In the jurisdiction of England and Wales whether a particular clause relieves a party of its contractual liabilities will depend upon the specific wording in the force majeure clause and will be facts specific. The facts specific issues will include:
- Whether there is any wording in the clause which would cover the current pandemic.
- Whether the clause specifies circumstances required for it to be triggered, for example, a law being enacted, action taken by a governmental or public body.
- Whether the clause specifies a requirement for there to be non-performance by suppliers or sub-contractors. Again, subject to the wording, the event itself would need to hinder performance of the contractual obligations or make them impossible.
The party seeking to rely on this will need to:
- To give the required notice of a force majeure event as the contract stipulates.
- Make reasonable mitigation efforts to avoid or limit the loss.
- Engage proactively with the counter-party to find amicable solutions to the disruptions complained of.
Impact of the doctrine of frustration
In the absence of a mutually agreed clause there are specific contract issues that require further attention and these flow from the common law doctrine of frustration.
In the jurisdiction of England and Wales the doctrine of frustration allows a contract to be terminated when an unforeseen event occurs that renders the performance of the contract impossible. The purpose of frustration is to avoid injustice where there has been a significant change in circumstance and neither party is at fault. Where a frustrating event occurs, the contract is automatically ended without requiring any action of the contractual parties.
As contract termination is very onerous the threshold for frustration is high, and the test to establish this is very strict. In short a contract may be frustrated where:
- The frustration event is beyond what was contemplated by the parties on entering the contract and that it strikes to the root of the contract.
- Neither contractual party is at fault.
- The frustration event renders performance of the contract impossible, illegal or radically different from what was contemplated by either of the parties.
As with force majeure, specific terms of each contract need to be considered individually. The key question is whether COVID-19 makes performance of a contract impossible, or just more difficult. If it is just more difficult this will not necessarily result in the contract being frustrated. An example of this is if COVID-19 merely delayed performance of an obligation, or increases the cost of doing so.
How we should draft contracts in the future
Looking forward it will become more important that parties consider alternative contractual relief, in the now foreseeable, event of similar virus pandemics occurring in the future. These can be addressed by:
- Limitation of liability and exclusion clauses, in which parties seek to limit or exclude liability for specified non-performances. These will be especially important if a suitably worded force majeure clause can’t be agreed.
- Price adjustment clauses, in which parties can alter the contract price for goods and services due to increases in the supply chains or reduction in the availability of qualified personnel.
How Gallagher can help
We can provide you with suitable contract risk management advice to allow you to amend your contracts to comply with the terms of your insurance and to control your liability under contract. In addition we will always discuss our advice with other parties to negotiate a suitable contract. The advice will be provided as contractual risk management advice only and although we will take every reasonable step to assist you, our advice does not represent a legal opinion. If you wish to receive a legal opinion you should consult a suitable qualified independent solicitor.
