Practical Note on Covid-19: Force Majeure Clauses in Commercial Contracts

On 11 March 2020, the novel Coronavirus (“Covid-19”) was officially declared a pandemic by the World Health Organisation. Covid-19 has already caused significant changes to day-to-day lives and impacts on global economy. The government in Ireland has implemented various measures in order to slow the spread of the virus. Many business in Ireland are experiencing significant disruptions and it is now time to consider how these disruptions will affect commercial relationships and obligations under contracts, in particular force majeure clauses.

What is a force majeure clause?

Force majeure means “superior force” and is a common clause in contracts that essentially frees both parties from liability or obligation when an extraordinary and unforeseeable event or circumstance beyond the control of the parties, such as war, strike, riot, plague or act of God, prevents one or both parties from fulfilling their obligations under the contract. “Acts of God” often include natural disasters, such as fire, floods, epidemics and/or pandemics. Many force majeure clauses do not excuse a party’s non-performance entirely, but only suspend it for the duration of the force majeure.

Many contracts already contain an express force majeure clause. Wording of the clause may vary so it is essential to consider the wording of such clauses on a case-by-case basis. Where such a clause is omitted in a contract, Irish courts are unwilling to imply one into the contract.

Is Covid-19 a force majeure event?

Covid-19 in itself may not be sufficient to constitute a force majeure event. It is necessary to assess any disruptions in the context of Covid-19 and to consider whether the disruptions have hindered performance of the contract or made it impossible. If an obligation merely becomes more expensive or more difficult to fulfil due to Covid-19 while remaining possible to be done, then there may not be sufficient grounds to invoke the force majeure clause.

For example, if a party to a contract is a non-essential service provider and its employees have to stay home under new government measures and are unable to perform work from home, it may cite Covid-19 and the subsequently government measures as reasons why it is unable to fulfill its contractual obligations. Again, it is necessary to examine the exact wording of the clause and to assess the context.

However, it is worth noting that a force majeure event should be unforeseeable in nature. If a contract was entered into since the outbreak in China was reported back in January, it may be more difficult to convince the courts that the parties did not foresee the risk of Covid-19 impacting the contract.

Frustration

If there is not a force majeure clause in the contract, the parties should consider whether the contract has been frustrated. The doctrine of frustration provides that a contract may be discharged where circumstances arise (a) which were unforeseeable at the time the contract was entered into, (b) which render the contract impossible to perform and (c) which are outside the parties’ control. Mere greater difficulty or greater expense in performing a contract is not sufficient. Party looking to invoke frustration has to establish that Covid-19 rendered it impossible to perform the contract. This is a very high threshold and is difficult to prove.

What should I do if I am a business owner?

If you are in difficulty fulfilling your contractual obligations with your clients or business partners or are in a situation where other parties fail to carry out their obligations to you under a contract, you should take the following steps:
• Try and work out a reasonable solution for both parties;
• Review your contract and ascertain if the contract contains a force majeure clause;
• Examine the exact wording of the force majeure clause and consider its applicability in the context of your business’ circumstances;
• Notify the other parties if the contract provides for a requirement to notify parties involved;
• Take any measures if possible to mitigate the effects of the force majeure event;
• Review your insurance policies to see if you have coverage for events like this.

We can be contacted by phone and email as normal if you requires legal advices. You can reach us by phone at 01 661 6102 or by email at   connor.quigley@arqsolicitors.com or  gerard.rudden@arqsolicitors.com.