Pinsent Masons advises Malaysia-based Tenaga Nasional Berhad (TNB) on first international offshore wind investment
Out-Law Guide | 26 Mar 2020 | 10:41 am | 9 min. read
Where English or Scots law applies, the answer depends on the particular circumstances and the drafting of the relevant contractual provisions. The position is similar in, for example, Singapore. Despite previous events such as SARS and Ebola, there is no reported case law in these jurisdictions directly on the operation of force majeure clauses in the context of epidemics or pandemics.
However, some overarching guidance on how such clauses in general commercial contracts might be interpreted and applied in the current circumstances, based on existing case law, is set out below, along with practical guidance for businesses looking to rely on force majeure clauses.
Force majeure clauses are contractual clauses which alter parties' obligations and/or liabilities under a contract when an extraordinary event or circumstance beyond their control prevents one or all of them from fulfilling those obligations.
Depending on their drafting, such clauses may have a variety of consequences, including: excusing the affected party from performing the contract in whole or in part; excusing that party from delay in performance, entitling them to suspend or claim an extension of time for performance; or giving that party a right to terminate. We talk principally below about parties being excused from performance entirely, but many of the principles are common to these different varieties of clause.
In English and Scots law, force majeure is a creature of contract and not of the general common law. It therefore differs from some other legal systems where force majeure is a general legal concept and where courts may declare that a particular event, such as a pandemic like Covid-19, is a force majeure event.
As a result, whether a particular clause relieves a party of contractual liability will, under English and Scots law, depend on the precise wording used in the clause, the allocation of risk between the parties provided for by the contract as a whole, the circumstances in which the parties entered into the contract, and the situation that has arisen. It is for the party seeking to rely on a force majeure clause in order to excuse its non-performance or late performance to satisfy a court or other tribunal that this is the effect of the clause.
Force majeure clauses will generally adopt one of the following approaches to defining the type of event which may, depending on its impact, relieve a party from contractual liability:
These may include events such as war, terrorism, earthquakes, hurricanes, acts of government, plagues or epidemics. Where the term epidemic, or pandemic, has been used, that will clearly cover Covid-19.
An act of government will have occurred where a government body has imposed travel restrictions, quarantines, or trade embargoes, or has closed buildings or borders, however the position is less clear where the government makes recommendations rather than makes orders using legal powers.
Where no relevant event is specifically mentioned, it is a question of interpretation of the clause whether the parties intended such an event to be covered. This involves considering whether the list of events included was intended to be exhaustive or non-exhaustive. Unless specific words are used to suggest that a list is non-exhaustive, it can be difficult to argue that parties who set out a list of specific events but did not include a particular event, such as an epidemic, nonetheless intended that event to be covered.
Contracts might, for example, refer to events or circumstances "beyond the parties' reasonable control". Determining whether this covers issues arising from Covid-19 is a question of interpretation and is fact-specific.
In unprecedented circumstances like the present, the courts are likely to be generous in their interpretation of this sort of wording when faced with parties who have encountered genuine difficulties in performing. However, as discussed further below, such parties will still need to show that their non-performance, or late performance, was truly outside their control and could not have been prevented or mitigated.
Clauses may give a list of specific criteria, such as fire, flood, war and so on, alongside wider, general wording, such as "or any other causes beyond our control". Although all will depend on interpretation of the particular words used, the general wording in this type of clause will usually be interpreted broadly, rather than being limited to events that are similar to those specifically mentioned. As a result, such a clause may still be triggered even if a health event or other relevant event is not specifically listed.
Sometimes just the phrase "force majeure" itself is used, although this is rare. "Force majeure" has no technical legal meaning in Scots or English law. Where this term is used, its meaning will be a matter of contractual interpretation.
Standalone references to "force majeure", without any contractual definition or other relevant contractual wording by reference to which the term can be interpreted, may well be void for uncertainty. However, where the wording surrounding the phrase and other contract terms allow, "force majeure" might potentially be held to cover a range of matters, including legislative or administrative interference such as embargoes and/or epidemics.
Given the almost unprecedented nature of the Covid-19 outbreak and/or the actions of governments around the world in response, it is likely that Covid-19 would constitute a force majeure event under many force majeure clauses. However, as discussed further below, just because a force majeure event has occurred does not necessarily mean that the parties will protected from liability for failing to perform or delay in performance.
Even if the Covid-19 pandemic or a related consequence such as government action is a type of event covered by the force majeure clause in question, the next question to consider is the impact on the affected party's ability to perform its contractual obligations.
It is common for force majeure clauses to specify the impact that the event or circumstances in question must have in order for the clause to be triggered. Reference may be made, for example, to the event or circumstances having "prevented", "hindered" or "delayed" performance. These terms require different levels of impact on performance before a party will be relieved from liability.
"Prevented" means that it must be physically or legally impossible to perform. This is a high bar. It is not enough that performance is more difficult, more expensive, or less profitable. Even where the word "prevented" has not specifically been used, the courts have interpreted force majeure clauses as only applying where performance is impossible in circumstances where such clauses state that a party is to be excused on the occurrence of causes beyond their control, and where a contract provided for delivery "unforeseen contingencies excepted". Similarly, it is common to see wording such as "unable to perform" and this is likely to be treated in a similar fashion by the courts.
"Hindered" – or "impeded", "impaired" or "interfered with") is a lesser standard and may in appropriate circumstances be triggered by performance being made substantially more difficult.
For example, a shortage of raw materials caused by a force majeure event may hinder the performance of a manufacturing contract if those materials can be obtained at a higher cost but performance would mean breaking other contracts. However, the fact that performing would simply be less profitable due to higher costs, for example in sourcing alternative supplies of materials or labour, is generally unlikely to be sufficient to absolve the party in question of liability to perform.
Proving that performance has been "delayed" should be less onerous than proving it is legally or physically impossible: it is not necessary to show that obligations have been "impossible" to perform or "prevented" for a period of time, just that complying as quickly as required under the contract is substantially more difficult.
A party seeking to rely on a force majeure clause must also show that:
As a result, where a party anticipates falling into difficulty with meeting its obligations, for example due to staff shortages through self-isolation in accordance with government guidelines or issues with the supply of materials, it is crucial to explore whether alternatives, such as alternative sources of labour or materials, are reasonably available – including at higher cost, unless this involves breaching existing contracts.
A business seeking to rely on a force majeure clause must also comply with any procedural requirements under the contract, such as a requirement to give notice of its intention to rely on the clause to the other party within particular timescales, including any formalities required for the service of notices. Some clauses may also require updates to be provided and/or an express obligation to mitigate.
The usual remedy if a force majeure clause is invoked is for one or more of the parties to be excused from its obligations and/or liability under the contract, without any damages being payable. Force majeure clauses also sometimes provide for extension of time, suspension of time, or termination in the event of continued delay or non-performance. A right of termination could be commercially important, as it may provide leverage to renegotiate contractual terms.
Some clauses also expressly provide that additional costs incurred due to the inability to perform or perform on time will be borne by a particular party. If not, then it is likely that costs will be borne by the party that has incurred them, because there is no contractual provision to override this.
Since force majeure is a creature of contract rather than a rule imposed by the general law, if there is no force majeure clause, an affected party will have to look to other provisions of the contract for potential routes out of its difficulties. If the contract does not provide any such routes, it may in certain circumstances be possible to rely on the doctrine of frustration of contract.
However, it is very difficult to show that a contract has been frustrated. Frustration requires that an unforeseen subsequent event outside the control of the parties has made the contract impossible to perform, or has transformed performance of the obligations under the contract into something so radically different from that which the parties intended that it would be unfair to hold the parties to their obligations. One extreme situation where the courts have held that a contract was frustrated was when war broke out and the government banned the works and seized and sold the necessary equipment.
As with the test for "prevention" of performance under force majeure clauses, the fact that performance has been made more difficult or costly is not enough. In addition, it is questionable whether an epidemic, or even a pandemic, would be considered to be unforeseeable, given previous recent epidemics and warnings that further epidemics or pandemics are likely to occur. However, it might be possible to argue that the extent of the global government enforced lockdowns was unforeseeable.
Frustration may also be commercially undesirable in some circumstances, since its effect, regardless of the wishes of the parties, is to bring all parties' obligations under the contract to an end immediately.
Parties seeking to rely on a force majeure clause should follow the following practical steps:
For further information, you can contact Ann Henry, David Kirkpatrick, Deirdre Cormican, Faye Moore, Jacqueline Harris, James McBurney, Jason Kirwin, Julian Diaz-Rainey, Michael Fletcher and Valerie Wu.
13 Mar 2020
06 May 2020
Pinsent Masons advises Malaysia-based Tenaga Nasional Berhad (TNB) on first international offshore wind investment