Peter advises readers to review their contractual terms and conditions in the light of the Covid-19 pandemic and subsequent lockdown.
GLOBAL supply chains have been impacted hugely, not just by Covid-19 and the resulting lockdowns, but by the confusion concerning where responsibility lays for delayed, missed, and incomplete deliveries. The problems again illustrate the underestimated importance of contract clauses, such as ‘force majeure (FM)’, designed to address issues arising from unexpected future events beyond the reasonable control of the contracted parties.
Owing to the time to reach court, we’re yet to see significant judgments in large FM claims arising from the pandemic, but the courts have already handed down judgments on injunctions related to FM clauses and actions for breach of contract, stating each FM clause should be considered on its own words and within context of the specific circumstances.
This is a clear warning for businesses to ensure their FM clauses are drafted very carefully, especially if they hope to rely on them to defend a breach of contract, whether it’s caused by natural disasters, wars, or compliance with government restrictions during a pandemic.
The importance of a good ‘force majeure’ clause
When including an FM clause, it should enable the business to invoke a rights of suspension, and/or termination of its duties and obligations under the contract. The inclusion of the words ‘epidemic’ and/or ‘pandemic’ in the clause may be sufficient to trigger FM. Where these terms haven’t been included, the emergency measures to address or contain any outbreak, like a travel ban or quarantine zones, may be sufficient to trigger FM.
If a business seeks to invoke an FM clause, it must show any failure to perform its contractual obligations cannot be attributed to other factors, such as any additional cost of performance. Any FM clause cannot be taken in isolation, but it can interact appropriately with the other terms of the contract, such as any obligation to mitigate loss, and the procedure to notify the other party.
Key actions for businesses in 2021
The first step is for every business to review existing standard terms and conditions of supply and/or purchase, carefully scrutinising all proposed new contract terms, especially to see if FM is expressly included within the contract.
Consider what’s included as an FM event and what procedural steps are involved in relying on FM, such as the obligations to notify the other party. You should also consider what effort to perform/minimise loss will be required on the part of your business or your supplier.
Finally, consider the overall impact on the contract as a consequence of FM being triggered, such as termination rights. Then check your insurance position regarding a supplier invoking an FM clause or you having to, hoping to protect your business.
Remember, if a contract doesn’t include an FM clause, it may in limited circumstances be possible to seek redress based on frustration, but this is a complex legal matter with very strict requirements to be met.
In English law, the concept of frustration is that contract obligations may be discharged in their entirety if an event has occurred, without the fault of either party, that renders it physically or commercially impossible to fulfil the contract.
Such an event might also transform the obligation to perform, into a radically different obligation from that agreed when the contract was signed, again allowing the obligation in the original contract to be discharged. However, it’s worth remembering the threshold for showing a contract is frustrated, is generally extremely high.
Force majeure clause isn’t a magic bullet
In order to minimise potential loss in FM scenarios, it’s vital to give a prompt, contractually compliant notice to the other party of possible or actual disruptions to performance, to allow them to prepare and to act appropriately to mitigate loss or damage.
It will also be prudent for businesses to consider if there is any alternative way of performing the contractual obligations, rather than leaving the client with the problem, which could help protect the long-term relationship.
Retaining written evidence of any disruption is essential, as either party may wish to take matters further, once the contract to supply has been terminated or suspended.
While we await the outcome of Covid-19 FM claims, there’s plenty for businesses to consider, from checking contract clauses cover all possible eventualities to checking they have adequate insurance cover, but a review of standard contract terms and conditions is a crucial first step.