UK: Force majeure and the effect Covid-19 may have on businesses

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updated on 1 April 2020 | reading time approx. 2 minutes

 

The global pandemic Covid-19 has caused a huge disruption for businesses and more so, in circumstances where customers and third parties are waiting for services to be supplied to them. So the question is, where does this leave the businesses?

 

 
The starting point would be for the parties to look at the contract. Businesses will also review this to understand why they can’t perform their obligation, and what the consequences would be for failure to perform their obligations.

 
The impact of a force majeure event will be dependent on the governing law of the contract. In the UK this may apply if included in the terms of the contract. Force Majeure is not a legal term, but instead a contractual term.

 
Covid-19 would not automatically qualify as an Act of God. Courts would usually review several factors when deciding if the force majeure clause would apply; firstly

(1) whether the event qualifies as force majeure under the contract,

(2) whether the risk of non-performance was foreseeable and able to be mitigated and

(3) whether performance is truly impossible.

 
You therefore couldn’t simply rely on Covid-19 in order to believe force majeure applies. But instead, look at the specific issue hindering the performance of the contract. What is the particular consequence arising from Covid-19 which is disrupting the business and preventing you from performing your services?

 
When looking at what is causing the disruption in the supply chain, one would have to distinguish whether the business itself has had to close or if the workforce are not at work. It is usually sensible for businesses to carry out measures which would allow them to deal with such business intereferences.

 
If the contract has no force majeure clause, then Frustration may apply. Either way, Frustration and force majeure may only be applied in severe circumstances. Frustration is available under English contract law but only where force majeure is not available and only in limited circumstances.

 
The threshold for proving Frustration is high. In order to be able to claim Frustration there must be an event which occurs after the contract is formed and which:

  1. Is fundamental to the contract and was not contemplated by the parties when the contract was formed;
  2. Is not due to the fault of either party;
  3. Results in performance being impossible, illegal or makes it radically different to that contemplated by the parties when the contract was formed.

 
So Frustration is not available in circumstances where there has been a change in economic conditions, and therefore the test in itself is quite high. This is why it is so common for parties to include force majeure clauses in contracts.

 
However, it is worth considering that the high threshold of Frustration may be met if the UK government decide to pass a particular law regarding closure of certain businesses which will result in an impossible delivery for service. A successful claim of Frustration would mean that the contract would automatically be terminated and both parties no longer have to perform any of their obligations.

 
Meanwhile, it may be worth businesses consider business interruption insurance which will cover losses, if any due to circumstances out of the control of the business.

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