knowledge | 13 March 2020 |
COVID-19: Commercial Contracts and Force Majeure
Public health concerns about COVID-19 are now having direct and significant impacts in the general economy. This briefing addresses a key question that is likely to arise for business-people where commercial relationships and commitments are strained by these extraordinary events.
The Starting Point
You should always assume that an obligation under a valid contract that is governed by Irish law is enforceable unless a specific, significant reason can be raised as to why it isn’t. Merely because (due to events prompted by COVID-19) performance of an obligation is inconvenient or more difficult or more expensive or otherwise does not mean that a party to the contract will be excused from having to perform its obligations. It will be seen that the legal threshold for a defence to a breach of contract because of external events is extremely high.
If your contract is governed by the law of a jurisdiction other than Ireland, advice will be required from a lawyer in that jurisdiction.
What’s the Real Impediment to Performance?
The first legal task is to identify why it is claimed that the particular contractual obligation cannot be performed. “Coronavirus” and “COVID-19” in the abstract and in themselves are unlikely to be sufficient for this purpose. What is the precise reason? For example:
- As a result of delays in the supply of components, is your company in turn unable to complete a process and ship a product to a customer or (say) to complete its sub-contracted construction work within time?
- Due to infections or as a prudent precautionary step or on the advice of the public health authorities, have you had to exclude your workforce from your offices?
- Due to a liquidity pinch caused by the payment or financial default of others (perhaps in a payment ‘waterfall’), is your company – or the other party to your contract – unable to pay a debt on time?
It is critical that you identify the precise circumstance giving rise to the inability to perform a particular contractual obligation, even if COVID-19 can be said to be the underlying or indirect cause.
Many commercial contracts include an express force majeure clause and it is difficult to persuade a court to imply one into a contract if it has been omitted.
A force majeure clause can apply where an event that is within the scope of the clause prevents a party (or both parties) to a contract performing a particular obligation under that contract.
Where there is a force majeure clause within a contract and it properly applies on the facts (acknowledging that the parties might disagree on this), the parties’ mutual obligations that are affected by the circumstances may be suspended until the force majeure event passes.
Assessing whether a force majeure clause has been triggered in any particular situation is a difficult matter requiring legal advice – it needs detailed and careful interpretation of the specific terms of the force majeure clause and of the wider contract and also consideration of the circumstances. While “COVID-19” won’t be mentioned in existing agreements, perhaps the force majeure clause includes terms such as “Act of God” or “epidemic” or other similar terms. This will depend on the precise wording of the particular clause and may well end in a dispute between the parties. The courts interpret such clauses strictly (ie in the event of any ambiguity, it is unlikely that the clause will apply).
Where a force majeure clause applies, it will usually have the effect of providing a defence to the party that has not performed its obligation(s) and which would otherwise be in breach of contract.
It is likely that a commercial contract that includes a force majeure clause will require that notice of intention to rely on it must be served on the other party within a stated period of time and by particular means (such as notice in writing served on the other party at a particular address). It is critically important that these requirements are identified and observed in order that the clause may operate as intended. It is especially important to determine whether, under the contract, (for example) a notice “in writing” can include a notice by email. This interpretative question must always be considered on the specific terms of the particular contract and the answer may vary between contracts.
It should also be noted that a party to a contract that faces a breach by the other party must take reasonable steps to mitigate the potential harm that the breach might cause. This is especially so when it might not be clear whether a force majeure clause would apply.
If there isn’t any force majeure clause in the contract, then the question arises as to whether the contract has been frustrated. This is where the extenuating circumstance (a) is preventing the relevant contract being performed, (b) is outside the parties’ control, and (c) was both unforeseen and unforeseeable. The legal threshold for frustration is extremely high and so it is difficult to prove.
Importantly, frustration means that the relevant contract comes to an end and is not ‘re-activated’ when the circumstances return to normal. Also, frustration applies to the entire contract. In contrast, a force majeure clause can merely suspend the relevant obligation(s) for the time that the force majeure event exists.
Impossibility in Performance, not merely Difficulty
It should be recalled that the Irish courts lean in favour of enforcing contracts and so there is a high threshold to proving force majeure and contractual frustration as defences for a party breaching its bargain. Mere greater difficulty or greater expense in performing a contract is insufficient. To reiterate the starting point, a court will assume that a party should perform its contractual obligations and it is for that party to establish why, in the particular extraordinary circumstances, it should be excused from having to do so.
This document has been prepared by McCann FitzGerald LLP for general guidance only and should not be regarded as a substitute for professional advice. Such advice should always be taken before acting on any of the matters discussed.