Unchartered territory: legal issues relating to Covid-19

Unchartered territory legal issues relating to Covid-19 | BDM Blog | BDM Law

In recent months and weeks, the impact of Covid-19 has been severe and unprecedented, both for businesses and in our personal lives. The challenges we face are constantly changing and, from lockdowns to home working and schooling, in many ways we are in unchartered territory.

In this article we provide a list of eight key legal points and guidelines that may apply where Force Majeure issues arise relating to Covid-19. We focus here on contracts in the maritime, insurance and offshore sectors.

This is the first of a series of articles we will be publishing in the coming weeks relating to Covid-19, so please do keep checking in on this page for further news.

Force Majeure – a checklist of key questions and issues

The term force majeure (“FM”) has no recognised meaning under English law and so the wording dealing with FM must be expressly included in any contract. FM wording may vary significantly from contract to contract and it is therefore very important to look at the actual words used in any particular FM provision (including checking whether there is any FM clause in the contract at all).

An FM clause usually limits or excludes the liability of one or both of the parties when a particular event or circumstance (as defined in the FM clause) prevents that party from fulfilling its obligations under the contract. The clause will typically allow either or both of the parties to be excused from some or all obligations for a certain length of time. In addition, the clause may allow either party to suspend or terminate the contract if the FM event continues for a certain stated period of time.

Below are some key points to consider where a Covid-19 force majeure issue or argument has arisen:

  1. Does the event relating to Covid-19 fall within the FM Clause? As mentioned above, the FM clause will include a definition of FM itself, including a list of FM events. The party relying on FM must show that the event in question falls within the FM clause. While some FM clauses include reference to “disease” or “epidemic” which may be helpful, others may simply refer to “act of god”, which is more ambiguous. There may also be references to “quarantine” or “government interference”. As further measures and regulations are implemented and enacted, we expect an increase in cases where parties invoke such events and in each case careful attention to the particular facts and the contract wording will be essential.
  2. Was Covid-19 the effective cause? Causation is an important consideration in any FM scenario. If there was another effective cause for the party’s failure to perform, which falls outside the FM clause, then it is unlikely that the FM clause would apply. Again, much will depend on the wording of the FM clause and the particular event that has arisen.
  3. How is performance affected by the FM event? If we assume that a Covid-19 issue falls within the FM clause, it is important to examine the wording of the clause in relation to how performance may be effected. For example, if there is a requirement for performance to be “prevented” this usually means physically or legally impossible. On the other hand, “hindered” sets a lower bar meaning that it should be substantially more difficult (but not necessarily impossible) to perform the relevant obligation(s). In either case, it would not be enough simply to argue that it has become more difficult or expensive to perform the contract.
  4. Has the party invoking FM taken reasonable steps to mitigate the effects of the FM event? It is common to see wording in the FM clause requiring such reasonable steps to be taken. For example, delivery of goods at one particular port may not be possible due to closure of the port following Covid-19. However, if it is reasonably possible for the party to deliver the goods to a nearby port and then carry the goods by road to the destination, then these steps should be taken to mitigate the effects of the original port’s closure. A failure to do so in these circumstances would mean that reliance on FM would not be possible.
  5. Does the FM clause require events to be unforeseeable? Commonly the FM clause will contain such a requirement and so, it is likely that a party much show that Covid-19 was an unforeseeable event. However, for contracts entered into after the outbreak, we expect it will be more difficult to be able to rely on such a clause, as unfortunately, a Covid-19 event or any resurgence of the virus, is likely to be considered foreseeable.
  6. What are the notice requirements? FM clauses typically require the party relying on the clause to give notice to the other party. Depending on the wording, failure to give notice may prevent the party from relying on the FM clause for the event in question. Alternatively, this would give rise to a claim in damages. In either case, it is worth paying close attention to the notice provisions and complying with them if you are the party invoking FM.
  7. In these changing times, it is increasingly important to pay close attention to local port and other regulations that will impact the performance of the parties’ obligations under a contract. Many ports have already implemented new regulations dealing with Covid-19 and parties should continually monitor the position in order to determine whether or not certain obligations or actions are actually prohibited.
  8. Is it possible to rely upon frustration? If a party cannot rely upon an FM event, or there is no FM clause in the contract, a party may look to rely upon the English common law doctrine of frustration. In order to rely upon frustration, it is necessary to show that there has been an event that was not the fault of either party, was entirely beyond the contemplation of the parties and that has radically altered the performance of the contract from that which the parties had originally envisaged, meaning that further performance is impossible or illegal. Frustration is typically difficult to establish and careful consideration of the contractual obligations and particular facts is required in each case. In addition, it will not be possible to rely upon frustration where an existing FM clause has been drafted as a “full and complete provision” for the relevant event. In that case, the Parties should rely on the FM clause.

Please do not hesitate to contact us if you have any questions or require any assistance with Covid-19 related issues.

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