The topic of force majeure, or frustration of contract, has been talked about a lot since the beginning of the COVID-19 pandemic.
A force majeure clause generally operates to discharge a contracting party when a supervening, sometimes extraordinary, event occurs that is beyond the control of either contracting party but that makes performance of the contract impossible. This event must be unexpected and something beyond reasonable human foresight and skill.
Force majeure clauses must be expressly provided for in the contract. The Court has yet to make a finding of an implied contractual force majeure provision. The contract, however, does not need to specifically use the words “force majeure”. Other language can make the same principals apply. Typically, the force majeure provision will list events that could qualify as a force majeure event, although this is often not a closed list.
If your current contract contains a force majeure clause, it does not mean that your contract comes to an end. Rather, the parties will be excused from performance of any obligation under the contract to the extend the performance of the obligation is related to the force majeure event.
Any current tender and/or contract review should include a review of any force majeure provisions that are provided in the proposed contract. If one is not provided, you might want to consider, as the contractor or subcontractor, asking whether consideration has been made for the current pandemic and whether the contract should be amended or revised to include a force majeure clause that addresses pandemics.
Can COVID-19 Constitute a Force Majeure?
1. Wording of the Clause
The answer to this question will turn, in large part, on the exact wording of the clause in your contract. Force majeure clauses are usually interpreted narrowly, and the Court pays close attention to the specific language of the force majeure clause.
To constitute a force majeure, it is likely that the language in question must explicitly capture an event like COVID-19 by using language like “pandemic”, “epidemic”, “quarantine”, “outbreak”, “disease” or “public health emergency”. Absent such specific language, courts may be reluctant to recognize COVID-19 as a force majeure. However, depending on how the situation continues to unfold, the Court may recognize COVID-19 as an “Act of God”, “plague” or “circumstances beyond a party’s reasonable control”.
2. Is COVID-19 Beyond the Relying Party’s Control?
The Court has stated that force majeure clauses excuse non-performance of a contractual obligation upon the occurrence of a specified, unforeseeable event or circumstance that is beyond the parties’ control. So, the issue becomes: is COVID-19 beyond the relying party’s control?
The Court has held that the relying party cannot rely on a condition that it brought upon itself. Accordingly, the Court will scrutinize the facts leading up to the decision to rely on the force majeure clause. If there were problems that pre-dated the execution of the contract or if the force majeure clause is relied on as an excuse for other business issues, then reliance on this clause could be jeopardized.
3. Was COVID-19 Foreseeable?
For most businesses, the answer will be no, COVID-19 was not foreseeable. However, this issue might arise if you enter into a contract after it became reasonably likely that the pandemic would take root. Thus, the date on which the contract was effective or signed will be an important consideration.
4. Is Performance Impossible?
Usually, there is a level of interference with an obligation that must exist before a force majeure clause is triggered. The Court will, therefore, scrutinize the ability (on inability) of the relying party to perform their contractual obligations.
Additionally, COVID-19 must have an actual or direct impact on the relying party’s ability to perform their contractual obligation. Indirect impacts, such as pricing fluctuations or inability to obtain financing due to increased interest rates, are less likely to be found to prevent contractual performance. Force majeure clauses are likely not enforceable if the only impact is to render the contractual obligation more expensive to perform. It is therefore important for the impact of COVID-19 on your contractual obligations to be documented.
5. Have You Mitigated Your Damages?
As with any claim, you have an obligation to mitigate your damages. Some contracts will specify the requisite level of mitigation efforts that the relying party must take. Where the contract is silent, the relying party is still under a duty to mitigate to overcome the occurrence of the force majeure event and to mitigate the effects of the event on the other party. This duty is limited to a standard of commercial reasonableness. The inquiry as to what constitutes commercially reasonable mitigation is also case and industry specific. Is it important to keep track of any and all mitigation efforts that undertaken.
In addition, it is important to see if your contract provides for the maintenance of a continuity plan or a disaster recovery plan, which may impose additional requirements on the relying party to mitigate against the occurrence of a force majeure event.
6. Notice of Reliance
Finally, force majeure clauses often require the giving of notice as a condition precedent to trigger the operation of the clause. It is important that the contractual provisions regarding notice are strictly adhered to.
Frustration of Contract
Contracting parties may also rely on the legal principle of frustration of contract. Frustration of contract generally occurs when, without the default of either party, a contractual obligation has become incapable of being performed because the circumstances in which performance is called for would render the performance radically different from that to which the parties originally agreed. There must be more than hardship, inconvenience or material loss for this principle to come into play.
In other words, frustration of contract allows for the termination of a contract because of unforeseen circumstances that:
- Make the contract impossible to perform;
- Make the performance of the contractual obligations illegal; or,
- Render the contract fundamentally different from its original intended character.
The fact that a contract may become unprofitable will not trigger a frustration of contract.
Accordingly, frustration of contract will not apply if the COVID-19 pandemic is simply impacting your productivity and/or profitability or makes your contract more difficult to perform. This is why force majeure clauses are particularly important for construction contracts.
The key take-away is that the enforceability of a force majeure clause and the application of frustration of contract will be fact-specific, so please talk to a construction or civil litigation lawyer to determine your risks and chances of success and how best to navigate this uncertain period.