Is Covid-19 an “Act of God”?
The question may look facetious at first sight, but it is quite likely that the Supreme Court will be grappling with this before too long.
As you probably know, many written contracts include a “force majeure” clause – a term that excuses one or both parties from performing the contract following an unforeseen event outside the parties’ control that makes performance impossible. It is intended that the clause will cover a multitude of circumstances. Let’s take a typical example.
A contract may say something like:
“The Seller (S) shall not be liable for any delay or failure to deliver where such delay or failure is brought about by a force majeure event.
A force majeure means any circumstance not in the seller’s reasonable control including, without limitation: terrorist attack, civil war, riots, floods, fire, acts of God or other natural disasters ……………”
In the present crisis, where many businesses have to be closed and many otherwise normal journeys are discouraged, possibly unlawful, what will happen if S says he is unable to deliver?
Will the force majeure clause get him out of jail?
English law has long recognised that a contract may be “frustrated” by an intervening event. However, this is quite narrow and has particular effects. (I will write about this shortly). That is why most written standard terms and conditions include force majeure clauses – even though few will have ever read, let alone used, them.
The first question may be whether those standard terms and conditions are actually included in the contract. If S cold called a purchaser and agreed to sell him 1000 widgets at a set price without mentioning terms and conditions, then the contract is made there and then and no T and Cs would be included in the contract. This may present difficult points in its own right. Let’s assume that the term is a part of the contract.
“Force majeure” does not have a fixed meaning. It means whatever the parties say it means, i.e. courts look at the exact words used. The example above includes the words “a force majeure event means….” Sometimes there may be only one line, others over 100.
A contract merely referring to “the usual force majeure events” is meaningless.
Usually there is a list of possible disasters. If that list includes “epidemics or pandemics”, then the clause is likely to apply, subject as below. It is likely that everyone will insist on those words in future, but many current contracts do not include them.
Traditionally the Courts have said that if a particular event is not in the list then parties cannot have intended it to be included. To get around this, the list often includes phrases intended as catch-alls. Our example includes the words, “without limitation” and “other natural disasters”. Even here, Courts are cautious. In a case following the 2008 financial crash, one party tried to rely on a force majeure clause including a long list ending with the phrase “any other cause beyond the seller’s reasonable control”. The court studied the list, saw nothing remotely resembling economic downturn and decided that the force majeure clause did not apply. The contract stood.
A force majeure term will not usually help a party unless the event is entirely outside his control. However, clear wording may sometimes allow this. For example, a force majeure relating to “industrial action” has been upheld, even though the industrial action was arguably due in part to the seller’s hard line in wage negotiations. This may become relevant to Covid-19 where the “epidemic or pandemic” neatly included within the clause has resulted in a seller choosing to close down his warehouse in line with his interpretation of Government advice even if it was not strictly unlawful to have kept it open.
A force majeure clause may refer to illegality or, (more unusually), to Government “requests”. Most of the existing decided cases on this concern war time or complications in the international oil industry. (It became illegal to import goods from Nazi-occupied Poland so a purchase contract was avoided). Under Covid-19, it may be or become illegal for a particular delivery journey to take place. On the other hand, there may be legitimate debate as to whether that journey was “essential”.
What if S cannot deliver for two reasons, either of which would have made performance impossible? For example, S had forgotten to place an order with his supplier, but restrictions due to Covid-19 would have made delivery illegal anyway. The few decided cases say that where a party seeks to rely on force majeure, he must show that it is the only thing making performance impossible. If S has forgotten to place his order, then he could not rely on the force majeure clause.
S must also show that the wording of his contract covers the circumstances of the case. For example, if the contract only refers to events that make performance “impossible” then mere delay would not normally trigger the clause. Our illustration refers to “any delay or failure to deliver”. Even if Covid-19 is covered by the term, S must show that this is what has caused performance to be delayed, or caused the failure to deliver. It will have different effects in different sectors.
It is not essential that the event should be “unforeseeable”. The very fact that a term has been included in the contract means that at some level it was foreseen. However, courts are unlikely to sympathise with S if the alleged force majeure event is something that both parties were obviously thinking about at the time that they entered the contract. Anyone contracting in (say) late March 2020 would obviously have been aware of the Covid-19 crisis and courts will not sympathise with a party seeking to rely on Covid-19 as a force majeure event. It remains to be seen how far back the courts will go. If the contract was entered when the first reports of Covid-19 were emerging from China but before its global impact was widely anticipated it is likely that a force majeure clause would be upheld. It remains to be seen where the courts will draw the line.
The force majeure term can also set out the consequences of the event. Is the whole contract cancelled, just delayed or is one party excused a part of its obligations? It all depends on wording. Our example refers to delay, which is clear, and failure to deliver, which might be subject to argument. If the crisis delays delivery by, say, three months but it remains physically possible to deliver at that time, will S be in breach if he fails to do so? Better wording might go on to say that if delivery is delayed by the force majeure event for more than X days then S will be excused from delivery.
It can also define where the loss falls. In our example the poor old buyer is left without remedy if S fails to deliver. At least he has the opportunity to insure against such risks at the time when he enters the contract. The contract can set out more complex terms. For example what happens to any prepayment for goods that are not going to be delivered?
Note also that force majeure clauses are subject to the Unfair Contract Terms Act and would therefore be subject to a test “reasonableness”. It may be argued that it is not possible to exclude liability in certain consumer contracts.
So, what about our first question that was raised in this article? Would Covid-19 be regarded as an “act of God”?
Arguably the origin and spread of the virus is due at least in part to human act. However, a court is likely to say that a new disease may spring up and catch everyone by surprise and that it is almost certainly not due to the fault of either party to the particular contract and for that reason it would fall under the heading “act of God” or “some other natural disaster”. The Supreme Court may, of course, disagree with me.
Since the wording of every contract is different and the circumstances arising from this crisis will affect everyone in different ways it is essential that you seek legal advice on any force majeure clause in your terms of business. Contact our team on 01752 203500.