The Effects of COVID-19 on International Contracts

How to handle the case in which a supplier or customer within an international supply chain defaults on a contract? When can Force Majeure be invoked? What are the consequences on contracts? How to minimize risks to the company’s business?

To answer these questions, it is necessary to analyze the content of the contracts and understand what the law applicable to the individual agreements provides for.

Our experts explain how to manage the effects of the Covid-19 pandemic on industrial and commercial activities and share operational advice for managing international contracts during the emergency.

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United Kingdom

How is Force Majeure incorporated into contracts in England and Wales?

First and foremost, Force Majeure has no recognised meaning in English law. Its inclusion into English contracts is to excuse one or both parties from the performance of the contract in some way following the occurrence of certain events which are usually beyond either of the parties’ control. However, to be effective, those events need to be properly defined in order to add certainty to the agreement. It is not sufficient to simply say that a party will be excused from complying with its obligations if a Force Majeure event takes place. For example, in British Electrical and Associated Industries (Cardiff) Ltd v Patley Pressings Ltd [1953] 1 WLR 280 a clause stating that the “usual Force Majeure clauses shall apply’ was considered void and was therefore unenforceable.

Given the importance that such clauses can have on a contract, the drafting of a list of events that might be considered Force Majeure can be both cumbersome and lengthy. What might be considered outside of the parties’ control to one party might not be considered as such by the other party.

That is why it is important to have express inclusion or exclusion of certain events when a contract is being drafted. The party most likely to seek to rely on a Force Majeure clause (generally the supplier of goods or services) will want to ensure that any eventuality is covered so that they do not end up bound by the terms of a contract that they may find difficult complying with if compliance is even possible.

Whereas, the party least likely to enforce the clause will want to omit as many events as possible so that it can either enforce the terms of a contract if a specific event is not covered or alternatively sue for any loss suffered if the contract cannot be performed.

Where a party seeks to rely on a Force Majeure clause, the burden of proof falls on them to prove that the event falls within any defined clause in the contract and that specific event is the reason for non-compliance. It is not sufficient to rely on a defined event for failure to comply when the reason that the contract has not been honoured is for completely unrelated reasons.

Even further, the Force Majeure event must be the sole reason why the contract has not been honoured. This proposition was established in Intertradex v Lesieur [1978] 2 Lloyd’s Reports 509 and was upheld in Seadrill Ghana v Tullow Ghana  where Teare J found that the defendant’s failure to provide drilling instructions to the claimant, a contractual obligation, was caused by two matters; one a Force Majeure event, the other not. As the Force Majeure event was not the sole reason for failing to comply with the terms of the contract then the contract remained binding and enforceable.

Further, it is not sufficient to simply rely on a Force Majeure event as reason for not complying with your contractual obligations if it cannot be shown that the party seeking to rely on the clause has used reasonable endeavours to prevent, or at least mitigate the effects of the Force Majeure. This means, for example, a party should consider whether there are any other ways that the contract can be complied with even if it falls outside of the scope of what is contractually obligated to do.

Once a Force Majeure clause has been relied upon by one party and it is accepted that they are contractually entitled to rely upon that clause, what does it mean for the performance of the contract?  For the most part, clauses are suspensory so that the obligations do not fall away, they are simply put on hold until such time as the contract can be performed.

If compliance of the contract makes no commercial sense after the Force Majeure event has passed then either party may serve notice terminating the agreement after a specified period of time if the contract allows for such a notice to be served. Once a Force Majeure clause has come into effect and the contract has either been suspended or terminated, the non-performing party will not be liable for any non-performance or delay unless they were already in breach at the time of the Force Majeure event.

Does the Coronavirus fall within an event of Force Majeure?

As in all cases, the party seeking to rely on the Coronavirus as being a Force Majeure event will have the burden of proof of asserting that it falls within any Force Majeure clause that exists in the contract. A party seeking to rely on Force Majeure will want to check whether the contract specifically lists ‘pandemics’ or ‘epidemics’ as Force Majeure events. If the contracts contain such wording then the Coronavirus will almost definitely be considered a Force Majeure event. It must be remembered that even if the Coronavirus is considered a Force Majeure event, the clause can only be relied upon if performance of the contract is rendered impossible as a specific result of the Coronavirus and not for any other reason.

If pandemics are not covered by the contract then it might be arguable that the Coronavirus is covered under an ‘Act of God’ which was defined by Lord Hobhouse in Transco PLC v Stockport Metropolitan Borough Council [2003] UKHL 61 as an act which (i) involves no human agency; (ii) is not realistically possible to guard against; (iii) is due exclusively and directly to natural causes; and (iv) could not have been prevented against with any amount of foresight, plans and care. It seems almost certain that Coronavirus will fall within each of these definitions although it has not yet been tested in Court.

Finally, it might be possible that Coronavirus falls within a clause relating to Government action. Given the Government’s decision to close all non-essential shops and to limit the reasons for people to leave their homes for four very specific reasons it may be that contracts cannot be performed as a result.

Can the doctrine of Frustration apply to Coronavirus?

In the absence of an express clause which would allow a party to rely on the Coronavirus as a Force Majeure event, the doctrine of frustration may still apply. Frustration applies when something occurs after the formation of the contract which renders it physically or commercially impossible to fulfil the contract, or transforms the obligation to perform into a radically different obligation from that undertaken at the moment of entry into the contract.

If a contract becomes frustrated then the obligations under the terms of the contract become discharged. It is a very high bar to claim that a contract has become frustrated as it is at direct odds with the idea of contractual certainty. The Court will always seek to enforce the terms of a contract if at all possible, which is why a party should seek to rely on a Force Majeure event if at all possible before relying on the doctrine of frustration.

What is the best course of action recommended in case either party issues a notice of Force Majeure?

For the party issuing a notice of Force Majeure it is imperative that they are certain that they are entitled to rely on the Force Majeure clause in the contract. If the contract does not specifically refer to the event that they seek to rely on, then they could be sued for specific performance or for losses relating to their non-compliance.

Even if a party is entitled to rely on the Force Majeure event it would not be sufficient to either suspend or terminate their contractual obligations if they are able to comply with their obligations through other means that may not have been considered at the time of entering the contract. Further, if there are any other reasons why their obligations cannot be complied with then they are unlikely to be able to rely on the Force Majeure event.

Any notice should also be issued as soon as it becomes clear that the contract cannot be completed and without delay to avoid any argument that the non-compliance was for any reason other than the Force Majeure event.

For a party that is served with a notice of Force Majeure they should consider whether the event relied upon is covered by the wording of the contract and whether there is any other means by which the contract can be performed or any other reasons as to why the contract cannot be performed. If the answer to either question is yes, then they are likely to be able to enforce the terms of the contract despite the Force Majeure event.

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