A guide to commercial contracts and force majeure clauses

Harrison Drury’s commercial dispute resolution team has produced a step-by-step guide to help business owners understand their written commercial contracts, the terms of agreement within them and to identify clauses that may relate to force majeure.

One of the key considerations when establishing the coronavirus COVID-19 pandemic’s effect on obligations to perform under a commercial contract is whether contractual agreements contain a force majeure clause.

Understanding the terms of the agreements entered into and the meaning of relevant clauses, enables business owners to make better and more informed decisions going forward regarding their obligations.

Here is a step-by-step guide to help understanding these:

1. Check which law applies to your agreement

Unless your agreement has a European or International element, it is likely that the applicable law stated in the contract will be that of England and Wales. The first step is to check, as this checklist applies to the law of England and Wales only.

Our team can also assist with directing you to the right advice if another country’s law applies.

2. Ascertain whether you need to check anywhere else

It is possible that the document you are reading is not the whole agreement between the parties. Unless the agreement has a specific ‘entire agreement’ clause, other oral or written representations made between the parties prior to it being signed may also be incorporated into the contract.

Some agreements may also reference other documents that also form part of it, such as attached terms and conditions or those accessed via a website link. You should be prepared to hunt through the agreement and any associated documents to find a force majeure clause.

3. Identify whether any clause is headed ‘force majeure’ or contains that phrase

Sometimes clauses within agreements will have headings which make their purpose and content easier to identify, but others will not. Some force majeure clauses will mention that phrase specifically, but other wording to look out for relevant to COVID-19 may include:

• unforeseen event
• act of God
• pandemic

Essentially you are searching for a clause which anticipates that there may be a supervening event outside of the control of the parties to the agreement. This event could be factual, for example, a serious illness, or legal, such as government-imposed restrictions.

Both types of supervening event may directly affect the performance of the agreement.

4. Consider what events the force majeure clause covers

It is often the case that the clause will include a list of events that are defined as ‘force majeure events’ according to the agreement. This list can either be exhaustive where only named events are included, or non-exhaustive, for example, including a catchall provision for all events outside a party’s reasonable control.

5. Decide whether COVID-19 may fall within one of the events referenced

Some listed force majeure events to look out for that may cover COVID-19 are:

• serious diseases
• epidemics and pandemics
• Acts of God
• labour or supply shortages

It may be the case that the agreement contains a specific definition of what is covered by a listed force majeure event, so these should be considered closely. For example, is an ‘Act of God’ limited to natural disasters only or can it extend to human interventions too?

6. Other clauses within the agreement

If you are unable to locate a force majeure clause or you do not believe that COVID-19 would be covered by any of the force majeure events listed, then there may be other potentially helpful clauses within the agreement. Read the agreement closely to see if there are other references to what is to happen if one party is unable to perform their obligations under the agreement.

7. Consider the effects of triggering the force majeure clause

You should understand your commercial aims and what the effects of triggering the force majeure clause will be. Does notifying the other contracting party of a force majeure event allow your business to delay performance, suspend or terminate the agreement?

If triggering the force majeure clause results in the contract ending and you do not want it to end, then it will not be helpful in achieving your commercial aim. It would be better in this particular situation to engage with the other party to negotiate a variation of the original agreement.

8. Comply strictly with the wording of the clause

If you do decide that the force majeure clause applies and it assists your business to use it, then care should be taken to ensure any timescales set out within it are strictly adhered to and communications contain the correct information and are in the right form. The last thing that a business will want to do is lose this opportunity due to a minor mistake in complying with the specific wording of the agreement.

9. Document, document, document

Your business should retain as much documentary evidence as possible about the agreement. This includes retaining copies of the agreement itself, together with any information relevant to the transaction, including invoices, statements, delivery receipts, purchase orders, among others.

You should also keep copies of all communications with the other contracting party concerning the agreement, in particular, relating to difficulty in performing obligations.

The above guidance provides a general outline on force majeure clauses. It is strongly recommended that you seek professional advice to fully determine your position and obligations according to any written agreements you may have entered into with other businesses.

Taking prompt legal advice allows you to consider your options at the outset and make informed decisions on your business’s future.

Harrison Drury’s commercial dispute resolution team is experienced in advising in relation to force majeure clauses and can also consider other relevant areas of law in order to achieve your commercial aims.