Covid-19: An Outbreak of Force Majeure Clauses

Introduction

On the 30th of January 2020, the Director General of the World Health Organisation announced that the outbreak of the Covid-19 virus met the requirements of a Public Health Emergency of International Concern.

Government-imposed restrictions have led to a large-scale disruption of business and supply chains, as a result of which parties to a contract may find themselves unable to fulfil their contractual obligations.

This article will explore whether reliance on Force Majeure clauses and the Doctrine of Frustration may provide relief to such affected parties.

Definition of Force Majeure

A “Force Majeure” clause (“FM clause”) refers to a contractual provision under which one or more contracting parties are excused from performance, in whole or in part, or are entitled either to suspend performance or to request an extension of time for performance, following the occurrence of a specified event outside of their control.

FM clauses cannot be implied into a contract and are generally interpreted quite strictly, with any ambiguity therein construed against the party seeking to rely on the clause.

In Coastal (Bermuda) Petroleum Ltd v VTT Vulcan Petroleum SA (No. 2) (The Marine Star) [1996] 2 Lloyd’s Rep 383, the English Court of Appeal held that interpretation of FM clauses should be guided not by the general intention of the parties, but by the express wording of the clause. Parties should therefore carefully consider the language used in a FM clause with regard to the remainder of the contract when determining what protection the clause affords.

Is the Covid-19 pandemic a Force Majeure event?

Whether or not the Covid-19 pandemic constitutes a FM event will largely depend whether contracting parties can satisfy the following criteria:

  1. Triggering Event

The Covid-19 pandemic will need to be covered as an event triggering FM  under the wording of the FM clause and the contract generally.

This will be decided on a case-by-case basis. Generally, provisions containing some reference to a disease, pandemic or quarantine are more likely to succeed. However, where a FM clause makes no reference to the above terms,  same may still be caught by references to an “Act of God”, an “Act of Government” or by a general catch-all phrase such as “any other circumstances beyond the parties’ control”.

  1. Foreseeability

Some contracts preclude parties from relying on events which were reasonably foreseeable at the time of entering into the contract. This is an objective assessment.

The Covid-19 pandemic and quarantine/lockdown measures are prime examples of prevailing circumstances which were not foreseeable by contractual parties and could not have reasonably been provided against.

  1. Causation

Performance of a contract must have been hindered, prevented or delayed due to an event beyond the reasonable control of the parties. It is necessary to establish legal or physical impossibility of performance; mere difficulty, unprofitability or inconvenience do not suffice.

Furthermore, the relevant FM event must be the only reason for contractual breach. In Classic Maritime Inc v Limbungan Makmur SDN BHD [2019] EWCA Civ 1102, the English High Court stated that it must be established that had the FM event not occurred, performance of the contract would have occurred.

Therefore, the FM event must be the only reason for a default or delay in performance.

  1. Mitigation Duties

The party seeking to rely on a FM clause must show that it has taken all reasonable steps to mitigate and avoid the effects of the FM event. This is dependent on the facts of the case.

  1. Notice Requirements

Parties must consider whether there are any notice requirements contained in their contracts regarding notification periods for reliance on FM clauses. Failure to provide the correct notice may impede a contracting party’s ability to rely on a FM clause.

Notably, it may be difficult in the context of the Covid-19 pandemic to ascertain when the triggering event actually occurred and the duration thereof due to ever-changing circumstances.

The Effect of Successfully Invoking a FM clause

The precise effect of successful reliance on a FM clause will depend on the wording of the clause. The contracting party may be entitled to relief from performance and/or an extension of time to target dates. Parties generally bear their own costs arising from any FM delay, but the courts may make exceptions and award compensation after a certain duration and/or for certain costs incurred. Finally, parties will note that extended periods of FM can lead to the accrual of a right for one or more parties to terminate the contract.

Nevertheless, contracting parties will note there is no legal or contractual presumption of FM in Ireland. In the absence of a FM clause, or in the event that the relevant event (e.g. Covid-19 outbreak) does not qualify as a triggering event under the FM clause, contracting parties have one other options under Irish law: the Doctrine of Frustration.

Frustration

Where a contract does not contain a FM provision or the FM clause does not cover the Covid-19 crisis as a triggering event, the common law doctrine of frustration could be another option for relief. However, a successful frustration claim is difficult to establish as the legal threshold for relying on it is extremely high.

In Neville & Sons. Ltd v Guardian Builders Ltd [1994] IESC 4, the Irish Supreme Court held that a contract is “frustrated” when an unforeseen event occurs without the default of either party and for which the contract makes insufficient provision. This event must so radically change the nature of the outstanding contractual obligations from what the parties could reasonably have contemplated at the time of entering into the contract, that it would be unjust to hold the parties to the old contractual terms in light of the new circumstances.

MacGuill v Aer Lingus & United Airlines (Unreported, High Court, 3 October 1983) establishes the following additional requirements:

  • Performance of the contract has become impossible for one party;
  • The occurrence of the frustrating event is not attributable to any party;
  • The frustrating event was unforeseeable and unexpected at the time of entering into the contract;
  • Strict scrutiny will be exercised by the court of all circumstances, including the frustrating event and the provisions of the contract;
  • The threshold for establishing frustration will be high.

A successful claim for frustration leads to the automatic termination of the entire contract and a full discharge of all future obligations. Frustration further allows for all accrued rights to stand and for restitution to be claimed on the basis of total failure of consideration.

The practical difficulties in sustaining a claim in frustration are illustrated in Tsakiroglou v Nobleee and Throl [1961] 2 All ER 279, where it was held that a contract for the shipping of ground nuts was not frustrated due to the outbreak of war. This was so given the fact that an alternate route was available, despite the fact that it would more than double the freight cost of the load. Therefore, full frustration of the contract is necessary; mere unprofitability or inconvenience is not sufficient.

Similarly, the Irish courts in Ringsend Property Ltd v Donatex Ltd and McNamara [2009] IEHC 568 held that a contract is either frustrated in its entirety or continues to remain enforceable – thus, rejecting the possibility that a contract can be partially frustrated.

Nevertheless, contracts have been held to be “frustrated” in the following circumstances:

  • Impossibility – For example, in Taylor v Caldwell [1863] 3 B&S 826 it was held that performance of a contract for employment was frustrated by impossibility if the employee dies.
  • Illegality – For example, in Fibrosa Spolka Akcyina v Fairbairn Lawson Combe Barbour Ltd [1943] AC 32, a contract was held to be frustrated due to trading bans with Poland during World War II.
  • Frustration of Purpose – This occurs when the underlying purpose of the contract evaporates. This category is difficult to establish.

Successful reliance on a frustration plea will depend on the facts of the case.

A Claim in Force Majeure v Frustration

Contracting parties will note that relying on a FM clause may be better than relying on frustration for the following reasons:

  • A lack of certainty caused by relying on the frustration doctrine, which may not apply to the particular factual matrix;
  • A need to institute costly legal proceedings in order determine whether the frustration doctrine applies;
  • Successful invocation of frustration leads to a complete termination of the entire contract, unlike a FM clause which may allow for mere temporary suspension of contractual obligations;
  • A limited amount of remedies that a successful claim of frustration can offer.

Conclusion

As national and international market disruption is set to continue in light of the Covid-19 pandemic, it is important for contracting parties to be informed about the merits of a force majeure and frustration claim in light of their particular factual matrix.

Vincent & Beatty LLP are working closely with clients to create solutions for contractual hurdles posed by the Covid-19 pandemic. For more information on any issue discussed in this article please contact a member of our Commercial or Litigation departments.