The wording of the clause is also important in establishing what events are covered by the clause and whether the COVID-19 situation would fall within the events set out in that clause. Even if the situation of COVID-19 falls within the stipulated wording of the clause, how you can rely on it will also depend on the wording of the clause.
For example, we have had clients cancel events (before speaking to us) scheduled for September. The problem is that September is still a long way off and the world may not still be in lockdown. As a result, in this example, force majeure does not apply because it is not currently impacting the event. Only if and when the event were prevented (by lockdown extension or ban on mass gatherings) could this be claimed.
Q: There is a force majeure clause in the contract, which would apply to COVID-19 situation, can I rely on this clause to terminate the contract?
The most common effect of force majeure clauses is usually to suspend the obligations of the parties until the event comes to an end. It is very important to review the clause to see what consequence is provided by the wording of the clause. Another common misconception is that termination means that the other party get an automatic refund. It depends what the wording states – you may be able to terminate but you may have no entitlement to a refund.
Q: The lockdown due to CIVID-19 means that it will not be commercially feasible to perform the contract on the performance date which is a few months from now. Can I rely on force majeure?
You will not be able to rely on force majeure if by the performance date of the contract, the lockdown is lifted.
The force majeure event (lockdown) should be the cause of the non-performance and this event should be happening at the time of performance thereby preventing you from performing the contract. If the UK is not in lockdown in a few months’ times by the performance date, there is no longer a force majeure event (lockdown). So the force majeure clause is not applicable to this future performance/non-performance.
Q: I am an events promoter contracted to sell tickets for big events. The lockdown due to COVID-19 has led to poor sales for events in September, October and November. From my experience it is very unlikely I will be able to sell enough tickets to meet my obligations under the contract. Can I rely on force majeure for the poor sale in these months?
It will not be force majeure if the lockdown is lifted before these months. Unless there are circumstances PREVENTING the event, the force majeure will end at the point the restrictions are lifted. Poor ticket sales is not a force majeure event unfortunately. It must directly affect performance. Just because the lockdown makes it more onerous on you to perform the lockdown does not fall within what would be classified as force majeure.
Q: Most of my contracts are business to business (B2B) and are conducted on my standard terms and conditions. Can I rely on the force majeure clause if my business is unable to perform its obligations due to the lockdown?
Whether or not you can rely on the force majeure clause in your standard terms and conditions depends on whether the clause is held to be reasonable. For example, if the clause covers events that are in your control, for example allowing your workers to work from home but you don’t allow them, this will be held to be unreasonable as this may be said to be within your control.
Q: Most of my contracts are business to consumers (B2C) and are conducted on my standard terms and conditions. Due to the lockdown and many of my staff self-isolating, my business cannot deliver orders on time. There is a force majeure clause in the terms and conditions, can my business rely on this to limit liability?
Greater protection is given to consumers by various legislation. There is a high threshold to be met when trying to limit your liability in consumer contracts. The clause would need to be shown to be fair and applicable in certain specific situations. In addition to the clause being fair, the terms and conditions have to offer the consumers some other rights such as cancellation of the contract without a penalty.
Our advice is to be open and upfront with customers. Most people will understand if they are told there is a delay. Provided that you give them opportunity to cancel without penalty, you will probably find that customers will keep their orders. Likewise, there is a message to manage customer expectations – remove anything from your websites that is offering things you just simply can’t deliver at all or in the timeframes specified. Force majeure clauses can help but they don’t if it was obvious you promised something that was never going to be reasonable or possible.
Q: The force majeure clause in my contract does not refer to pandemics, can I nonetheless rely on it for COVID-19?
Another common misconception is that “force majeure” or “acts of God” are defined in law. They are not and the amount of case law reflects this. .
The effectiveness of the force majeure clause will depend on the wording of the clause itself and the rest of the contract.
Q: I entered into contracts after a few reported cases of COVID-19 in UK but before the lockdown. With the lockdown, it now seems impossible to perform the contracts. Is this force majeure?
It will depend on the wording of the clause. Though most force majeure events are unforeseeable, there is room to argue that some can be foreseeable. The more foreseeable, the more likely the event could have been prevented. Contracts entered into weeks before the lockdown are more likely to be covered by force majeure than contracts for example entered into during lockdown.
Q: Before the lockdown, I became aware that I would struggle to meet my obligations under the contract. But now with the lockdown it means I will not be able to perform anyway. Can I rely on force majeure clause in the contract?
You will not be able to rely on the force majeure clause if there is another reason why you cannot perform the contract. For you to be able to rely on the force majeure clause, the force majeure event (lockdown) needs to be the only reason that prevents you from performing.
Q: As we are in lockdown with most non-essential businesses ordered to shut down, can I relax without attempting to do anything as the force majeure clause in the contract applies?
There is a duty to take reasonable steps to mitigate the consequences of a force majeure event. This duty can either be expressly noted in the contract or it can be implied into the contract. Further, you should check the wording of the force majeure clause for any steps or requirements that you need to take for example giving notice to the other party of the event.
Sitting back and doing nothing is ill-advised and is likely to simply result in a bigger legal issue.
Q: My business is closed due to the lockdown and therefore the business is earning no money. I can rely on the force majeure clause and not pay my supplier.
Again, this is a misconception we are seeing time and time again. The banks are not closed. Money transfers can still be made and received. Therefore payment is NOT prevented. Force majeure clauses normally cover one party being unable to perform because they are prevented from doing something. COVID-19 does not prevent the action of the payment being made.
What it will affect is the availability of the money to make a payment – the business may not have the money. In such circumstances, speak to your suppliers/creditors. There may be other clauses that could be relied on, for example, the supplier has not provided the goods/services and therefore, you may be entitled not to make the payment or make the payment in full.
BUT do not be mistaken that “force majeure” automatically applies to all events in lockdown such as making payments. It doesn’t in most cases.
If you require tailored advice relating to your personal circumstances please contact Chris Else on 01283 526 200 or email directly Chris.Else@elselaw.co.uk.