Coronavirus: force majeure claims as UK emerges from lockdown

Out-Law Guide | 06 May 2020 | 3:23 pm | 6 min. read

As the UK's lockdown looks set to be gradually lifted and businesses address restarting manufacturing, supplying or trading, force majeure clauses triggered in response will need further reconsideration.

Many UK businesses will have sought to rely on contractual force majeure clauses in the immediate aftermath of the lockdown measures announced a little over six weeks ago.

By way of reminder, these clauses provide that in particular agreed circumstances, which may include an epidemic, the affected party may be excused from performing the contract in whole or in part, excused from a delay in performance or be entitled to suspend or claim an extension of time for performance. In return, the party which is expecting performance will normally have a right to terminate the contract.

The detail of each force majeure clause will differ from contract to contract, needing individual case by case consideration. Here, we set out the main general practical considerations.

What was the effect of the force majeure notice?

First, look at the effect of serving the force majeure notice. Did it give the other party a right to immediately terminate the contract, or has it simply given you more time to perform the contract? This is crucial: if the contract has already been terminated, then there is no contract to resurrect once lockdown has been lifted. Check that any termination event actually applied to the circumstances, and that notice and other procedural requirements were complied with.

Were there any ongoing requirements?

Often, it's not enough to simply serve a force majeure notice and then wait for lockdown to begin to lift. Some contracts require the affected party to provide updates to the other party, including details of when they expect to recommence operations - key information in managing the supply chain.

Some force majeure clauses oblige a party to perform its obligations under the contract as soon as the force majeure event ceases. As a result, restarting work could require a lot of planning before the lockdown is lifted.

Were you required to provide updates? If so, make sure that you keep a record of them along with the evidence gathered to support the claim for force majeure, such as evidence that alternative means of performance were kept under review. Is there any evidence that the other party accepted the claim for force majeure – expressly or by implication from its conduct – or did that party reserve its position, or even object at the time?

If you were the party which received the force majeure notice, then have you received any required updates from the other party and are these adequate under the contract? Also consider whether alternative means of performing the contract have actually been properly explored by the party claiming force majeure.

Are you really ready to start work?

You may not be in a position to immediately start work once the lockdown is lifted. For example, how quickly can any employees who have been furloughed be brought back into the business? Have any key employees left the organisation, and how quickly can they be replaced? If you were the recipient of a force majeure notice, are you now in a position to begin to receive performance again and to implement your own obligations under the contract in return?

It will often not be enough for just your business to be up and running, and consideration should be given as to whether your key suppliers are also back in business. Undertake an audit of these suppliers before concluding that your company is ready to start work to make sure that they are ready to supply, and that they can supply at a rate that will allow you to complete your contracts. Suppliers might have become insolvent and ceased to trade, or be slower to restart operations once the lockdown has lifted. Remember too that where supplies are imported, lockdown might be lifted in those countries at a different rate to the UK.

It is also important to consider the impact of social distancing and other protective measures which the business is implementing in order to safely and properly restart operations. Implementing protective measures could delay a restart, or have an impact on the rate of production if fewer employees are able to work at any one time or there are changes to shift patterns. It may be necessary to review whether a fresh or updated force majeure notice is necessary because, for example, the event which is having an impact on performance has ceased to be the lockdown and is now the measures which are necessary to exit lockdown.

Some force majeure clauses oblige a party to perform its obligations under the contract as soon as the force majeure event ceases. As a result, restarting work could require a lot of planning before the lockdown is lifted.

Is there a deadline for when you need to start work?

Your force majeure clause may allow you to delay performance for a particular length of time such as three or six months after which, if you still haven't performed under the contract, the other party will have the right to terminate or the contract may terminate automatically. Make sure that you have checked the force majeure clause to see when the right to terminate arises, and have this deadline in mind when seeking to restart operations.

If you are a party with a potential right to serve a termination notice, consider carefully whether this is justified by the evidence as serving a termination notice which is not in fact justified could well be a repudiatory breach of contract in itself. The other party may then be able to make a claim in this regard, especially when a termination notice is served at the point that the impact of the force majeure event may be coming to an end as lockdown is lifted or eased.

Do you need to serve another notice saying you can restart work?

Again, this will depend on the terms of your contract. If you are obliged to regularly provide the other party with updates then it is likely that they will know when you will be able to restart work. There may also be an additional obligation to formally give notice of when you can restart. If this is the case, make sure that you carefully follow the notice provisions to ensure that notice is validly given.

More broadly, it may be worth seeing if the other party will agree to document the end of force majeure in a manner which waives any contrary claims and enables parties to move on with clarity as to the position, albeit such requests will require careful diplomatic handling.

What happens if there is a dispute?

There are various ways in which a dispute could arise. For example, a party might argue that a force majeure notice was not properly served, or that the other party did not recommence operations quickly enough which led to loss. Whatever the nature of the dispute, there are some important practical considerations.

The priority may well be to resolve the dispute quickly and cheaply, but care should be taken that the very understandable desire to move on is not done at the expense of failing to take the steps which are required to protect both your legal and commercial positions. The first step again is to read your contract and check to see if there is a dispute resolution clause. These often provide that a negotiated settlement should be attempted, and that formal proceedings can only be commenced if these negotiations fail.

If negotiation fails, other dispute resolution options remain available notwithstanding the impact of the pandemic. Mediation, arbitration, expert determination and urgent court applications have continued by means such as written submissions and telephone or video conferences and can be tailored to the circumstances, allowing parties to reach legal clarity at the same time as getting back to business.

It is also worth considering whether the party will be able to honour any settlement or pay any damages awarded by a court before starting any proceedings, to avoid wasting costs and management time. The Covid-19 pandemic has produced very difficult trading conditions for a huge number of businesses, many of which could be insolvent or have ceased to trade. Insolvency of a party may well give rise to additional rights under a contract, notably termination rights. It is always worth considering whether termination for insolvency is an available right or, on the other side, a risk that you face.

Conditional fee agreements or third party funding may provide options for financing litigation when cash flow is tight due to difficult trading conditions.

What if restrictions are re-imposed in the future?

Care should be taken because of the risk of restrictions being re-imposed if there is a second peak of infection. This risk is now well known and should be planned for, meaning that a claim for force majeure which worked when lockdown was first imposed, and the depth and breadth of the impact of events was truly unexpected may well not work second time around now our knowledge has moved on.

If prudent steps are considered and implemented now to protect operations against the risk of fresh restrictions based on the knowledge which we now have, it will be much easier to justify claiming force majeure again should the need arise. Again, the contract should be carefully considered on an ongoing basis, for example to see if there is a specific termination right if force majeure is claimed more than once.

If you are entering into a new contract, it is important to try to deal specifically with the risk that restrictions may be re-imposed rather than simply relying on a force majeure clause. Again, this is because that risk is not of an unexpected event given the knowledge that we all now have.