Alison Lee

Alison Lee


We are all around the globe experiencing significant operational and public disruption caused by the Covid-19 outbreak.

These disruptions are placing a severe threat on our economies, largely due to a collapse in supply chains, production and distribution facilities and capital capabilities and resources, including human resources.

One of the consequences is that the performance of contractual obligations become nigh impossible and things slowly grind to a halt.

Said differently, many contractual obligations will only be partially met or not met at all; transactions and contractual activities will be disrupted, may limp along or simply stop.

So where does a contracting party stand in the face of this Covid-19 mess, which has given rise to partial performance and / or non-performance of contractual obligations?

Call in the contractual and common law principles, known as “Force majeure” and “Supervening impossibility”.

Force majeure clauses are contract provisions that excuse a party’s non-performance when “acts of God” or other extraordinary events prevent a party from fulfilling its contractual obligations.

These clauses are currently gaining attention due to the coronavirus outbreak (Covid-19), which has significantly impacted the global economy and businesses’ ability to manufacture, distribute and sell their products.

When deciding whether a non performing party may rely on a force majeure clauses, courts will typically look to several elements when considering the applicability of such a force majeure clause, including:

(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.

The primary focus is on whether the clause encompasses the type of event a contractual party claims is causing its non-performance.

Force majeure clauses are generally interpreted narrowly; therefore, for an event to qualify as force majeure it must be outlined in the clause at issue.

Even when a potential force majeure event is encompassed by the relevant clause, however, a party is under an obligation to mitigate any foreseeable risk of non-performance, and cannot invoke force majeure where the potential non-performance was foreseeable and could have been prevented or otherwise mitigated.

Furthermore, depending on the relevant contractual language and governing law, a party generally will be required to establish that performance is truly impossible rather than merely impracticable.

In many force majeure cases, non-performance will not be excused if it is merely financially or economically more difficult to satisfy contractual obligations.

Some jurisdictions, however, may only require that performance be impracticable, and some contracts may set a different standard (e.g., performance is “inadvisable”).

As a result, companies should closely scrutinize both the language of their force majeure clauses and the applicable law clause when considering their obligations and potential non-performance risks.

Following the above, a force majeure clause typically excuses one or both parties from performance of their contractual obligations in some way following the occurrence of certain events. The relevant events are often defined as acts, events, or circumstances beyond the reasonable control of the party / ies who is / are expected to perform under the contract.

In addition to a force majeure clause, contracts may also house a “supervening impossibility” clause. A supervening impossibility arises if a party is prevented from performing its contractual obligations as a result of some form of force major event or as a result of an unforeseeable accident or event. If the party who is unable to perform as a result of the force majeure event and in consequence relies on the “supervening impossibility” clause, can successfully indicate this by way of facts, showing that the event was “unforeseeable with reasonable foresight”, and that as a result performance was “unavoidable with reasonable care”, such party will be excused from such non-performance, and as a result will escape any contractual liability which flows from such non-performance.

Importantly, for both force majeure and supervening impossibility issues and events, a careful assessment of the facts, the contractual provisions, and the legal principles is required to form a view on whether one is able to argue that the event was “unforeseeable with reasonable foresight”, and that as a result it was “unavoidable with reasonable care”.

So, let’s dig deeper

The applicability of a force majeure provision is contract-specific, and there is a high bar for invocation of such a clause.

Recent events, including the declaration of Covid-19 as a “pandemic” and the implementation of travel, movement, and large-gathering restrictions, have altered the force majeure landscape in a manner that may impact the availability of such provisions to non-performing parties.

In considering the applicability of force majeure, courts look to whether:

(1) the event qualifies as force majeure under the contract.

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

(3) performance is truly impossible.

The court’s inquiry largely focuses on whether the event giving rise to non-performance is specifically listed as a qualifying force majeure in the clause at issue.

Even if a party can surmount this requirement, it cannot invoke force majeure if:

(1) it could have foreseen and mitigated the potential non-performance, and

(2) performance is merely impracticable or economically difficult rather than truly impossible, (unless the specific jurisdiction or contract at issue specifies a different standard).

Recent Covid-19 developments may impact whether the outbreak and/or its effects constitute force majeure.

Covid-19’s classification as a “pandemic” by the WHO will trigger a force majeure clause that expressly accounts for “pandemics.”

That said, the declaration of pandemic standing alone — without a reference to pandemics in a force majeure clause — will not automatically constitute a force majeure given the courts’ focus on whether the event is specified within the contractual language.

Clauses that are silent on pandemics, epidemics, or other viral outbreaks are likely to be insufficient for a force majeure defense due to covid-19, unless, of course, courts liberalize the force majeure analysis to account for market realities and factor in public interest considerations.

If a force majeure clause clearly covers covid-19 as a qualifying event in light of the WHO’s declaration, parties seeking to invoke the provision will not need to establish the event was unforeseeable, but will still need to show:

(1) that they took steps to mitigate the damage, and

(2) that performance is truly impossible (or meets any other standard the clause requires).

Recent governmental regulations intended to contain the Covid-19 outbreak may similarly make it easier to invoke a force majeure clause not previously triggered by the virus.

Ever-expanding governmental restrictions on travel, movement, and large gatherings have resulted in significant business interruptions and widespread event and travel cancellations, with a particularly salient impact on the event, tourism, restaurant, airline, venue rental, and sports and entertainment sectors.

Over the last few days and weeks many countries and states have imposed lock down measures, or have shut down schools, restaurants and bars.

Businesses may be able to invoke force majeure provisions to excuse any contractual non-performance resulting from these measures if the force majeure clauses at issue enumerate governmental orders or regulations that make performance impossible.

As with clauses triggered by the WHO’s pandemic declaration, the delineation of governmental regulations making performance impossible does not end the court’s analysis, and parties seeking to avail themselves of force majeure must still establish inability to mitigate, along with impossibility of performance (or any other standard the clause requires).

As a result, companies should continue to closely monitor Covid-19 developments and their potential impact on contractual performance, and take and document all reasonable steps to mitigate, where possible, their effect on business operations.

Contracts Lacking Force Majeure Clauses

As the impact of the Covid-19 pandemic magnifies, parties are increasingly looking to their contracts for potential excuses of non-performance, such as force majeure, only to find their contracts conspicuously silent on the issue.

Where this is the case, companies should begin to assess the applicability of alternative common law mechanisms for excuse of non-performance.

While courts will likely reject a force majeure claim if the parties’ agreement does not contain a force majeure clause, parties seeking to excuse non-performance may still avail themselves of the common law doctrines of impossibility or, in some jurisdictions, impracticability.

These doctrines may excuse non-performance where a party establishes that:

(1) an unexpected intervening event occurred;

(2) the parties’ agreement assumed such an event would not occur; and

(3) the unexpected event made contractual performance impossible or impracticable.

A party’s non-performance will not be excused under these principles where the event preventing performance was expected or was a foreseeable risk at the time of the contract’s execution.

Even if the event was unforeseeable, courts will still assess whether the “non-occurrence” of the event at issue was a “basic assumption . . . on which the contract was made.”

It is, for example, assumed that the subject of the contract will not be destroyed. It is not, however, considered a “basic assumption” that existing market conditions or the financial situation of the parties will not be disturbed.

As a result, mere market shifts or financial inability to perform generally do not constitute unforeseen events the non occurrence of which was a “basic assumption” of the contract.

As a general principle, a party assumes the risk of its own subjective incapacity to perform its contractual duties unless the contract envisions otherwise.

As a result, courts apply an objective assessment of whether the performance sought to be excused is impossible or impractical — whether the performance is beyond a party’s subjectively-viewed capacity is irrelevant to this analysis.

Some jurisdictions, excuse performance only where it is truly impossible, rather than merely impracticable, which generally requires a showing that destruction of the subject matter of the contract or the means of contractual performance make the satisfaction of obligations impossible.

Other jurisdictions, excuse performance where it is impracticable, such that it would require excessive or unreasonable expense.

We expect that the Covid-19 pandemic will require courts to address calls to liberalize the doctrines of impossibility and impracticality.

Another common alternative in the absence of a force majeure clause is the doctrine of frustration of purpose.

This principle functions similarly to impracticability and impossibility, but focuses on whether the event at issue has obviated the purpose of the contract, rather than whether it has made a party’s contractual performance unviable.

Frustration of purpose requires many of the same elements as the principles of impossibility or impracticability, but does not require a supervening event that impedes a party’s performance:

(1) an event substantially frustrates a party’s principal purpose;

(2) the non occurrence of the event was a basic assumption of the contract; and

(3) the event was not the fault of the party asserting the defense.

The overarching question with respect to frustration of purpose is whether the unforeseeable event has significantly altered the circumstances of an agreement such that performance would no longer fulfill any aspect of its original purpose.

There are two primary obstacles to successfully invoking this defense. First, courts interpret a party’s “purpose” broadly, and the mere fact that an event has prevented a party from taking advantage of the agreement in an expected manner may be insufficient. Second, frustration must be near total — it is not enough that a transaction was previously expected to be profitable, but is now unprofitable.

What now ?

We are of the view that Covid- 19 is an event that could be viewed as “an unforeseeable with reasonable foresight” event, and that as a result of the virus, performance under a contract could be rendered “impossible” or “unavoidable” even where one exercises reasonable care”.

That being said, a contract must house a “force majeure clause” which is specific and anticipates a pandemic, or act of government, or wording which anticipates a similar eventuality.

Many contracting parties will be carefully scrutinising these:

· “force majeure” and “supervening impossibility” and / or “frustration” clauses housed under their respective contracts, and in the absence of a written contract,

· the common law applying to these legal principles,

in order to ascertain if they may escape liability for non-performance and the resultant consequences, namely contractual breach and damages flowing from such a breach, where they have been unable to perform their respective duties under an agreement or contract as a result of the Covid-19 pandemic.

The coming weeks and months will bring many assertions of force majeure in response to quarantines, business closures and travel restrictions. Whether such assertions of force majeure will be successful will be heavily dependent on the facts relevant to the particular contracts and businesses at issue.

However, a word of caution – now that the virus is out there – the event, it is arguable, is no longer an “unforeseeable with reasonable foresight” event. As a result, such event or circumstance in respect of future contractual undertakings, will in all probabilities, not be viewed or categorised as a force majeure event.

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