Contract breaches and penalties amidst the coronavirus outbreak

Written by Shalisha Samuel. One Young World Ambassador, St. Vincent & the Grenadines.

Thumbnail

Force majeure clauses often appear in major commercial agreements, but are seldom invoked. Due to the 2019/2020 coronavirus outbreak, that is starting to change.

A force majeure clause allows a party to a contract to escape liability for failure to perform contractual duties if an event beyond that party’s control, and which is covered by the clause, has occurred.

Can the coronavirus outbreak be classified as a force majeure or an event beyond one’s control? To the layperson, the answer may seem obvious but, as usual, the law is not always straightforward.

Coronavirus & Its Contractual Implications

“Please pay attention to clause 5 of the agreement. If your child is absent for a period of a month, a two week payment is still required.”

 This was an abridged version of the WhatsApp message from the daycare to which my friend sends her son. My friend had to keep her son home for more than a month, because of the ‘stay at home’ order instituted by her government due to the coronavirus. How then, she argued, could it be reasonable to expect her to honor clause 5 of the agreement and pay for the child to be in daycare? Surely, his not attending daycare was an event beyond her control?

This admittedly simple example can be multiplied hundreds of times over. The potential financial liabilities for contract breaches in large sectors such as manufacturing, distribution and construction are in the billions of dollars.

The coronavirus induced regulations have affected the contractual relations between employers and employees; retail businesses and customers; suppliers and manufacturers; importers and exporters; passengers and airlines; patients and hospitals, among many others.

Some practical examples are that a deposit was made but there was no delivery of the product or service, employees have not reported to work as their contract requires, and your company faces fines for two missed payments. The domino effect of the coronavirus is not surprising for a virus that has infected some 5 million people worldwide. The contractual relations of millions, if not billions, of people around the globe have been affected, and we in the Caribbean have not been immune. Including my friend and her contract with the daycare.

The question is whether a force majeure clause could possibly come to the rescue, and if so in what circumstances?

Where the matter ends up in court, the judge will consider the nature of the agreement, the applicability of the force majeure clause and make a determination of whether the coronavirus outbreak was in fact an event that was covered by the clause and beyond the control of the contracting party accused of breaching the contract.

It is therefore useful for business owners to understand the practical arguments regarding their non-performance or breach of contract to support their reliance on force majeure.  

Force Majeure Explained

In English law, a force majeure clause must be expressly written in the contract and not implied. Simply stating ‘force majeure’ would not be sufficient. Such legal certainty is required because, as explained, the court will interpret the text of the clause.

In the absence of a force majeure clause, businesses may be able to rely on the common law relief of ‘frustration’. ‘Frustration’ is based on the premise that the event has frustrated the basic purpose of the contract by no fault of the party seeking relief. Further, the doctrine of ‘frustration’ only excuses nonperformance when the contractual duty becomes impossible or impracticable to perform – this is a very high bar.  Note, however, that ‘frustration’ brings the contact to an end. The hurdle can be overcome, or circumvented, if there is an appropriately drafted force majeure clause.

Gavel image

Questions the court will likely ask

  • Was the coronavirus an event covered by the clause?
  • How was the coronavirus an event beyond your control?
  • How has coronavirus prevented you from performing your contractual duties?
  • What steps did your business take to limit the likelihood of or scale of any impact of the coronavirus? (mitigation)

The questions imply what a force majeure clause should include. Here is an example:

“Neither Party shall be liable for any costs or damages due to delay or non-performance resulting from acts beyond its reasonable control including, but not limited to, acts of God, fire, floods, acts of terrorism, acts of war (whether declared or not) riots, strikes or civil unrest. Either Party must promptly notify the other in writing of any event that delays or prevents performance of all or part of their duties and the period such event is expected to continue. Notwithstanding the foregoing, each Party agrees to use commercially reasonably efforts to perform its obligations hereunder. Each party must promptly reconvene its duties and notify the other of such, in writing, when the intervening event has ceased.”

'Beyond Your Control' Is Not Sufficient‘

My first job out of law school involved negotiating and drafting agreements and while I negotiated force majeure terms I knew that the force majeure clause was not the star of the show. I would say that it is rare for the clause to be invoked as events that can justly be considered an event of force majeure are not common occurrences but events of ‘strong force’ with the following characteristics:

  • Acts of God/nature: hurricane, storms, tornado, floods, lightning, tsunami
  • Acts of man: terrorism, war, riots, trade embargoes, nuclear and chemical contamination
  • External to your business
  • Not due to your negligence

The World Health Organisation’s Director-General has referred to coronavirus as a pandemic, which the Organisation defines as “...the worldwide spread of a new disease… and most people do not have immunity”. A force majeure clause that includes ‘epidemic’ and ‘pandemic’ is likely to be interpreted as the parties’ intent that coronavirus be an event of force majeure. I have rarely seen those terms in a contract however. The court still has discretion to come to the same conclusion where the clause is non-exhaustive and states “…but not limited to…” as seen in the above example.

As cautioned earlier, proving an event is beyond your control does not excuse non-performance. The key question is what inhibiting circumstances arose following the event that prevented your performance?

  • Did the government prohibit activities in your sector because it is non-essential? Was it a prohibition or merely an advisory?
  • Would it have been illegal to perform your contract?
  • Did your business fall outside the sectors exempted from the ban on activities?
  • Does your business rely on non-essential services?
  • Did the curfew, social distancing, stay at home orders or a closed border impede your contract performance?
  • Were there other events, other than corona, that affected your performance?

Any delay or non-performance should only be to the extent of the limiting circumstances of the event. Failure to perform a duty that was not inhibited by the affects of the coronavirus would not afford your business protection under a force majeure clause. Additionally, the impact of the coronavirus must be the only cause of the non-performance.

Finally, reasonable efforts must be made to continue performance of the contract:

  • Were attempts made to source products elsewhere?
  • Was delay or non-performance simply due to higher operation costs?
  • Could you have provided your employees with personal protective equipment (PPE) and continued operations?
  • Could you have changed business hours?
  • Could you have operated with a skeleton staff?
  • Could your employees work at home?
  • Did you seek to renegotiate timeframes?
  • Did you promptly resume performance when circumstances improved?

Conclusion

The novel coronavirus has raised novel legal questions. It is unprecedented and therefore an exciting time for legal practitioners and the courts. Presently, China and Ukraine issues force majeure certificates to companies, but these may have little to no weight in our local courts.

In the future, we may see the specific inclusion of ‘epidemic’ and ‘pandemic’ in almost all force majeure clauses. More so, smaller businesses may pay keener attention and include a force majeure clause in their contracts. Nonetheless, consider invoking best business practice before invoking your force majeure clause. Promptly inform your partners of any potential delay or non-performance, renegotiate and, in good faith, perform your contractual obligations where legal and feasible.

 

This article was originally published in The Barbados Business Authority.

Shalisha headshot

Shalisha Samuel is a One Young World Ambassador, U.K Barrister and a Transitional Student at the Hugh Wooding Law School.

Connect with Shalisha:

Linkedin