By Lewis Wright
Covid-19 has impacted commercial contracts in a big way as of late. However, with the country’s lockdown gradually loosening, many businesses are seeing a sense of normality creep back into their lives.
However, throughout this pandemic, commercial contracts have taken a hit. One such way is through force majeure clauses. These clauses, in ordinary times, most likely elicited next to no thought and were viewed as ‘boilerplate’ provisions; but in these trying times these small clauses, in certain circumstances, can result in huge consequences.
These clauses, despite attempts, remain undefined in the law, meaning parties are left to argue between themselves what these are and, incidentally, what they mean.
Essentially, a clause of this nature allows a party to escape their contractual obligations due to prolonged extraordinary circumstances. When a party is prevented from fulfilling their obligations due to this event (which is out of their control), this clause can offer relief.
Now, for those unfamiliar with these clauses, the Coronavirus seems to fit the bill quite nicely. However, this has not been the opinion of the courts throughout this pandemic as they have often swayed between allowing and blocking such clauses from having a binding effect. Nevertheless, the courts have set out certain factors under English law that will impact the effectiveness of such clauses. These are: the exact wording of the clause, the circumstances surrounding the contract, and the allocations of risk. However, many more factors have, and are yet to be, considered as this is a non-exhaustive list.
The courts, quite rightly, have taken very narrow interpretations of such clauses. For example, judges have widely adopted the principle of termed ejusdum generis meaning ‘of the same class’. Fundamentally, this means that if your clause labels an earthquake as an extenuating event, it wont cover anything outside that category; like covid!
The effects of these clauses allow the impacted parties to suspend the performance of their obligations until it becomes practicable to continue.
The effects of this pandemic have been felt by everyone. The judiciary particularly have been impacted massively, seen by the introduction of remote hearings. Therefore, judges will hold at least a modicum of sympathy for those trying to rely on a force majeure clause.
Osborne Clarke's recent article has highlighted some similarities between both post and pre-covid force majeure cases in the hopes of shining some clarity on what the courts’ most likely responses may be. Their main comparison came from the case of 2 Entertain Video and Others v Sony DADC Europe. In this case, Sony stored 2 Entertain’s goods. These goods were subsequently destroyed during a riot and 2 Entertain sued Sony for damages.
Sony, who tried to argue the validity of their force majeure clause, were met with disdain as the court held that the circumstances were not ‘beyond reasonable control’.
But how does this relate to covid? Well, when companies could reopen but choose not to (as a safety precaution to prevent spread), the other party may argue that the ‘force majeure event’ was the choice of the party and not due to the virus. Of course, all decision will need contextual clarity before any real decisions can be made; but this shines a very dim light on what may occur should parties decide to pursue this route for their unfulfilled contracts.
With the pandemic seeing a decline in recent weeks, it is hard to know what is to come for troubled businesses; but should they feel like they cannot honour their contracts, I sincerely hope they can be excused during such difficult times.