Suspending contract performance in response to Covid-19

The coronavirus crisis is raising the concept of force majeure in construction contracts. White & Case partners Mark Clarke, Dr Markus Burianski and Christian Theissen consider the issues.

The coronavirus outbreak has quickly developed into a global threat with tragic human losses that overshadow contemplations of its economic impact. However, the disease is likely to have a profound impact on business and underlying contractual relationships. It has been highlighted frequently that scenarios like the one we are currently witnessing bring the concept of force majeure into play. As a vital mechanism to excuse a party’s non-performance, the question is: does the coronavirus constitute force majeure?

What is force majeure?

Force majeure can be defined as unforeseeable circumstances that prevent, and justify, a party from fulfilling its contractual obligations. 

However, in English law contracts, force majeure will only be available where it is provided for expressly in the contract. For that reason, when considering whether to invoke force majeure, the first step is to review the contract in question. Generally, force majeure clauses will specify:

(a)    the events which enable either party to declare force majeure;

(b)    how a party should notify its counterparty about the occurrence of a force majeure event; and

(c)    the consequences which flow from declaring force majeure. 

The clause might include a list of specific events which entitle a party to declare force majeure. Alternatively, or in addition to a list, the clause might provide that a force majeure event includes anything that is beyond the parties' control.

Force majeure and the coronavirus

When assessing whether there is a qualifying force majeure event in the context of coronavirus, two questions must be asked:

  1. What is the specific event relied upon: is it the outbreak itself or something related to the outbreak (such as governmental restrictions imposed to contain it)?
  2. Does the relevant event meet the relevant contractual test? For example, whether it falls into a category of defined events, was beyond the parties' control, and/or has prevented or hindered performance. 

It is equally important that any notification procedure is complied with fully. The contract may require that the party declaring force majeure must notify the other party within a certain timeframe, or that the notice must be delivered in a specific way or to a particular address. 

The consequences of invoking force majeure should also be considered. Typically, the clause will specify that neither party is liable for a failure to perform its contractual obligations where that failure is caused by the force majeure event. Importantly, it is common for clauses to require the parties to take steps to mitigate the effect of the force majeure event. This requirement should not be overlooked: a failure to take steps in mitigation may undermine a party's ability to rely on the force majeure clause. 

Frustration, where there is no force majeure clause

Even where a contract does not include a force majeure clause, it may be possible to argue that coronavirus has frustrated the contract. However, there are two critical differences between force majeure and frustration:

  1. The test for frustration is generally stricter than that included in a force majeure clause. A contract is frustrated where an event results in it being physically or commercially impossible to fulfil. 
  2. The consequences of frustration are more radical than force majeure. Rather than suspending performance, frustration results in the contract being automatically discharged. 

Understanding the consequences 

Companies considering asserting force majeure or frustration must be cognisant of the serious consequences which result from a mistaken assertion of either of these legal rights. An incorrect assertion of force majeure or frustration may amount to a breach (or anticipatory breach) of the contract. Depending upon the severity of that breach, the aggrieved counterparty could be entitled to claim damages or even to terminate the contract. 

With major transportation companies and infrastructure firms starting to claim force majeure, it is critical that parties review their contracts and fully understand their legal position in order to take the right steps to seek resolution.

Mark Clarke, Dr Markus Burianski and Christian M Theissen are all partners at international law firm, White & Case.