Coronavirus and Force Majeure
The COVID-19 pandemic is causing disruption to international trade and transport, with the consequence that many companies have found themselves unable to perform some of their contractual obligations, or are at risk of not being able to do so in the future. We have been receiving enquiries regarding the effect of COVID-19 on parties’ ability to perform under maritime contracts. This article considers whether Force Majeure (“FM”) clauses in contracts can be invoked as a result of the COVID-19 outbreak or whether the doctrine of frustration can apply.
Force Majeure
A FM clause is a contractual term whereby, following a specified event or events beyond its control, a party to a contract is entitled to suspend performance of its obligations or to claim an extension of time for performance. In some cases, where the FM event is continuing, the contract may be terminated.
Parties who wish to rely on FM must come within the express wording of the FM clause. The courts will not imply FM in the absence of an express contractual provision.
There are typically four key considerations in assessing whether a force majeure clause applies:
Specified event: FM clauses typically lists specific events that must occur for the clause to apply, for example, the BIMCO standard shipbuilding contract NEWBUILDCON lists “epidemic”, “quarantines” and “requirements of government authorities”.
Prevented performance/caused delay: The wording of the FM clause is important here. Where the clause requires that the event “prevented” performance, the Courts have ruled that it is not enough that the FM event has made performance more difficult or expensive. The contract may have a lower standard; for example, the clause may require the event to have “hindered”, “delayed”, or “adversely affected” performance. In the case of COVID-19 restrictions on travel and requirements for self-isolation, it is not certain that these are sufficient to trigger FM provisions.
Beyond party’s control: The clause requires that the failure to perform was due to circumstances beyond the party’s control.
Mitigation: The affected party is under a duty to show it has taken reasonable steps to mitigate/avoid the effects of the FM event.
Parties should carefully review the wording of the FM clause in their contracts to ensure that it applies in all the circumstances.
In most contracts, establishing that the FM clause applies will lead to relief from performance (avoiding the risk of a default termination) and an extension of time to perform obligations/meet targets. However, extended period of FM can lead to a right for one or more parties to terminate the contract. It will be important for parties to engage in discussions well before this deadline to determine whether they can agree on a variation to the contract to prevent this occurring.
Frustration
Where a contract does not contain a FM clause, the doctrine of frustration may apply. This common law doctrine allows a contract to be discharged on the occurrence of certain events beyond the control of the parties which would make the performance of the contract impossible. The courts have still set a very high threshold for the doctrine to apply. Typically, it requires an event to occur that is unforeseen and it must significantly alter the relationship between the contracting parties, for example:
A change of law or government directive that makes performance illegal.
The subject matter of the contract is unavailable (for example, the person providing the services is permanently indisposed).
The purpose of the contract no longer exists (for example, the contract relates to an event that has been cancelled).
For the doctrine of frustration to apply in the case of COVID-19 prevention measures, the effects of the Coronavirus must be so significant as to make performance of the contract impossible or radically different. Parties should be careful in asserting frustration. If the doctrine does not apply, the party refusing to perform on this ground may have wrongfully repudiated the contract.
If you have any questions relating to Coronavirus and Force Majeure, please email Peter Dawson at peter@maritimelaw.co.nz, or phone +64 27 229 9624.