Covid-19 – What are your contractual rights?

Covid-19 is raising a number of legal issues in
addition to a host of other problems. We set out below a practical analysis of
the relevant law.

Force
Majeure

As ‘force majeure’ is not defined in statute or
case law, contractual clauses are interpreted by looking at their precise
wording under the regular principles of contractual interpretation. Some
contracts attempt to include “force
majeure conditions” without going further but English courts have concluded
these are too uncertain and found them void.  It is important to understand that the English
courts will not imply a force majeure clause.

The courts have also held that where a clause
states that a force majeure event must “prevent” a party from performing its
duties (or render it unable to do so), then it must be impossible for
the parties to perform the duties – not just more costly or most difficult.

On the other hand, the courts have found that where
a clause states that a force majeure event must “hinder”, “impede”, “impair” or
“delay” a party in the performance of their duties, the performance only needs
to be significantly more onerous.

Parties to a contract can claim force majeure
even if the event was not unforeseeable, but a party cannot claim if the event
was caused by their own negligence. It was also decided in a recent case that a
force majeure clause will only apply if the force majeure event was the only
cause of a party’s non-performance.

A party to a contract seeking to excuse
non-performance under the contract by relying on a force majeure provision must
demonstrate that:

• a
  force majeure event has happened and that the contract specified the particular
  impact of the breach
• the
  non-performance was a consequence of forces “beyond its control”
• there
  was nothing it could have done to avoid the event or minimise the impact

Where the force majeure event definition
includes a list of specific events, followed by a catch-all phrase (such as “any
other cause beyond the parties reasonable control”) the catch-all phrase will
not be qualified by the list and will keep its wide meaning.

Force
Majeure and Epidemics

Deciding if Covid-19 would trigger a force
majeure clause in a contract will be determined on a case by case basis by
looking at the wording of the contract. It is likely to be triggered if the
definition of a force majeure event includes words such as “epidemics” or
“diseases”.

If such wording is not included, parties may
have to rely on more generic language in order to classify the Covid-19
outbreak as a force majeure event.

Examples might include “outbreak”, “crisis” or
“government action”.

It may be worth noting that the China Council
of the Promotion of International Trade (an international trade promotion
agency in China) is currently issuing force majeure certificates to Chinese
businesses struggling under the effects of the outbreak.

Frustration

As stated the courts will not imply a force
majeure clause where one is not included in the contract, but the concept of frustration
may apply.

Put simply, if after the formation of a
contract an event occurs that makes it impossible to perform a fundamental
obligation of the contract OR makes a fundamental obligation radically
different to how it was imagined when the contract was entered into, then the
contract will be frustrated and therefore automatically terminated.

Usually the threshold for proving frustration
is higher than the standard required by force majeure clauses.

Some (non-exhaustive) examples of situations
where a party cannot claim that a contract has been frustrated include:

• where
  the parties to the contract made a provision for the consequences of the event
  (for example, by including a force majeure clause)
• where
  the alleged frustrating event should have been foreseen by the parties
• where
  there are other ways of performing obligations

The 2019 case Canary Wharf (BP4) T1 Ltd v European Medicines Agency shows how
difficult it can be to prove frustration. In this case, the European Medicines
Agency (the EMA) tried to convince the High Court that its 25 year commercial
lease was frustrated as, after Brexit, they were required to move their
headquarters from London to Amsterdam. The court held that it was foreseeable
to both parties when the lease was agreed that EMA may need to leave the
premises during the term and had included provisions allowing the tenant to
assign or sub-let the lease during its term. Therefore, it was found that
Brexit did not radically alter the EMA’s performance of the contract as it
still had the ability to assign or sub-let the lease. The parties, despite not
foreseeing Brexit, had foreseen the possibility of the tenant wishing to leave the
premises during the term AND had included provisions for this by including an
assignment/sub-letting clause.

Covid-19

It is of course difficult to predict the
possible impact of Covid-19, but the fact of an outbreak can longer be
characterised as “unforeseen”. Under English and Welsh law, if a contract is
silent on whether the force majeure event needs to be unforeseen, the court
will be reluctant to impose the qualification.

The current outbreak may impact the
performances of countless contracts, not rendering them impossible but more
difficult or more expensive to perform. Under English and Welsh law, there is
no implied right to renegotiate a contract – the right to renegotiate would need
to be specifically drafted into the contract. Even if it was included, courts
are very reluctant to hold parties to an “agreement to agree” as this is too
uncertain as to be enforceable.

Practical
tips

• review
  the wording of force majeure clauses, especially to the listing of non-exhaustive
  force majeure events and the consequences of triggering a force majeure.  If you do not have a force majeure clause in
  your contract then consider including a suitably worded provision
• if
  a long list of force majeure events is included, it consider now including
  wording such as “pandemic”, “epidemic”, “outbreak”, “crisis” or “government
  action”
• check
  if new force majeure clauses require that events are “unforeseeable”

19 March 2020

Paul Jonson
Senior Partner
Email: paul.jonson@pannonecorporate.com 
DDI: 0161 393 9035
Mob: 07737 571147

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